Epoch
Perspectives

White Papers

Epoch’s investment approach is designed to uncover opportunities that others may miss. In our view, growth of free cash flow, and the intelligent use of that cash flow, represent the best predictor of long-term shareholder return. We look for strong company management with a commitment to financial transparency and a track record of delivering returns to shareholders.

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2018

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.

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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.

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January 31, 2018 When “Bits” Meet “Atoms”

The Digital Age and the transition from “atoms” to “bits” implies a capital-light economy in which technology is being substituted for labor and physical assets. Its impact is widespread and stretches beyond the technology sector. In the third part of our technology focused series we explore:

  • The evolution of technology and why it is so noticeable today
  • The key differentiator between the first and second machine ages
  • Technology’s impact on microeconomic factors such as demand and marginal revenue
  • Why the digital age entails a radical reevaluation of macroeconomics
  • Implications for investors
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2017

December 15, 2017 The Winds of Change

While regulators and many investors are focused on leverage, we are more concerned with liquidity risk, which was at the core of the 2007-2009 crisis and will likely be again at the next one. As central banks move toward “quantitative tightening,” higher interest rates and waning liquidity are the most significant global macro risks, especially given that many assets are trading toward the high end of their historical ranges.

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December 7, 2017 What Do We Mean When We Talk About Value?

It has long been common practice in the investment world to divide the market up into “value stocks” and “growth stocks.” What do these labels really mean? “Value” connotes that the stocks in this category are undervalued, and should therefore outperform over time, while “growth” implies that these are stocks with faster earnings growth.

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August 10, 2017 Tech is the New Macro – Part II: Implications for Labor Markets and Productivity

The rapid expansion and implementation of technological innovation has become a key factor in the behavior of the economy and capital markets. In this paper, Investment Strategist Kevin Hebner and Co-CIOs Bill Priest and David Pearl explore how tech has become the new macro, including a look at how:

  • Tech is positive for all three return on equity (ROE) components
  • Profit margins have soared over the last two decades
  • Asset utilization improves with technology
  • Tech impacts leverage and payout ratios
  • Platforms and their network effects have resulted in a winner-takes-all market
  • Disruptive innovation will affect all economic sectors
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June 29, 2017 Tech is the New Macro – Part I: Impacting All Three Components of Return on Equity

The rapid expansion and implementation of technological innovation has become a key factor in the behavior of the economy and capital markets. In this paper, Investment Strategist Kevin Hebner and Co-CIOs Bill Priest and David Pearl explore how tech has become the new macro.

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May 16, 2017 The Impact of Passive Investing on Market Efficiency

Passive ETFs have influenced the informational efficiency of the stock market: trading costs have risen, stocks are more correlated with each other than they used to be, and valuation is now partly affected by whether a stock is in a widely traded index or not. Read this paper to learn more about the impact that passive investing has had on market efficiency and what active managers must do to in such an environment.

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2016

December 15, 2016 The Big Rewind

CEO and Co-CIO Bill Priest and Investment Strategist Kevin Hebner discuss how president-elect Trump’s economic policies could have a positive cyclical influence on earnings within the context of secular stagnation and higher interest rates putting pressure on valuation multiples.

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October 6, 2016 Free Cash Flow Works

Epoch’s investment philosophy can be summarized by saying that it is the ability to generate free cash flow that makes a company worth something to begin with, and it is how management allocates that free cash flow that determines whether the value of the business rises or falls. In this paper, we address the former of this statement and answer two questions: 1) Why does free cash flow matter more than earnings in determining the value of a business, and 2) do free-cash-flow metrics help investors identify stocks that outperform the market?

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September 14, 2016 Secular Stagnation: “2% is the New 4%” for U.S. Growth

Over the last two years Lawrence Summers has been an energetic proponent of the secular stagnation thesis whereby the increased propensity to save and the decreased predilection to invest acts as a drag on demand, reducing both growth and inflation, and pulling down real interest rates. In this paper, Investment Strategist Kevin Hebner joins co-CIOs Bill Priest and David Pearl to explore the underlying components of Mr. Summers’ thesis and their investment implications.

