Emerging Markets Equity
At a Glance
Our Emerging Markets Equity strategy invests in a portfolio of 60-80 securities of companies, selected based on their ability to generate free cash flow and allocate it intelligently for the benefit of shareholders.
The Emerging Markets Equity Opportunity
- Use of a quantitative model and defined processes to systematically implement Epoch’s investment philosophy ensures discipline and repeatability.
- Quantitative insights complimented with fundamental analysis provide a holistic view of candidate holdings and the ability to respond to unusual circumstances (e.g., spin-off, IPOs). The quality of our fundamental analysis gives us the conviction to hold focused portfolio of 60-80 stocks.
- Modern data science techniques boost the speed and efficiency of our research and enables us to innovate faster.
- Customized performance measurement system spurs self-improvement and helps us keep our investment edge.
Epoch’s Systematic Investment Philosophy and Approach
The bedrock of our philosophy is that the growth and applications of free cash flow represent the best predictor of long-term shareholder return. Capital allocation matters because decisions on how to allocate cash flows — whether to reinvest in order to grow a company, or to return capital to shareholders — can create or destroy long-term shareholder value. Specifically, we look for a consistent and sustainable ability to generate free cash flow and to allocate it effectively among internal reinvestment opportunities, acquisitions, dividends, share re-purchases and debt pay downs.
The strategy is actively managed and uses a systematic, data-driven investment process. We believe this approach to emerging markets investing provides discipline, repeatability, and intelligent flexibility.
We primarily use the Epoch Core Model, our proprietary quantitative model, to generate research ideas. Our sector specialists and thematic views are additional sources of research ideas. We recognize that even the best stock selection models will struggle to capture complex industry dynamics and nuanced differences in business models. As such, we rely on detailed fundamental analysis performed by sector specialists to understand the sources of competitive advantage for companies, how they translate into free cash flows, and whether these will persist over time. Another key component of the analysis is an evaluation of management’s framework and ability to allocate capital effectively to create shareholder value. The companies uncovered by this process may have inherently less volatility due to their ability to generate cash flow over time. Only stocks which meet our investment criteria are considered for inclusion in the portfolio.
Our portfolio construction process considers the relative attractiveness of a stock per the Epoch Core Model, our fundamental analyst insights, as well as risk considerations. Once a stock has been purchased, we continually revisit our thesis. The stock is sold if our thesis is challenged or if we see another investment with a better risk-reward profile.
The investment team offers complementary skills and perspectives – quantitative, fundamental, and data science. Our team is integrated — fundamental analysts are embedded with our quantitative and data science professionals and work closely on model and stock research, as well as various long-term projects. In this manner, we ensure a unified purpose and cross-fertilization of ideas.
We believe effective risk management requires an active, forward-looking, and flexible approach, especially in Emerging Markets where country risk can be a significant source of under-performance. We use a comprehensive risk management process to minimize unintended risks and diversify portfolio holdings across countries, industries, market cap ranges, and other risk factors. This tends to result in a portfolio with below-average volatility.
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.