Investment managers present a puzzle to understanding the prospective value of their work, even when compared to other services business. The measurement of portfolio performance has evolved considerably in the past 30 years: evaluated against a particular benchmark, the wisdom of a manager’s past decisions can be analyzed in great detail, with a galaxy of custom- designed statistics.

That said, portfolio mathematics still have trouble in definitively distinguishing luck from skill in historical results (particularly over short periods). Even the most skillful active managers sometimes underperform their benchmarks, and less skilled managers can be blessed with lucky streaks. A great active manager might outperform 60 percent of the time, but still underperform during the other 40 percent (and in truly challenging market environments, such as the one following the global financial crisis, it’s likely that many active managers will fall short).

Even more challenging is the prediction of future performance from the results of the past: some of the earliest research from financial academics went in search of predicting performance, although its success has been fleeting. One early example is the Sharpe ratio, proposed 50 years ago by Stanford professor William Sharpe, initially as a tool for forecasting the returns of mutual funds.¹ More recently, the financial economists Martijn Cremers and Antti Petajisto hit on a new statistic that they hoped would have predictive value, named active share.² Subsequent research has shown both the Sharpe ratio and active share to be informative in measuring past performance, but the industry is still in search of an effective predictor. (Investment manager skill is a topic covered in detail in Chapter 6.)³

Accordingly, prospective clients, and the consultants that assist them, supplement return histories with additional characteristics of investment managers. A firm’s culture is a distinguishing feature and part of its value proposition to clients, alongside its investment process and the pedigrees of its team. It’s our view that even in the largest firms that manage hundreds of billions of dollars in client assets—and accordingly may need greater structure—there exists a desire and effort to create a partnership-like environment within teams.

Values

Underlying an investment firm’s culture is a set of values—beliefs and principles that guide its employees in their work, and its leaders in their strategic decisions for the organization. Some firms articulate their values in a written statement that becomes part of the processes of hiring and orientation, and is useful to both the firm and employees in identifying the kind of people who should be hired, as well as providing practical guidelines on how to succeed.

At Epoch we don’t maintain a detailed list of values; instead, we express them through an aspiration statement, which we developed at the founding of the firm in 2004:

• To provide superior risk-adjusted results using a transparent approach based on our free cash flow philosophy;
• To serve investors who seek and value Epoch’s investment approach;
• To continue as a thought leader and innovator in global investment management.

The first aspiration, setting out the goal of superior performance, calls for a strong work ethic, a solid base of knowledge that people refresh through curiosity, and consistency and good judgment in security selection and portfolio construction, among other things.

The second requires candor and sincerity in dealing with clients, and taking responsibility for our results. This point is especially important, as it addresses Epoch’s investment style: it’s essential that clients understand what sort of risk-adjusted results our approach is trying to achieve, and when it is most likely to succeed (or to underperform).

Meeting the last goal also calls for hard work, but in the sense of a separate effort—thinking creatively outside one’s silo of experience and knowledge, to anticipate developments in the global economy and financial markets, shape the results into new investment strategies, and articulate them to clients in our resource of white papers and other investment insights.

Epoch’s second aspiration deserves amplification. We think of ourselves as owners of businesses, not as traders of stocks. We don’t buy companies because we think their stock prices are temporarily depressed after having disappointed the markets, and might stand to benefit from a short-term pickup in their outlook. Rather, we look for firms that have the ability to grow the value of their businesses over the long term, through a combination of superior returns on their invested capital, and management teams who understand that value is created by successful capital allocation decisions.

Deb Clarke, the global head of investment research at consultants Mercer LLC, has written on the distinction between the two investment viewpoints, and advocates that a long-term orientation is likely to better match the liabilities and objectives of the institutions that own the managed assets. She identifies two groups of such investors: one invests in established businesses expected to earn superior long-term returns on their high-quality operations and finances. The second type of long-term investor finds companies that may already be recognized as high-growth, but believes that the market lacks the imagination or time horizon to appreciate just how far they can go.