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June 30, 2016 The Capital Reinvestment Strategy

Return on Invested Capital (ROIC) is a crucial metric in evaluating companies, yet investors pay more attention to growth in earnings, which can be misleading. In this white paper, learn more about the opportunity for investors to earn superior returns by focusing in a systematic way on harvesting the benefits of owning companies with high ROIC. Our Capital Reinvestment strategy focuses on companies that use their free cash flow to reinvest and acquire, and in doing so have a persistently high level of ROIC well in excess of their weighted average cost of capital.

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May 17, 2016 The Case for Trade Remains Overwhelming

International trade has moved to center stage in the U.S. political debate, with anti-trade tirades and protectionist rhetoric dominating stump speeches and media coverage. Against this backdrop, Co-CIOs Bill Priest and David Pearl join Investment Strategist Kevin Hebner to explore three key questions:

 

  • Why does trade matter so much?
  • Why has protectionism become such a prominent issue in 2016?
  • What are the economic and market implications if the protectionists prevail?
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2015

August 28, 2015 Contagion—A Perspective

Recent events in China have sent tremors across global equity markets. Read and learn more about the sources of these tremors, their interplay with our twin themes of secular stagnation and contagion, and the important investment implications they bring.

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July 13, 2015 Shareholder Yield: The Case for the Next Decade

The Shareholder Yield strategy is approaching its tenth anniversary. Since its inception, it has established a strong track record. But with widespread expectations that the next ten years will be different, it is fair to ask: was this strategy simply right for the time? Or is it, as we believe, a core strategy, relevant for all times? In the attached white paper, we lay out the case for the relevance of the strategy in the coming decade.

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June 26, 2015 The Case for Active Management, Continued: Epoch’s Investment Process

This continuation of our previous paper furthers our examination of the recent performance of active managers and considers both the theoretical and empirical arguments.

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March 23, 2015 The Case for Active Management

In our most recent whitepaper, we discuss the case for active management. The paper looks at the recent performance of active managers and then considers both the theoretical and empirical arguments.

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January 21, 2015 2015 Oil Outlook

One of the most important issues for investors in 2015 will be understanding the implications of the precipitous fall in oil prices. In our latest perspective, <em>2015 Oil Outlook</em>, we provide a framework for thinking about oil prices and where they are headed.

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January 5, 2015 Dividends by Another Name

At Epoch, we invest in companies that we believe are good capital allocators. This means finding companies that have a track record of successfully investing free cash flow for profitable growth and returning excess free cash flow to owners. If management does not have high-ROIC projects to pursue, including acquisitions, the “next best use” of that cash is to return it to the owners. We see dividends, share repurchases and debt pay-downs as equivalent ways to achieve that objective.

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2014

May 29, 2014 The Power of Zero + The Power of the Word

Bill Priest, David Pearl and Ken Hightower outline how the “power of zero” (quantitative easing and ultra-low interest rates) and the “power of the word” (the most significant being Mario Draghi’s “whatever it takes” statement) have held sway over equity markets. The paper describes the perils and opportunities ahead as these influences wane.

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2013

July 1, 2013 Sea Change — The End of ZIRP and the Beginning of “The Movie Run Backwards”

The Federal Reserve has signaled the end of quantitative easing in the U.S., conceptually if not tactically. CEO and Co-CIO Bill Priest discusses the global implications of a higher discount rate on various financial assets in our new white paper.

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May 13, 2013 Too Big To Ignore

Epoch has been wary of financials, particularly large banks, since before the financial crisis.  In the U.S., however, banks have recapitalized their balance sheets, reduced leverage, and have a greater level of transparency than in the past.  While revenue growth will likely be slow for as long as the yield curve remains suppressed, some now have the ability to generate excess capital and return it to shareholders.

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January 24, 2013 Japan in 2013: New Dawn or Another False Start?

John Tobin, Bill Priest and David Pearl examine the outlook for Japan in our new white paper. They discuss whether the new fiscal and monetary initiatives will be effective and lay the ground work for sustainable long-term growth and why the portfolios we manage continue to remain underweight Japan.

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January 17, 2013 Where’s the Value in U.S. Markets?

