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.

Our process begins by identifying candidates for investment from a universe of common stocks generally consisting of companies in the Russell 3000 Index, although the strategy has the flexibility to invest outside the Index. We look for companies that generate free cash flow, have little debt relative to their competitors (or are deleveraging), and possess managements with a history of capital allocation decisions that have increased shareholder value.

From the investable universe, we develop a focused list of investment candidates sourced by our qualitative insights, quantitative tools, and macroeconomic observations. Analysts leverage their deep industry knowledge and experience to identify potential research candidates through meetings with companies, suppliers, customers and peers, as well as conferences and trade shows. 

We complement our fundamental insights with the Epoch Core Model ("ECM"), a proprietary quantitative tool that expresses and reinforces, in quantitative terms, the economic logic behind TD Epoch's fundamental research, seeking out companies headed by capable managements that are able to consistently generate and grow free cash flow. The ECM evaluates each stock in our investment universe according to five broad investment characteristics—Quality, Valuation, Growth, Capital Allocation, and Investor Behavior—which we believe drive company fundamentals and security prices.