She points out that conventional performance measures, such as quarterly or annual returns, are not sufficient to evaluate such broad-based, long-term investing, and that additional measures of risk—geopolitical, environmental and technological—should be part of the dialogue. Ms. Clarke explains that “it is possible to succeed with this approach if investors genuinely understand . . . the manager’s strategy, and agree at the outset on the measures that will be used to monitor the progress of the portfolio on a regular (but not too frequent) basis. This is likely to align investors and managers more closely and make for a much better-informed discussion . . . ultimately leading to . . . better long-term performance.”⁴

Clients that hire Epoch simply from a few years’ superior returns in a performance record would probably dismiss us when returns fall short, so we look for clients who subscribe to the economic logic behind our strategies, and appreciate the benefits of investing with Epoch for the long term. Importantly, we want to be seen as providing thoughtful insights on the investment issues of the day.

“Clients that hire you by the numbers will fire you by the numbers, too, so we look for clients that understand and value the methodology behind our strategies.”

—Bill Priest

A complementary set of values is proposed by Mike Krzyzewski, coach of Duke University’s basketball team. His Duke teams have won five national championships, and “Coach K” has led all his teams to over 1,000 wins—the most in NCAA history.⁵

Coach K has developed a framework for team building, promoting five key values expressed in the analogy of a fist. “[M]y goal as a leader is to create a dominant team where all five fingers fit together into a powerful fist,” he wrote in his 2001 book Leading with the Heart. “So in order to make it happen, the team has to learn how to think as one.”⁶

His first value is communication: Duke’s teams feature offensive and defensive systems, but also build in a system for communication. We add that as an investment firm grows, the permutations among the employees grow exponentially, and management needs to ensure that communication expands to where it’s needed. That expansion can be accomplished with planned meetings, or informal get-togethers, or just establishing places in the office for people to gather, but management must do what it can to nudge team members to exchange ideas. (By the same token, leaders also should seek advice from their team members.)

Coach K’s second value is trust, which he casts in terms of telling the truth—identifying team members’ shortfalls, but in a constructive way. His third value is collective responsibility: teams win and lose together, and when a finger points blame, the group no longer has a fist. Caring is essential as well, toward individuals and the team, as well as caring about group goals of performance and excellence. The fifth value is pride— individuals trying hard enough, and putting a personal signature on everything they do. Overall, the goal of his value system—which has shown great results—is to convince team members that they are part of something bigger than themselves.

During year-end reviews at Epoch, we ask people two questions, in the spirit of Coach K’s values of collective responsibility and caring. The first is directed at the individual: “What can we as management provide to allow you to do your job more effectively?” The second is directed back at management: “What can we do to make the organization more effective?” Everyone has to own the effort in his individual way, and asking these questions leads to valuable conversations—causing staff and management to think about how they can help one another, and bringing us together as a team.

“‘Evolve We Must’ is our mantra. Standing still usually means that at the end of the day you will not still be standing.”

—Bill Priest

Integrity

Financial businesses have unique obligations to their clients. Companies in many lines of business follow a caveat emptor, or “buyer beware,” business model, where customers are expected to be their own judges of product and service quality. Not so with investment management: asset managers are fiduciaries, and held to a higher standard of putting the interests of clients above their own. This places an emphasis on trust—both among the firm and its clients, and within the firm among its employees—and integrity. Werner Erhard and Michael Jensen, prominent scholars of human behavior and achievement and financial economics, respectively, have developed an extensive framework around integrity in finance,⁷ motivated by their disappointment with the behavior of some financial institutions leading up to the 2008 financial crisis. Their work focuses on corporate financial management and compensation policies, as well the underwriting of securities, but Erhard and Jensen’s ideas have broad application to a great many other businesses, and certainly are relevant to the cultural aspects of investment management. They line up with our thinking as well.

Erhard and Jensen construct a detailed model of integrity, which states, in summary, that people with integrity know what’s expected of them; that they keep their word; and that they carry out what they’ve said they would. Importantly, when people fail to keep commitments—as will happen—they must acknowledge that they have and, as Erhard and Jensen put it, make provisions to clean up any messes they’ve created for colleagues or customers who were counting on them.

In Erhard and Jensen’s model, integrity is not just a desirable, intangible virtue, but is a “positive phenomenon”—a definite cause, with observable effects. As they state: “[W]ith any positive phenomenon—for example, gravity—there are effects caused by actions related to that phenomenon. The action of stepping off a cliff will, as a result of gravity being a positive phenomenon, cause an effect (whether one likes the effect or not).”⁸ The implication of their work is that integrity is a factor of production—“heretofore hidden, . . . as important as knowledge, technology, entrepreneurship, human capital, and physical and social capital.”⁹ In their 2014 paper, the two scholars noted that empirical tests of integrity were under way at a large financial services firm.