David Pearl and Ken Hightower outline what has been driving equity returns, how that is changing, and where we see opportunity.

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2012

November 12, 2012 Locks, Stocks and Barrels of Money

Bill Priest and Ken Hightower examine how a monetary policy of financial repression has replaced fiscal policy and how this has been the catalyst for the recent period of unusual equity returns.

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August 23, 2012 Our Thoughts on the Euro Crisis

It is difficult to have an opinion on markets or specific stocks without having a view on the future of the euro. We outline three possible scenarios, our expectations, and the investment implications.

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June 25, 2012 Investment Opportunities in a World of Hurt

Bill Priest examines the difficulties facing the euro and how excessive government debt is taking a toll on GDP growth globally. This will leave equity strategies focused on the expansion of P/E multiples at a disadvantage to those that emphasize companies growing their cash flow, returning capital to shareholders and taking intelligent advantage of globalization.

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April 18, 2012 Earning the Return: Are Global Income Oriented Stocks a Crowded Trade?

Are dividend-oriented investments a “crowded trade?” Valuations and interest rates can be interpreted differently, but in the end, high-quality companies with growing cash flows that consistently return capital to shareholders earn their return.

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2011

November 10, 2011 Dividends: Beautiful, and Sometimes Dangerous

Dividend strategies are regaining popularity. But pursuing dividend yield alone can lead to poor results. Investors need to understand a company’s sources of cash and should view cash dividends, share buybacks and debt repayments collectively in assessing management’s strategy to create shareholder value.

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August 8, 2011 The Road to Perdition?

Bill Priest and Ken Hightower address the root cause of our current economic ills. While expectations for equity returns are being lowered, we believe stocks can still provide attractive returns over the long term.

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August 7, 2011 The Case for Non-U.S. Small-Cap Equities

Today, there are many reasons from both a beta and an alpha perspective to maintain or increase a strategic policy allocation toward the non-U.S. small cap asset class.

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April 18, 2011 Free-Cash-Flow Investing: A Value Strategy

Value, a word commonly used in our profession, means many things to many people. We share our perspective of value, as reflected in our free-cash-flow methodology, and how it relates to the conventional concept of value.

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March 21, 2011 Japan: Our Outlook

Read to gain a better perspective from a portfolio standpoint regarding what the events of Japan could mean in a broader global context.

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January 10, 2011 Macro Markets and Micro Opportunities

In 2010, the equity markets were driven predominantly by “macro” forces, resulting in an environment characterized most accurately as “risk on” or “risk off”. High correlations of returns existed among and within many industry sectors.

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2010

November 8, 2010 The 9% Solution

In a world likely to offer 6-8% long term equity returns on average, we discuss a strategy that should weather the challenges that lie ahead and provide a “9% Solution” with lower volatility over the long term.

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September 3, 2010 The Role of “Mr. Market” in Asset Pricing

With a long term perspective, certain equities may be viewed as a “safe” asset now.

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July 16, 2010 The Good, the Bad, and the Ugly

Epoch seeks equities positioned to survive and perform well no matter which “gang” wins the day.

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June 25, 2010 The Coming Change in Expectations

Changes in the investment landscape are creating new opportunities in the equity markets, especially relative to fixed income.

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April 28, 2010 The Power of Zero, The Dash for Trash and The Economic Growth Path

The power of zero interest rates have had an impact on the stock market. However we believe it has run its course with respect to its influence on valuations.

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February 20, 2010 The Small Cap Conundrum of 2009

Read to gain insight into the 2009 underperformance in U.S. small cap stocks with a comparison of the Russell and MSCI small cap indices.

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February 2, 2010 Half Time at the Financial Super Bowl

The battle between the “Power of Zero Interest Rates” and “Deleveraging and its Consequences”.

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January 20, 2010 Dividend Days

Dividends – in the form of cash, share buybacks and debt repayments – will be a primary determinant of total equity returns in the years ahead.

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2009

September 28, 2009 The Financial Crisis: A “Whodunit” Perspective

The causes, implications and lessons of the 2008 financial crisis.

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July 23, 2009 The Easy Way Out…

Have we taken the easy way out of the most difficult economic problem in over 70 years and how should investors adjust their approach?

