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.
The recent surge in start-ups and unicorns reflects the broadening of the digital revolution across industries, and suggests improving productivity and free cash flow. Further, although the digitization of the economy is still in early earnings, we expect digital platforms to represent the majority of market cap by 2025, with tech, health care and communications the most promising sectors.
The Pandemic Accelerant Part II: Turbo-Charging the Digital Economy
Inflation risks are at a four-decade high due to today’s combination of a generous Treasury, an overly tolerant Fed, and a reopening economy. While our base-case scenario assumes only a brief period of above-target inflation, investors should brace themselves for more inflation scares, which will likely remain a key driver of equity markets well into 2022.
During the past two years, CBDC has progressed from a bold speculative concept to a seeming inevitability and will soon be a core feature of our financial ecosystem. The rollout of CBDCs will further accelerate the digitization of the economy, which is the key defining feature of markets over the past decade. This paper explores the implications for monetary policy, the FinTech and payments sectors, and the potential disintermediation of significant swaths of the commercial banking system.
Money 3.0: Central Bank Digital Currencies (CBDC)
The Cambrian explosion of exciting breakthroughs in AI, autonomous driving, 5G, and cloud computing will drive double-digit growth in semiconductor revenues for the foreseeable future. Superstar firms have come to dominate all subsectors of the increasingly concentrated semiconductor industry, which implies pricing power and explains the sector’s attractive operating margins and return on capital. Valuations are reasonable, and we have a constructive view on the semiconductor sector and believe it possesses considerable upside.
Moore’s Law & the Race for the Rest of the Chessboard
Both sides of the political spectrum have been increasing their calls for regulatory action on the Big Tech companies. Here we explain why tech will continue to be the most dynamic sector of the economy, and why we expect greater breadth in tech market leadership and the emergence of entirely new sub-sectors.
Will Biden Take On the Tech Barons?
More than just our proprietary stock selection model, the Epoch Core Model (ECM) is a rules-based expression of Epoch’s free cash flow investment philosophy. Learn more about the components that make up the ECM and how it’s being used to enhance the firm’s investment processes across strategies, to surface ideas for further research, to prioritize our research queue, and to inform our portfolio construction process.
The Epoch Core Model: Our Proprietary Stock Model
In understanding the performance of any investment strategy, it is important to pay attention to how real economic events drove that performance, rather than fall back on a set of abstract factor returns as if they were somehow responsible.
Factors: Not Driving, Just Along for the Ride
The last six months have been profoundly transformational, with the COVID shock acting as an accelerant for the digitization of the economy. This radical transition is especially advantageous for asset-light business models. All companies will be acutely affected, although the biggest winners are platforms, with their economies of scale and low marginal costs.