We add another criterion that is implicit in the Erhard-Jensen integrity framework, but with little specific mention: accountability. In the wake of the 2008 financial crisis, regulators in the United States and elsewhere brought many actions against financial companies for marketing toxic investment products, but there were few consequences for the individuals involved.

Gretchen Morgenson, writing in the New York Times in August 2015, highlights the lack of accountability with an example of a 2015 settlement around a municipal bond strategy sold by Citibank from 2002 through 2008 to thousands of high-net-worth investors. It was marketed as a safe investment despite its considerable leverage, and triggered losses to customers estimated at $2 billion. The bank is said to have paid investors about $700 million to compensate for losses, as well as $180 million in a settlement with the U.S. Securities and Exchange Commission (SEC).

“Most disturbing . . . is the settlement’s lack of accountability,” Ms. Morgenson wrote: “As is all too common, Citigroup’s shareholders are footing the $180 million bill associated with it. But they didn’t devise the toxic bond strategy, sell it or hide its risks to investors.” The SEC’s action pointed out the role of the fund manager in failing to properly oversee the fund, but the accountability was apparently plea-bargained away, and the SEC settlement did not name the individual ultimately responsible (although Ms. Morgenson’s story did so). She asks: “How can we expect Wall Street’s me-first culture to change when regulators won’t pursue or even identify the me-firsters who are directly involved?”¹⁰

As for Epoch, we are inclined to leave detecting and measuring integrity to the experts, but we have always emphasized its importance. In a firm with integrity nothing is hidden, and deception and untruth are not tolerated. Therefore, the compliance function—following regulations of legal authorities, as well as the rules of conduct a firm has developed on its own—is paramount. As a firm our compliance record has been excellent, as validated by the results of audits by various regulatory bodies.

Trust

Trust is an essential value within professional partnerships, where people need to know that they can depend on their colleagues to deliver quality results. Creative thinking and collaboration are essential, again highlighting the shortcomings of a command-and-control culture—in some settings.

“After all, bureaucracies are based on the assumption that people will abuse power if we entrust them with it,” wrote management consultant Robert Bruce Shaw: in such situations, “Trust is replaced by formal regulations that force people to behave in ways deemed appropriate by those in positions of authority.”¹¹ Shaw goes on to say that “new” competitive demands—he was writing in 1997—render such tight controls too restrictive and time consuming.

He sets out three “trust imperatives” for building trust in an organization: achieving results (possessing the right skills and getting the intended results); acting with integrity (behaving consistently and following through on commitments); and demonstrating concern (respecting the well-being of others). Unlike formal regulations, however, an environment of trust does not become effective immediately upon management’s pronouncements; instead, it must be built up over time among colleagues, and at different levels of the organization, as they meet each other’s expectations.¹² (However, it is constructive for management to keep trust in mind while making and keeping organizational and individual commitments.)

Trust has a special role in investment management, one that is pervasive and transcendent. Clients must intrinsically trust the firms working for them to be capable stewards of their assets, and deliver the best performance their strategies allow.

Investment management firms operate in two spheres. One concerns the “business of investing”—managing clients’ money capably, and delivering the best returns possible, in the context of the firm’s philosophy and investment process. The other focuses on the “business of the investing business,” which revolves around gathering assets, providing career opportunities for the firm’s employees, and making a profit for its owners. Individual firms tend to be either client-centric or self-centric,¹³ emphasizing the two parts in different ways depending on their ownership structures, and what revenue and profit targets they are obligated to reach. Ideally, the business of investing takes priority; when that job is well done, the clients, employees, and owners all will be rewarded.

In the relationships among asset managers and asset owners, the elephant in the room is often a gap of trust between the two. Asset managers are generally for-profit shareholder entities, while asset owners tend to be profit-for-members entities, and a lack of congruence can cause a breakdown in trust, and a short-lived relationship.¹⁴ The sub rosa question for both parties is “What kind of asset manager are you?” That is, are you investing-led, or commercial-led? Long-lived relationships require the former element to dominate, and it needs to reflect itself not only in performance metrics, but in thought leadership—allowing for partnering efforts of knowledge exchange, going well beyond just run-of-the-mill quarterly reviews.

