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.
Our Perspectives
In this second part of our two-part series, we demonstrate that deglobalization implies trend increases in capex and the labor share, as well as a higher weighted average cost of capital (WACC). This constitutes a secular headwind for margins and free cash flow (FCF), especially for tech and manufacturing. With companies facing greater macro volatility and an elevated WACC, we expect lower average multiples. This will prove especially challenging for longer duration assets, such as venture capital and speculative tech companies that are years away from generating FCF on a sustainable basis.
Global supply chains are being overhauled to reduce vulnerabilities and to restrict Chinese imports of “dual-use” products that can be used for both commercial and military purposes. In Part I of this two part series we show why the initial focus is on semiconductors and energy, and where it might go from there (AI, quantum computing, and other advanced tech). We also demonstrate the challenges for Chinese equities and U.S.-based multinational corporations, which have been the two biggest beneficiaries of globalization.
December 8, 2022
Reinventing Globalization: Part I Playing the Movie in Reverse
Of late, people are blaming a variety of economic ills on an unlikely villain: the desire of investors to earn good returns on capital. But, no industry can be expected to survive if it is not creating value for the investors in that industry. Earning good returns on capital is not an obstacle to satisfying consumer demands; it’s what enables companies to continue to satisfy those demands.
July 19, 2022
This Is Why We Can’t Have Nice Things
Until recently, we had been living in a disinflationary environment that started in the 1980s. We believe three factors – Deglobalization, Demographics and Decarbonization – have led us to a secular reflationary environment. As a result the next decade is going to look quite different than the 2010s, with a number of critical implications for investors.
The transition to net-zero emissions (NZE) involves a fundamental change in the structure of the economy, and will likely be messy, implying periodic supply shortages and even more volatile energy prices. Further, inflation and nominal interest rates will probably be higher and more volatile, especially relative to the levels of the last two decades. This has not yet been priced into markets.
March 31, 2022
Greenflation: The Energy Transition Will Prove Inflationary
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.
September 21, 2021