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Winning at Active Management by John Keefe, Michael A. Welhoelter, Steven D. Bleiberg, William W. Priest

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Chapter 13 The Epoch Core Model

Epoch manages a variety of equity strategies, differing by the markets where they invest (in the United States, outside it, or globally) and by the size of companies they target. What they all have in common, however, is the firm’s active investment philosophy detailed earlier, which selects companies on their ability to generate free cash flow, and allocate that capital wisely.

Considerable effort goes in to the decision to add a stock to the Epoch portfolios. A part of the process is a thorough understanding of the drivers of each company’s business, and forecasts of what is likely for the future. Every sector has its own set of economics, and within sectors, companies’ business models can vary widely. Each of Epoch’s fundamental research analysts is responsible for maintaining complete financial models for 100 or so companies per sector—a workload that rapidly becomes voluminous.

The work is also complex: the evaluation of companies is highly subjective and requires detailed handwork, so to speak, on the part of our analysts. In some cases companies’ free cash flow is revealed with simple adjustments to the financial statements they present, while in others more subjective interpretation is necessary. For instance, in their deployment of capital investment some companies pursue a higher proportion of internal opportunities in existing business lines while others grow through acquisitions. Putting them all on an equal footing requires the insights ...

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