“There’s the business of investing, and the business of the investing business. Of course, when conflict arises, the business of investing should dominate.”

—Bill Priest

At another level, a firm’s employees have to trust their leaders to use the company’s resources well, and make equitable decisions on compensation and advancement. (Because bonuses and other incentives typically make up a large and variable proportion of compensation, this trust is probably more important in investment management than in other knowledge businesses.) And leaders have to trust employees, to whom they have granted such important roles in the fortune and reputation of the firm. Finally, the employees have to trust each other in order to make mutual interdependence a workable proposition.

A firm’s clients have an advantage in placing their trust with a manager: they can turn to investment management consultants, who in addition to vetting a firm’s performance record also make a tacit, or even explicit, endorsement such as, “We’ve known these guys for a while, and you can trust them.” It’s not as easy for employees: even with plenty of research into how a firm operates, for a new employee entering a firm, coming to trust leaders and colleagues will likely require the successful completion of a few performance and compensation cycles.

At Epoch Investment Partners, we were able to expand the trust within the firm upon the arrival of the global financial crisis in September 2008—a very challenging time indeed. While the senior members of Epoch’s investment team had decades of experience, the firm was only four years old, and assets under management were about $6 billion. How would the firm fare in such an uncertain time?

When the crisis hit, Epoch’s leadership faced three difficult challenges at once: what to tell clients about the health of the firm; how to manage the work force in the face of what might be a great contraction in business; and how to protect the investment of the firm’s owners. (Epoch was a public company at the time.)

We also wanted the actions to be consistent. We started to become wary of the state of the financial markets in 2007, as evidenced by several white papers Epoch published during that period. By August 2008 the markets and the global economy were already in serious trouble, and we couldn’t rule out that they might get worse. (A few of our most relevant white papers are reprinted in Appendix A.)

Then on Sunday, September 15, 2008, Lehman Brothers Holdings filed for bankruptcy, and the global financial markets went into freefall. Lehman’s failure also had an immediate impact on the global real economy, as Lehman had grown to become the principal counterparty to letters of credit, which are crucial to international trade.^15,16 That evening, we sent out a note to everyone in the firm, saying that we would hold an “all-hands” meeting Monday morning at 9 o’clock.

In that meeting, I said, “Look—we are about to go through something that none of us has ever seen before. It’s an enormous threat to the world as we know it, and no one, not even me, has seen anything like it, and it’s going to be absolutely terrifying.”

“However, because we have a balance sheet that can withstand a prolonged period of market correction”—at that point, the cash on the balance sheet was greater than our annual revenues!—“there will be no layoffs, so long as all of us do our jobs.” I went on to declare that there would be a bonus pool for the year, albeit a reduced one.

So as leaders, we took the long view, deciding that we would not lay off any employees despite the downturn sure to come, and would be better off keeping our staff at the ready for a recovery. Fortunately, the firm was in a strong financial condition. However, Epoch’s leaders chose to cut their own compensation drastically and allocate those funds to salaries and bonuses of the staff, to ensure that client portfolio objectives were pursued with full focus and resources. We mention this not because we are looking for a pat on the back, but rather as an example of the importance of bringing justice, rather than formulaic fairness, to a difficult situation. Employees appreciated that action, and it certainly enhanced trust and loyalty throughout the firm: the choice showed employees that management valued them and their efforts, and strengthened the connection among Epoch’s staff and leadership.

Culture and Clients

While the culture of an investment manager is developed and refined within the firm, culture is also important in distinguishing a firm to the outside world, and should be an important consideration to clients in manager hiring. A firm’s track record is obviously important to the decision to engage and keep a manager, but in isolation investment performance, particularly over shorter periods, can be an unreliable indicator of investment skill and returns to be earned in the future. Thus, institutional investors, and the consultants that advise and assist them, take culture into account when choosing and monitoring investment managers.

