Library of Congress Cataloging-in-Publication Data
Names: Jones, Evan L., author.
Title: Active investing in the age of disruption / Evan L. Jones.
Description: Hoboken, New Jersey : Wiley, 2020. | Includes index.
Identifiers: LCCN 2019057707 (print) | LCCN 2019057708 (ebook) | ISBN 9781119688082 (hardback) | ISBN 9781119688075 (adobe pdf) | ISBN 9781119688129 (epub)
Subjects: LCSH: Investments. | Portfolio management.
Classification: LCC HG4521 .J665 2020 (print) | LCC HG4521 (ebook) | DDC 332.6–dc23
LC record available at https://lccn.loc.gov/2019057707
LC ebook record available at https://lccn.loc.gov/2019057708
Cover Design: Wiley
Cover Image: © Holmes Su/Shutterstock
ABOUT THE AUTHOR
Evan L. Jones oversees direct investments for Duke University Management Company (DUMAC) and teaches a course on investment management and endowments.
DUMAC manages $19 billion on behalf of Duke University and affiliates investing globally across all asset classes. Direct investments span global equities, commodities, credit, and market-neutral strategies.
Prior to joining DUMAC, Evan cofounded and managed Brightleaf Partners, a long/short US equity hedge fund. Brightleaf Partners focused primarily on consumer micro-cap companies and managed assets for high net worth and institutional investors.
Prior to Brightleaf Partners, Evan founded and was chairman/CEO of TSI Soccer, a catalog and e-commerce retailer focused on soccer enthusiasts. TSI Soccer was one of Inc. Magazine's 500 fastest-growing companies in the US for two consecutive years (1993–1994). TSI Soccer distributed seven million catalogs, operated 12 retail stores, and created one of the sporting goods industries' first e-commerce sites. TSI Soccer was sold to a publicly traded company (Delias: DLIA) in 1998.
Evan has taught at Duke University since 1998 (entrepreneurship and investment management).
He is a graduate of Duke University (BA 1987), University of North Carolina Kenan-Flagler (MBA 1993), and is a CFA charter holder.
ACKNOWLEDGMENTS
Thank you to all my colleagues at Duke University Management Company. Your experiences and insights have made me a better investor and keep me thinking in new ways. Special thanks to Neal Triplett, CIO, and the direct investments team (John Burkert, Brandon Gall, Ian Jennings, and William Hockett) for their insights and camaraderie in battling the markets on a daily basis.
Thank you to John Pinto, my cofounder and partner at Brightleaf Partners. Running a small cap hedge fund for seven years that culminated in the extreme volatility of the great financial crisis should have been enough to force us both into retirement, but you never stopped looking for the next great idea. Your enthusiasm for investing is unparalleled.
Thank you to all my Duke students for keeping me young and curious, which is important in a profession in which the turmoil of the markets can make you old and fatalistic fast.
Last, thank you to my family—Suma, Kiran, Morgan, and Dylan—for always being the brightest part of my life.
PREFACE
Why write this book?
There are thousands of research and thought pieces written every day across the investment industry. Investment professionals get hundreds of emails each day with news and opinions on the market. They can listen to podcasts and watch television every moment of the day, only to wake up the next day and get a new stream of data and opinions. Brilliant, educated analysts; pundits; and executives offer their market opinions all day every day. It is pumped into investment firms like a firehose in the hope of finding an edge to make better decisions and outperform the market. However, the information is almost always in the context of the current point in time and never filtered by any screen of relevance or importance to the specific investment mission.
Information is of value only if investors have a very clear understanding of their investment process and what is truly informative to an investment decision. A detailed, disciplined investment process is necessary to organize the information and decide on its value in the context of each investment.
The first reason for writing this book is to step away from the tasks of day-to-day investment management and think about the investment process and the broader scope of the financial markets. Hopefully, introspection offers the opportunity to think about what data is important and what data is extraneous and answer the questions of how, when, and where the constant stream of data should be used to create superior returns. Additionally, the broader challenges facing active investment management today and how they might be affecting the execution of the investment process may be contemplated.
What were the challenges in the 2010s?
How will the 2020s be different?
Why has active investing alpha declined significantly since 2010?
How can the challenges be met?
The environment created by global central bank intervention has had many derivative effects and made active investing in the 2010s more difficult than ever; this will continue in the 2020s. Global central banks have taken center stage, capital is cheap to everyone, and momentum is a driving force in the financial markets. Refocusing on defining and executing the key investment tenets that will lead to significant outperformance is necessary to meet this challenge. Throughout this book, I define significant outperformance as averaging 1,000 basis points of alpha per year measured on a three-year rolling basis. No one can outperform every year, and the best time frame to judge an investor is five years, but a three-year rolling basis is a fair measurement. This is a lofty goal. Few managers achieve this goal and the number that do is dwindling every year. In fact, fewer and fewer managers are even getting the chance to try, because institutional allocators are moving more capital to passive investing each year.
For me, process is the key to success despite it often seeming boring and, to many who do not see the subtleties, the same. These subtleties to the investment process make a huge difference when the margin of error between under- and outperforming is so thin. Writing this book is a pursuit to further organize my own thoughts and ideas on how to optimize the investment process and understand the current environment.
You never really know something until you prepare to teach it.
My secondary career activity since 1998 has been teaching at Duke University. I taught entrepreneurship for ten years and more recently endowment investment management, a class in which many members of the Duke University management team participate. My experience in teaching has made it clear to me that organizing your thoughts to teach someone is a great learning process. No one wants to step in front of a class of young, intelligent students without being prepared, so teaching is a constant challenge to keep learning and to understand every aspect of the