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May 20, 2009 A Case for a Market Bottom

The liquidity crisis subsides and leads us to take a cautiously optimistic outlook on the recovery of the economy.

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April 3, 2009 Equities: Priced for a Calamity, But Not for a Near-Term Recovery

An explanation for the financial crisis and the case for why certain equities now offer compelling long-term value.

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March 11, 2009 Dividends – A Perspective

Dividends really matter; and capturing them in a low cost, diversified manner is both important and rewarding for investors.

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February 11, 2009 A Really Bad Idea

The benefits of global trade and why a solely “Buy American” policy is a bad idea.

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January 16, 2009 A Change in Fortune and the Reasons Why

A review of government intervention during the 2008 financial crisis and the outlook for recovery.

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2008

October 23, 2008 Equities – A Bottom or a Value?

There are reasons to maintain a conservative outlook, but values exist.

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September 30, 2008 An Investment Outlook

The recession train has officially left the station. We look at what’s next for the global economy.

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September 29, 2008 The Earthquake, the Tsunami, and the Backwash: A Market Commentary

Erratic weather patterns and an uncertain global economy; the comparisons are enlightening.

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September 15, 2008 Market Commentary

Insight on the global economy’s failing health, the nature of the illness and potential cures.

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July 21, 2008 The Perfect U.S. Economic Storm

The U.S. economy faces extraordinary challenges.

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April 21, 2008 Address to Southern Conference on Teacher Retirement

Words of guidance for the informed investor to help steer clear of the rough seas on the horizon.

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February 29, 2008 Dual Economies: The Developing Storm

There are two sides to the story of the oncoming recession: the real economy and the financial economy.

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January 8, 2008 Bleak House, Bleak Times?

Bleak times: a look ahead into the recession of 2008.

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2007

December 3, 2007 Incredible Shrinking Equity

The current and future destruction of equity capital within the banking system and its impact on the real economy.

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November 14, 2007 China: a Long March to Imperial Renaissance

When Marco Polo traveled to Dadu1 in 1271 via the Silk Road as a member of Pope Gregory X’s delegate to Kublai Khan, the first Mongolian Emperor of the Yuan Dynasty (1271-1368), he did not know that he would spend the next seventeen years in an empire that not only ruled China, Mongolia and Persia, but also commanded an economy with the most advanced technology on earth.

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November 9, 2007 Hedge Fund Math: Why Fees Matter

A look at the fees charged by hedge funds and their effect on the investor.

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September 4, 2007 A Roller Coaster Called Credit

Examining the forces that fueled the market’s climb, our expectation for an impending fall, and the wild ride in store for debtors, lenders and, most importantly, investors.

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May 23, 2007 Punctuated Equilibrium and Its Relevance to Investment Markets

Bill Priest addresses the Institute for Private Investors on the topic of “sustainability and disequilibrium.”

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April 23, 2007 The Canary in the Coal Mine: Subprime Mortgages, Mortgage-Backed Securities, and the US Housing Bust

A look at the bursting housing bubble and the impact on the future of the global economy and financial markets.

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March 21, 2007 Equity Returns: Sources and Drivers for the First Decade of the 21st Century

An examination of Epoch’s investment philosophy which is based around the changing order of the sources of equity return.

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2006

November 21, 2006 Financial Services Stocks: The Storm Clouds Gather

More signs that point to the weakness and vulnerability of financial services stocks.

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September 6, 2006 Wishes and Beliefs—How They Influence Economic and Financial Forecasts

How our insights and experience tell us that simply wishing for a robust economy will not result in one.

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August 3, 2006 Punctuated Equilibrium and the Risk Reduction Trade

A discussion of the concept of “punctuated equilibrium” and the manner in which this theory of evolutionary biology can be applied to today’s financial landscape.

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July 31, 2006 What the Market Has Not Discounted

How informed investors can build a winning portfolio in the current market environment.

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July 12, 2006 A Slowdown in the Making?

Inflation concerns and peaking interest rates portend a slowdown in housing and economic growth.

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June 15, 2006 The Risk Reduction Trade

Financial and economic forces behind the recent equity market decline.