“We don’t make a specific assessment of a firm’s culture, but we look at six areas of investment skill, and culture is included in each one,” says James MacLachlan, Global Head of Equity Research in the New York office of global investment consultants Willis Towers Watson. “Skill without culture doesn’t get you there, and neither does culture without skill.”¹⁷

Much of Willis Towers Watson’s analysis looks at the alignment of the firm with its clients—whether the manager is living up to the spirit of its obligations as a fiduciary, putting the interests of clients ahead of those of the firm, and resolving any conflicts in favor of the client.

An important culture-skill consideration is how the manager addresses the capacity of its investment strategies. For most asset classes, and for most investment styles, the size of a portfolio and the probability of outperformance work at cross purposes: once a strategy grows beyond a critical mass, the portfolio manager faces challenges in finding the right securities, acquiring them at the right prices, and then selling them in a timely fashion when necessary. Thus, the client’s interest is best served by keeping the portfolio within its capacity limits. However, managers of successful strategies face the temptation of bringing in new clients and letting the portfolio grow further to increase fee revenues, and then possibly jeopardizing future investment returns. James MacLachlan observes: “We spend a lot of time looking at how managers handle capacity issues proactively, and how they trade off the interests of long-time clients against the additional revenues new clients will bring in, and not hurt their ability to generate alpha.” He points out that few organizations truly constrain their capacity.

In a similar vein, Willis Towers Watson looks at how a firm’s managers are compensated—whether on the basis of the returns on client portfolios (how well the clients do) or on the growth in assets under management (how well the firm does). Paying incentives to employees on asset growth can work against the principle of observing capacity limits on investment strategies, and MacLachlan asks: “Is a firm led by its investment managers, who are likely to be more attentive to performance, or by its business managers, who might seek to maximize assets beyond a limit that serves clients?”

At Epoch, we align the firm’s interests with those of clients in several ways. One is fee rates: clients with similar-sized accounts are charged equal fees (a practice known in the industry as a “most favored nation” policy). Another is compensation: bonuses are paid on the performance of the portfolios, rather than the volume of new business in a given year. And as mentioned earlier, instead of receiving bonuses in cash, employees are required to hold a portion in Epoch’s investment strategies—so employees are investing alongside the clients, and earn those same returns on a significant amount of their net worth. Such co-investment also aligns the time frame of the firm with that of the client: investment people shouldn’t be focused just on the current year, but instead on the multi-year life span of a client relationship.

Firm Culture under Stress

A firm’s culture is tested and evolves over time as the organization expands, and is subjected to sudden shocks. One instance highlighting the strength of Epoch’s culture involved the seemingly innocent issue of our firm party for the winter holidays in 2008, a few weeks after the full arrival of the financial crisis. Some financial firms throw legendary holiday parties, but as a relatively small company with a fairly conservative group of employees, ours have tended to be more modest. Still, employees and management both were wondering whether to have one at all: given how terrible the markets were, and the economy seemed to be, might a party be disrespectful of the many people already enduring hard times? Should we give the money to a charity instead? Or put it into staff bonuses? People had worked hard, especially so, in 2008. Along with the many other issues to be addressed in the face of the crisis, our management team seriously debated the Christmas party, and the message that having one—or not—would send.

Thus, at the end of November, I penned a memo to the entire firm, which said in part:

Having a holiday party perpetuates a culture of shared values, demonstrates a sense of collective appreciation for the year’s efforts, and allows all of us a few moments of pleasure before returning to the more somber world around us. Everyone works hard to move the firm forward. Sometimes our best efforts are not good enough, and this year may be one of those years. Nevertheless, let us come together for an evening and celebrate a year of common effort. . . . [A]fter all, is this not the season of promise and renewal? Please save December 12th for the Holiday Party and we look forward to seeing you there.

Culture in Recruiting

Shocks such as big market downdrafts are among the most trying events an investment firm’s culture is called on to survive, but keeping culture on track can also be a challenge during periods of more normal organic growth. Determining which prospective employees will best fit and carry the culture forward is very difficult, because the intangible traits of culture are hard to observe in the course of a few interviews.

Some firms supplement their hiring practices with standardized personality tests, but in my long career I have never believed that such measures added much insight to the interview process. Standardized tests provide only an indirect view of each individual, and the means for evaluating the results of tests—grouping people into categories from very broad averages—are indirect as well. Moreover, investment firms are often hiring for specialized positions, where it’s desirable that someone has gained a special knowledge as an analyst, or shown skill as a portfolio manager. Therefore, our starting point may be the resume and what an individual has already achieved.

