When “Bits” Meet “Atoms”

by: , CEO, Co–CIO, and Portfolio Manager, Epoch Investment Partners, Inc.; Kevin Hebner, PhD, Managing Director, Global Portfolio Management, Epoch Investment Partners, Inc.

This post is part three of a three-part series titled “Tech is the New Macro”. Read part one and part two for the full story.

Implications of the Second Machine Age for Corporate Profitability and Traditional Business Models

  • Although the impact of the Second Machine (or Digital) Age was difficult to see for the first few decades, as even exponential growth from a small base is not visible for a long time, we believe technological innovation reached an inflection point around 2007.
  • The Digital Age and the transition from “atoms” to “bits” implies a capital-light economy in which technology is being substituted for labor and physical assets. This points to higher ROE—in fact, all three components should rise (profit margins, asset utilization and leverage).
  • Since progress in the Digital Age is exponential rather than linear, the business world has never seen disruption at this speed and scale before: witness the dramatic transformation in industries such as newspaper, film, music, telecommunications, retail, transportation, and accommodation.
  • Additionally, platforms are arguably the best business models ever created, benefiting from low marginal costs, with their distinctive asset-light nature and powerful network effects. Winner-takes-all dynamics have resulted in neo-monopoly profits for dominant firms and increased concentration in most sectors.
  • Moreover, the pace of technological change continues to accelerate, suggesting we are nowhere near the late stages of this transformation.
  • The ability of companies to generate free cash flows is becoming increasingly dependent on how they adapt their business models to the Digital Age. We believe companies that can consistently generate free cash flow and allocate it competently will provide investors with the best returns.

The information contained in this whitepaper is distributed for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The information contained in this whitepaper is accurate as of the date submitted, but is subject to change. Any performance information referenced in this whitepaper represents past performance and is not indicative of future returns. Any projections, targets, or estimates in this whitepaper are forward looking statements and are based on Epoch’s research, analysis, and assumptions made by Epoch. There can be no assurances that such projections, targets, or estimates will occur and the actual results may be materially different. Other events which were not taken into account in formulating such projections, targets, or estimates may occur and may significantly affect the returns or performance of any accounts and/or funds managed by Epoch. To the extent this whitepaper contains information about specific companies or securities including whether they are profitable or not, they are being provided as a means of illustrating our investment thesis. Past references to specific companies or securities are not a complete list of securities selected for clients and not all securities selected for clients in the past year were profitable.

New York Life Investment Management LLC engages the services of Epoch Investment Partners, Inc., an unaffiliated, federally registered investment advisor.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, New Jersey 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.


William Priest, CFA

CEO, Co–CIO, and Portfolio Manager, Epoch Investment Partners, Inc.

Bill is Chief Executive Officer and Co-Chief Investment Officer of Epoch Investment Partners. He is a portfolio manager for Epoch’s global equity investment strategies and leads the Investment Policy Group, a forum for analyzing broader secular and cyclical trends that Epoch believes will

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Kevin Hebner, PhD

Managing Director, Global Portfolio Management, Epoch Investment Partners, Inc.

Kevin is a global investment strategist. Prior to joining Epoch in 2016, Kevin served as a senior FX strategist at J.P. Morgan Securities. Before J.P. Morgan, Kevin worked as a global investment strategist at Third Wave Global Investors, Citigroup Asset Management, and

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