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.
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.
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
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.
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.
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
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.
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.
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.
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?
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.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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.
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.
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.
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.
Bill Priest joined nine other investment industry experts for the Barron’s 2019 Roundtable. He spoke about what Epoch expects to shape markets in the coming year, including quantitative tightening, trade wars, excessive debt and challenges for liberal democracies. Read more »