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May 31, 2006 Dividends – Here They Come

Why dividends are an important source of equity returns.

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January 9, 2006 The Ongoing Importance of Free Cash Flow and Globalization

What drives today’s equity returns and how can we capitalize on these trends?

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January 5, 2006 2006 – More of the Same (But with a lot less confidence)

Trends and issues for the new year’s investment landscape.

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2005

December 28, 2005 The Case for Shareholder Yield

The growing significance of free cash flow and shareholder yield as a dominant driver of future equity returns.

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October 24, 2005 Equity Research at Epoch Investment Partners

A clear and simple approach, designed to identify stocks that will protect our client’s capital and provide a return on their investments.

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September 8, 2005 It’s a MAD, MAD, World (and It’s Working, So Far!)

The benefits of globalization.

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August 15, 2005 Financial Services Stocks: The Wheels are Coming Off

More signs point to inherent weakness and vulnerability of financial services stocks.

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August 8, 2005 Mixing Financial Principles with Accounting Standards – A Slippery Slope

Today’s investors are witnesses to a fierce battle between two methods of stock market valuation – the battle between accounting and finance. Why is this battle so important and why are the stakes so high?

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July 4, 2005 The Silver Lining and a Big Dark Cloud

Looked at from a distance, the world is working surprisingly well. Almost all nations are experiencing real growth and interest rates are remarkably low. Indeed, rates are lower than almost anyone postulated a few months ago. Few things matter in finance more than interest rates. It is this rate that becomes the discount rate in one form or another for virtually all investments and provides the key metric when valuing public securities.

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July 4, 2005 The Future of Housing Prices – The Dark Side of Falling Interest Rates

A closer look at the housing market, where the continuation of low interest rates has created a bubble and is poised to play a vital, and potentially problematic, role.

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June 6, 2005 An Alternative Strategy for Seekers of Absolute Return

Our “long only” investment philosophy and winning the “free ante”.

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April 7, 2005 Back to the Future

For some readers, the title of this paper may recall one of the most popular movies of 1985. In “Back to the Future,” Marty McFly, the film’s young hero, returns to the past in order to gain insight into the future. At Epoch, we believe the same approach should be taken in the field of equity investing: in order to profit from the stock market’s future, you need to understand its past. In the following pages, we’ll explore how the history of equity returns can be used to optimize stock selection, portfolio construction and total value creation.

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2004

December 30, 2004 Silver Linings

Despite dark clouds in the distance there are plenty of investment themes to capture.

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July 26, 2004 3-11 – A Rate, Not a Date

The yield on U.S. Treasury bonds touched its lowest point in decades in 2003. What does this mean for future markets and returns?

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May 25, 2004 Value vs. Growth – An Update

Near the end of 2002, we authored a thought starter entitled, “Value vs. Growth– Does it really make a difference?” This essay examined the period March 1993 through September 2002, and appears below.

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2003

April 1, 2003 Why the World Works in the Long Run

The world is being ” rewired” in the first decade of this century. Globalization started in earnest in 1989 with the fall of the Berlin Wall and has accelerated in the early years of this new century. Prior to 1989 our world consisted of Europe, Japan, and the U.S. China, India, Russia and the rest of the world’s populace mattered little.

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2002

October 25, 2002 Financial Market Perspectives and Drivers

If the real economy and the financial economy are two sides of the same coin, what are the linkages, where can they be seen, and what drives changes within those linkages. Figure 1.A draws a link between the size of the real economy, measured by Gross Domestic Product, and the size of the financial economy, measured by the Wilshire Total Stock Market Index, from December 1970 to September 2002.

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June 17, 2002 The Case for Research-Based Small-Cap

The “small-cap versus large-cap” question is a classic dilemma within the investment community. Regardless of an investor’s preference, one thing is clear. If research matters, it matters most in small-cap companies.

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1978

November 3, 1978 An Analysis of Transaction Costs in Equity Trading

The genesis of this study occurred when a client provided BEA with a list of commissions per share paid by all eight of its money managers. The client wanted to know why the cents per share numbers varied so much from manager to manager. We replied that neither the size of the trades nor the effects of trading on the price paid for the security had been taken into account.

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