Strategies
& Results

Genesis

 

 

  • Earnings and dividends have been the primary contributors to equity returns
  • Valuations have waxed and waned, adding little to returns over the long run
  • Launched in 2005 when expectations were that rates would rise and equity valuations would decline
  •  While the opposite happened, we still achieved our goals:
    • A yield competitive with Treasuries
    • A target return goal (enhanced by share repurchases and debt reduction) that was attractive compared to market returns
    • Less volatility than the market
  • The environment for these goals looks more attractive today than at launch

Solution Oriented

 
  • The Shareholder Yield strategy: Global and U.S. versions
  • Same team, philosophy and investment process

  • Differences reflect higher dividends outside the U.S. and more share buybacks within the U.S.

Downside Protection

 

 

  • Smaller drawdowns driven by
    • Focus on higher quality companies
    • Characteristics of dividend paying stocks
    • Our risk management process
  • Our holdings are often global champions with dominant industry positions, creating the potential for future growth
  • Proven in down markets: In three-month periods where the market was down more than 5% in USD the strategy outperformed 96% of the time, by an average of 4.1%.
  • Lower drawdowns = less recovery time: 26 months for the strategy versus 53 months for the MSCI World Index following the GFC

Lower Volatility

 

 

  • Not a target, but a historically consistent outcome, due to:
    • Characteristics of companies in which we invest
    • Fundamental research
    • Portfolio construction and risk management processes
  • Stocks with stable or growing dividends have had lower volatility than those that cut their dividends or did not pay one
  • Portfolio construction: designed to lower risk around achieving our aspirational goal
  • Volatility impacts wealth: an identical average annual return, but with less volatility, mathematically leads to a higher end value

Consistent Income

 

 

  • Consistent income, due to:
    • Characteristics of companies in which we invest
    • Fundamental research
    • Portfolio construction and risk management processes
  • Delivery of above-average yield: greater and steadier than global equities and income generating investments like investment grade credit, real estate and infrastructure
  • Strong results helped by a large portion of holdings raising their dividends each year
  • Institutions and individuals need income, but income from bonds and other traditional sources has been diminished
  • Dividends are always positive contributors to equity market returns

Targeted Return

 

 

  • Aspirational return of 9% per annum over a full market cycle, with two-thirds of that return coming from payouts to shareholders – dividends, share buybacks and debt reduction – and one-third from cash flow growth
  • The average of the annual returns in the 97 overlapping five-year periods since the inception of the strategy has been 8.9% in USD
  • An aspirational return target may be beneficial to investors that have a target return associated with their investment portfolios to meet their liabilities

Portfolio Fit

 

 

  • Strategy can be a core holding or a standalone solution
  • Defensive characteristics help with active return diversification making it complementary to passive equity as well as higher beta satellite managers
  • Low correlation to value equities and negative correlation to growth indexes, make the strategy an effective diversifier for a global equity allocation
  • Potential for capital appreciation, driven by cash flow growth, make the strategy attractive in most market environments.
  • Strategy expected to perform well in fundamentally driven markets and potentially lag in more speculative, momentum and growth driven markets

Philosophy & Process

 

 

  • Value is created through free cash flow; whether that value grows depends on capital allocation
  • Once companies exhaust opportunities for profitable growth, they should provide shareholder yield to owners (dividends, buybacks and debt reduction)
  • The strategy has a disciplined approach:
    • Quantitative screen
    • Fundamental research
    • Portfolio construction and risk management that diversifies the sources of return

Risk Management

 

 

Contact Us

Email
info@eipny.com

New York
399 Park Avenue
New York, NY 10022
Phone: 212-303-7200

London
4th Floor, Carrington House
126 – 130 Regent Street
London, W1B 5SE
Phone: (+44) 0203 879 3900

Chicago
71 South Wacker Drive
Chicago, IL 60606
Phone: 312-800-0142


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.