Strategies
& Results

Quality and Profitability

 

  • An explanation of:
    • Epoch’s definition of a quality company
    • How quality has performed relative to the broader market
    • The strategy’s attractive exposure to quality and growth factors relative to the market and peer

Attractive Risk Reward Profile

 

  • A look at the strategy’s:
    • Risk reward profile compared to its benchmark, its peer group and other equity asset classes
    • Upside and downside capture and drawdown history
    • Recovery time following drawdowns

Consistent Outperformance

 

  • Details on the strategy’s:
    • Consistent outperformance of its benchmark since inception
    • Performance relative to its peer group
    • High Information Ratio and why the portfolio optimizer seeks to maximize this metric for the portfolio

Differentiation and Consistency

 

  • An analysis of how the strategy:
    • Is differentiated from its benchmark as measured by active share and market cap
    • Compares to its peer group in terms of holdings and style factor exposures
    • Has maintained style consistency while offering that differentiation

ESG and Sustainable Investing

 

  • A review of:
    • Epoch’s approach to ESG and sustainable investing
    • How ESG considerations are handled within the strategy

Investment Philosophy

 

  • An exploration of:
    • The reasons behind the importance of return on invested capital (ROIC) minus weighted average cost of capital (WACC) when evaluating a company’s investments
    • How the markets have treated companies with high ROIC
    • The persistence of high ROIC from one year to the next and how that informs our investment process

Investment Process

 

  • A view into:
    • How we narrow our investable universe using quantitative tools
    • The intertwined portfolio optimization and fundamental research steps of the process
    • Our ongoing portfolio monitoring and risk management process

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.

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.

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.

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.