The folks at Google take an alternative approach, focused on the individual rather than past accomplishments. Their prodigious growth has required adding many thousands of people every year, so that hiring is a continuous and substantial effort. In many cases, however, people don’t stay in one position for a long time, and as Eric Schmidt and Jonathan Rosenberg write: “Hiring decisions are too important to be left in the hands of a manager who may or may not have a stake in the employee’s success a year later.”¹⁸ Therefore, Google assigns its hiring decisions to small committees, based on a standard set of information on all candidates and four interviews of a half-hour each, without giving much weight to relationships a person might already have with people in the company, or the subjective opinions of the committee members. Still, they believe that hiring is an essential part of everyone’s job, including senior management, and too important to be consigned to recruiters alone.

The staffing needs of Epoch, and many other investment managers, are quite different in the sense that we seek to form lasting teams and relationships, because in our business, long tenures and stable staff are a desirable trait. We don’t hire that many people, so our process is not regimented, but instead driven by our qualitative assessments of candidates’ skills and values. Thus, rather than look to tests of general potential, we ask candidates to meet with all the people they will be working with at our firm—which could entail 15 or more separate interviews—and we make decisions from our aggregate impressions.

My philosophy, admittedly simple, is to seek out candidates who are “decent.”¹⁹ Decency is not easy to define or measure, but if people don’t like who they work with, they can’t work with them for long periods of time, or at least not productively.

Moreover, decent people tend to be likeable—they share traits such as fairness, generosity, sincerity, and curiosity. They have a moral compass and don’t want to disadvantage other people. Bringing in the wrong person, at whatever level, can be toxic to an organization, and reduce everyone’s interest in their work and detract from the culture of the firm.

Thus, decency is an essential trait in the staff of an investment management firm, or any professional environment. I used to set out to recruit the smartest people we could find, hoping that they would turn out to be decent as well. But after a few particularly painful lessons in my career, where people brought in for their extreme smartness turned out to be destructive to the organization, I came to realize that decency takes higher priority. So I’ve flipped the criteria and now first look for people who I think are decent and hope that they turn out to be as smart as they appear to be.

As a generality, there are three reasons that people join, stay with, or leave a given firm. One is that they like their colleagues—if not, day-to-day life can become pretty miserable. Second is being offered a platform from which people can grow their human capital—to become more valuable in the future, whether at that firm or some future employer.

Third is whether they are rewarded appropriately. This comes in two parts, of which the first is money: are people paid appropriately? The other is whether each individual can make a contribution to the firm—to “move the needle.” This element is crucial at a firm such as Epoch: we have just over 100 employees, so every person matters, and all help to move the firm forward.

Making an identifiable contribution is possible in a smaller firm such as Epoch, but what goes along with it is taking high-profile risks, and enjoying or suffering the consequences. There’s no achievement without effort; unfortunately, however, there can be effort without commensurate achievement. Not everyone who wants to make a positive difference achieves that, and it’s hard to know in advance exactly which people will, but the willingness to put in the time and hard work is a trait we value highly.

Acquisitions

Aside from market catastrophes, another class of stressful event for the culture of an investment manager is a merger or acquisition. And it happens frequently: by the numbers, asset management is an attractive part of the financial services sector. Revenues tend to be pretty steady, profit margins are typically higher than those in other financial business lines, and the capital requirements are comparatively low. Accordingly, during the decades of the 1990s and 2000s, many banks and insurance companies decided to acquire investment management firms.

Companies acquire asset managers for cultural reasons as well: investment management firms are full of people with entrepreneurial outlooks, and acquirers might believe that adding an asset management arm could infuse a new spirit and reinvigorate a staid organization.

But such acquisitions bring many challenges. One economic reality is that clients and consultants place managers under special scrutiny after they are acquired, expecting that the new owners might impose big changes to the investment style and marketing approach. That’s a logical view because it’s not uncommon that an investment firm’s top portfolio managers depart after an acquisition, fearing that they will chafe under the new ownership.

