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| Epoch Investment Partners
is a global asset management firm formed in April
2004 by experienced
professionals. Epoch was created with the specific
goal of responding to paradigm shifts within the
sources of global equity investment returns and
within the structure of the investment management
business as a whole. |
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| Our investment philosophy reflects the changing hierarchy within the three determinants of investment returns: earnings, dividends, and P/E ratios. Throughout history, the relative importance of each determinant has changed dramatically depending upon the economic landscape of the period under review. In the 1980s and 1990s, for example, rising P/E ratios were the principal drivers of equity returns, leading to the popularity of valuation methodologies that reflected Price to Book Value and Price to Earnings metrics. Underlying this 20-year P/E expansion was a collapse in interest rates. However, beginning in June of 2003, this two-decade period of declining interest rates and expanding P/E ratios began to show signs of ending. |
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| We believe we have entered a period in which P/E ratios are more likely to remain flat or contract rather than expand as interest rates are more likely to rise rather than fall from recent historical lows. Given the inverse relationship of P/Es to interest rates, P/E multiple expansion will cease to be the primary explanatory variable of equity returns going forward, leaving only earnings growth and dividends to drive equity returns. These two drivers come from a single source: cash flow. Consequently, Epoch's security selection process is focused upon free cash flow metrics as opposed to traditional accounting-based metrics. It is a better and more transparent methodology to understand how a business works. In our view, the key to producing superior risk-adjusted equity returns is the identification of companies with an ability to generate free cash flow and to allocate it properly among dividends, share repurchases, debt pay downs, internal reinvestment opportunities, and/or acquisitions. |
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| In addition to offering a responsive, insightful free cash flow-based investment strategy, the second key principle underlying the firm's foundation was the desire to provide greater transparency of our businesses practices. We understand that clients and consultants want to know as much as possible about the character of the people and the structure of the organization charged with executing their fiduciary responsibilities. As a result, Epoch has been a public company since its inception (Nasdaq: EPHC) and has adhered to all associated demands surrounding appropriate financial and business practices disclosures. All Epoch employees are shareholders in our business: further support that business principles (the client must come first) are reinforced by business practices. |
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| We foresee a desire
for clients to place funds with experienced, accomplished
professionals within a firm that has the following
characteristics: |
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A client first
focus
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Pursuit of best practices in
all of its business aspects
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Widespread employee ownership
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A transparency of employee
behavior as evidenced in the firm's code of
ethics |
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A substantial capital base |
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| As you examine
our philosophy, our products, and our professional
staff, we hope you will agree with us that there
is no better time than now to begin a new investment
firm without legacy issues — a new “epoch”
in the investment business. |
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