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 strategy primarily sources ideas from our suite of concentrated 'Choice' strategies (Global, Non-U.S. and U.S.) in assembling a highly concentrated portfolio. In turn, TD Epoch's Choice strategies source the majority of positions from the approximately 500-600 securities held across the firm, benefiting from proprietary research that drives our U.S. and global strategies. As such, Global Select represents the most concentrated form of our highest conviction ideas. Portfolio Management is led by the Co-CIOs, representing the full intellectual property of TD Epoch's global equity investment team, including risk management. 

The investment team looks 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. The Global Select strategy leverages the fundamental research efforts of the entire Firm, along with the work of its Quantitative Research and Risk Management team and themes developed by our Investment Policy Group.

The firm's broader underlying equity strategies incorporate qualitative and quantitative analysis to identify potential investments, taking into consideration factors that can lead to growing cash flow. Analysts identify potential research candidates through meetings with companies, suppliers, customers, their peers, conferences, and trade shows. In addition, the portfolio managers may assign research candidates to the analysts based on the macro context or portfolio positioning considerations. Fundamental insights are complemented with the Epoch Core Model, a proprietary quantitative tool that was developed in-house to systematically express our fundamental investment philosophy, increase the breadth of coverage by our fundamental analysts and help prioritize their research work. 

Research analysts perform rigorous bottom-up fundamental research with a focus on identifying companies that have the ability to generate, sustain, and grow free cash flow over time and possess managements that implement sound capital allocation policies designed to create shareholder value. We review the company's business model, industry dynamics, competitive positioning and strategy, free-cash-flow profile, and returns on capital. In addition, we examine management's historical track record and incentive schemes. We prefer management teams that are focused on measures like free cash flow, return on invested capital, and total shareholder return vs. shorter term sales and EPS growth measures that can be flattered by accounting practices but may not translate into true shareholder value creation.

The final research consideration is price. Analysts must have a variant view of the opportunity compared to what may be imbedded in the current price of the security. This insight may reflect a discounted cash flow analysis or a simpler, price to free-cash-flow multiple or free-cash-flow yield. Estimates of the variant point of view value of the company are compared to the current market price and we look to initiate positions when there is a disconnect between the two.

While the portfolio is constructed from the bottom-up, decisions are made with consideration of the macro context. TD Epoch’s Investment Policy Group, composed of the Co-CIO's and senior members of our investment leadership, provides insight and guidance on the global market environment and macroeconomic trends.

We analyze risk as part of the portfolio construction process to monitor portfolio volatility and better ensure the delivery of the strategy’s goals. A senior member of the Risk Management team is a co-portfolio manager on every strategy managed by TD Epoch, so portfolio leadership is aware of unintended biases and the effect individual securities may have on the portfolio. The portfolio is diversified across sectors and the sizes of individual positions are limited.