Emerging Markets Equity

TD Epoch Emerging Markets Equity

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At a glance

Our Emerging Markets Equity Strategy seeks long-term capital appreciation by investing in a portfolio of 60-80 securities in the emerging and frontier markets. is an actively managed core strategy, and uses a systematic, data-driven investment process to select companies based on their ability to generate free cash flow and allocate it intelligently for the benefit of shareholders. We integrate quantitative research, fundamental analysis, and data science techniques to deliver strong risk-adjusted returns. We believe this approach to emerging markets investing provides discipline, repeatability, and intelligent flexibility.

Strategy Profile

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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.

Philosophy and approach

The bedrock of our philosophy is the belief that the best predictors of long-term shareholder return are growth in free cash flow and management's skill in allocating that cash.

We prefer cash flow to earnings for three reasons. First, cash flows are more reliable than reported earnings because they are harder to manipulate under accounting rules. Second, for innovative businesses which derive much of their economic value from intangible assets, reported earnings have become increasingly less relevant as a measure of value generation compared to cash flows. Third, businesses which appear to generate reported earnings but not cash flows are more likely to run into financial distress.

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.

The investable universe for the Emerging Markets Equity strategy largely comprises the constituents of the MSCI Emerging Markets IMI Index, although non-benchmark securities may be included if they are suggested by our sector analysts. To broaden our opportunity set, we also consider a select number of frontier market (as defined by MSCI) securities.

The strategy combines rigorous quantitative screening based on our proprietary stock selection model and in-depth fundamental research. We developed the proprietary Epoch Core Model ("ECM")—a systematic, rules-based expression of our investment philosophy to help us identify companies which are most likely to meet our investment criteria. The ECM evaluates each stock in our investment universe according to five broad investment characteristics which we believe drive company fundamentals and security prices. Each investment component—Quality, Valuation, Growth, Capital Allocation, and Investor Behavior—comprises a multitude of variables and ultimately embodies the key aspects of our fundamental research process. While the ECM is the primary source for research idea generation within the strategy, investment ideas can also come from our sector analysts or the broader global investment team at Epoch.

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 analysts 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 lesser volatile businesses and stock prices due to their ability to consistently generate cash flow over time. Only stocks which meet our investment criteria are considered for inclusion in the portfolio.

Our portfolio construction process incorporates the relative attractiveness of a stock per our ECM, our sector analyst insights, as well as relevant risk considerations. In general, for a given level of risk, stocks with high ECM scores and/or high analyst ratings will tend to have larger weights in the portfolio. Similarly, for a given level of return, higher risk stocks will tend to have lower weights. 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—our fundamental analysts, quantitative researchers, and data scientists 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.