But even assuming the acquired firm stays intact, in many cases there can arise a cultural conflict between the acquirer and the new subsidiary, particularly if the parent is given to a command-and-control view of the world and requires that from all business units. The two cultures, and often the personalities of people at the two firms, just don’t match up. One conflict is dictating growth targets: big parents tend to set systematic asset and revenue objectives for acquired asset manager units that are unlikely to correlate with the natural cycles of the financial markets. Another, noted above, is setting the manageable size of strategies: for many types of strategies, asset management is often best performed on smaller scales, and forcing growth and building beyond their natural capacities can impair portfolio returns.

Buyers can also make the mistake of admiring firms for their component parts, and then inadvertently destroy the culture and success they coveted (“I can’t wait to get hold of this firm. We’ll send Mary to our London office, and Joe’s a star—he’ll be great in Tokyo”). Sellers are not without fault, however, as some can become mercenary (“We want you to buy us out, but we don’t really want to be part of your organization.” Or put more crudely, “We want your money but we don’t want you”).

“[S]urprisingly little attention is paid to culture before the new organization is created, and it is often a surprise to the parent that it now has to deal with powerful subcultures. . . .” commented culture scholar Edgar Schein, on the topic of acquisitions.²⁰ The parent may lay out a plan to take the best elements from both cultures, but that is seldom possible, because each subculture will want to stick to its own way of doing things.

Clayton Christensen, a prolific scholar on management and innovation, addressed the particular threat to the culture of acquired companies. Before undertaking a purchase, the acquiring firm needs to understand the strengths and limitations of its own culture, and study the culture of the target as well. On the challenge of combining the two, he wrote:

At a minimum, there is a clash of cultures. Often, however, the result is that while many of the acquired company’s resources are retained, its culture—those processes and the business model that made it attractive in the first place—[is] vaporized very quickly. In some cases this may have been the acquiring company’s intent. But in many cases it was not.²¹

An exception has been our association with Toronto Dominion Bank. We entered into a business combination with TD, whereby it acquired Epoch, in March 2013. Recognizing the importance of the continuity of culture, TD wanted Epoch to operate as autonomously as possible. Aside from meeting certain requirements of regulatory authorities, that continues to be the case, and the culture that existed before the acquisition is very much intact today.

Evolution of Culture

Cultures can evolve in several different ways: organic evolution from reacting to changes in circumstances; guidance from cultural insights of leaders; or planned change through directed group efforts.²² Or they may not: “If an organization’s internal and external environments remain stable, strongly held assumptions can be an advantage,” writes Edgar Schein. “However, if there is a change in the environment, some of those shared assumptions can become a liability, precisely because of their strength,” and limit the group’s ability to adapt, innovate and grow.²³

From a standing start, more or less, in 2004, Epoch grew its business to nearly $50 billion of assets under management and advisement by the end of 2015. The mantra “Evolve We Must” has been a constant thread in the firm’s DNA, and present in our attitude and energy from the start. Thus in charting the course for the firm’s future, Epoch leadership considered several new directions in order to build on our specialty of equity management. We ruled out an expansion into fixed income strategies, believing we would not likely reach the scale necessary to compete with established firms. There was also an active debate about adding strategies in emerging market equities, but that, too, seemed unproductive, as that skill set was not present in our team at the time and the prospects for emerging markets equities did not appear to be attractive.

However, we saw important opportunities in two important trends reshaping the industry. First, equity investors were moving their focus from their home markets and regions to more diversified strategies with a global scope. We were confident that Epoch’s investment philosophy would be well received outside the United States and that our global strategies would expand our client base.

Second, distribution in the industry was shifting its center of gravity from institutional investors, which made up most of Epoch’s clients, to retail investors. But our background was predominantly institutional, and we realized that Epoch would need to work through partners who could put our strategies in the hands of retail investors. Accordingly, we cultivated distribution relationships with key insurance companies.

The evolution of our strategy got off to a strong start, and between 2009 and 2012 assets under management rose to $24 billion. Epoch had correctly anticipated the expansion to global markets with the design of several strategies, including our successful Global Equity Shareholder Yield. Accordingly, as the client base and assets grew, their composition became increasingly global, and between 2009 and 2012 the share of Epoch’s managed assets in global strategies rose from 40 percent to 60 percent.

Growth called for a response of expanding the staff, and some structural modification of the company, with the goal of broadening the transfer of knowledge among the larger team. Given the greater importance of global strategies, separate regional research meetings evolved into global sessions, and additional teams were created to support the greater range of strategies.