Investment Approach

Investment Process

Our goal is to produce an efficient portfolio on a risk/return basis. We undertake detailed fundamental research on individual companies, diversify across attractive companies and economic sectors, limit individual holding sizes, and employ a strict sell discipline. If we have identified a good business at a good price, time is our ally as patient investors. As a result, we have relatively low portfolio turnover in most strategies. Epoch’s Investment Policy Group, representing the most experienced members of the investment team, provides a macro-level perspective that portfolio managers may use as a context when evaluating individual companies and sectors. This is combined with rigorous quantitative and qualitative analysis that incorporates the following components:

1 Analyze the business:

Determine the sustainability of the business, earnings drivers, barriers to entry, and competitive advantages.

2 Understand the Cash Flow Structure:

Focus on companies that generate cash earnings and assess the quality and character of those earnings to determine the net cash flow from the business.

3 Relate Cash Flow to Enterprise Value:

Examine relevant claims against net cash flow and determine the necessity of these claims to maintain and grow the business. Evaluate how management will use free cash flow. Value the cash flow stream and compare it to enterprise value to determine the attractiveness of the investment.

4 Evaluate Management Quality:

Identify managements with the intention and demonstrated ability to create shareholder value.

5 Seek Unrecognized Assets:

Uncover, where possible, hidden, undervalued or underutilized assets, especially in under-researched small- and mid-cap companies.

6 Manage Risk:

Risk management is integrated into each step of the investment process. We have a team dedicated to quantitative research and risk management, ensuring that the portfolio construction process takes into account aggregation risks and diversification objectives. The goal is twofold: first, to minimize stock-specific risk through greater diversification, and second, to avoid unintended risks or biases at the portfolio level. Our Chief Risk Officer is a co-portfolio manager of every strategy we offer. As a result, the lead portfolio manager is continually aware of these risks. While the research and security selection methodology is the starting point for all of Epoch’s equity strategies, the portfolio construction process is adaptable to the specific parameters of each investment strategy and our clients’ individual guidelines.

Our Perspectives

The dispute between the U.S. and China is clearly not just about trade, or even technology. At stake are the values that will determine the architecture and governance of the global world order.

December 2, 2019

Cold War 2.0: The Platform, the Players, and the Stakes

The dispute between the U.S. and China is clearly not just about trade, or even technology. At stake are the values that will determine the architecture and governance of the global world order.

The current hype about two-sided digital platforms, blitzscaling and winner-takes-most markets has fueled a surge in IPO listings and produced stratospheric valuations that are difficult to reconcile with free-cash-flow (FCF) fundamentals. The big question is, are we repeating the excesses of the dot-com boom? In this paper, we look at the reasoning used by those who think history is repeating itself including IPO supply, profitability and VC funding. We also look at the weaknesses in those arguments and why some believe that the current situation is different from the dot com bubble, such as median age of tech IPOs and sales growth. Finally, we explore how investors can look at these companies through a free cash flow lens.

June 19, 2019

Blitzscale and Hope: Unicorns, IPOs and the Fear of Repeating the Late 1990s

The current hype about two-sided digital platforms, blitzscaling and winner-takes-most markets has fueled a surge in IPO listings and produced stratospheric valuations that are difficult to reconcile with free-cash-flow (FCF) fundamentals. The big question is, are we repeating the excesses of the dot-com boom? In this paper, we look at the reasoning used by those who think history is repeating itself including IPO supply, profitability and VC funding. We also look at the weaknesses in those arguments and why some believe that the current situation is different from the dot com bubble, such as median age of tech IPOs and sales growth. Finally, we explore how investors can look at these companies through a free cash flow lens.

Does a stock’s price and its P/E ratio tell you how much a company is worth? Conventional wisdom says yes, but we think otherwise. In this paper we explore:

  • The theory behind the discounted cash flow (DCF) valuation model and the underappreciated role that ROIC plays in the model
  • The P/E ratio and find that it does not tell us what most people think it does, nor does its offshoot, the P/E to growth (PEG) ratio
  • How we can use what we have learned about the DCF model to deconstruct P/E ratios in the real world to better understand what they do tell us
June 17, 2019

The P/E Ratio: A User’s Manual

Does a stock’s price and its P/E ratio tell you how much a company is worth? Conventional wisdom says yes, but we think otherwise. In this paper we explore:

  • The theory behind the discounted cash flow (DCF) valuation model and the underappreciated role that ROIC plays in the model
  • The P/E ratio and find that it does not tell us what most people think it does, nor does its offshoot, the P/E to growth (PEG) ratio
  • How we can use what we have learned about the DCF model to deconstruct P/E ratios in the real world to better understand what they do tell us

If there is a “small-cap effect” then why has the Russell 2000 underperformed the Russell 1000 over time?

January 18, 2019

The Size Paradox

If there is a “small-cap effect” then why has the Russell 2000 underperformed the Russell 1000 over time?

China’s mercantilist behavior, underscored by its “Made in China 2025 initiative,” is in conflict with U.S. demands for greater IP protection, a level playing field and improved market access. Left unresolved, free trade and globalization will be in retreat, with broad economic implications beginning with manufacturers.

December 10, 2018

Trump, Tech and Trade

China’s mercantilist behavior, underscored by its “Made in China 2025 initiative,” is in conflict with U.S. demands for greater IP protection, a level playing field and improved market access. Left unresolved, free trade and globalization will be in retreat, with broad economic implications beginning with manufacturers.

While the e-Commerce index as a whole appears frothy, many companies in the sector do possess sound and promising business models. For investors, the key to success is understanding how these business models should be valued. In this paper we examine the reasons e-Commerce may be a bubble, the reasons it may not and a free cash flow based methodology for valuing e-Commerce companies.

September 13, 2018

Is e-Commerce a Bubble?

While the e-Commerce index as a whole appears frothy, many companies in the sector do possess sound and promising business models. For investors, the key to success is understanding how these business models should be valued. In this paper we examine the reasons e-Commerce may be a bubble, the reasons it may not and a free cash flow based methodology for valuing e-Commerce companies.

Three developments (the unwinding of QE, the soaring US budget deficit and the impending wall of maturities, especially of corporate bonds) will engender higher volatility and wider credit spreads. There is also a risk that interest rates will start rising for “bad” reasons (that is, an increase in fixed income supply). Each of these outcomes would be a headwind for high duration strategies.

July 2, 2018

The Return of Price Discovery

Three developments (the unwinding of QE, the soaring US budget deficit and the impending wall of maturities, especially of corporate bonds) will engender higher volatility and wider credit spreads. There is also a risk that interest rates will start rising for “bad” reasons (that is, an increase in fixed income supply). Each of these outcomes would be a headwind for high duration strategies.

Modern Portfolio Theory (MPT) dominates investment thinking today, but the pre-MPT view of the world still holds valuable insights. Our new white paper explores the limits of MPT in aiding successful investing.

April 13, 2018

The Limits of Theory

Modern Portfolio Theory (MPT) dominates investment thinking today, but the pre-MPT view of the world still holds valuable insights. Our new white paper explores the limits of MPT in aiding successful investing.