A standout global equity option for investors

With a focus on stock selection and fundamental research, EdgePoint Global Portfolio will look different from most.

Shehryar Khan, CFA 4 September, 2018 | 5:00PM

Since the inception of Edgepoint Wealth Management, its founders have charted their own distinct path. From the unique setup of the firm, where a publicly traded holding company called Cymbria owns a stake in the investment management firm, to the transparency that leads them to list all of their investment mistakes on their website, founders Geoff MacDonald, Tye Bousada and Patrick Farmer have done things their own way.

Supported by a strong young team of analysts who apply a simple (but not easy) investment process, the flagship EdgePoint Global Portfolio has produced outstanding returns for investors over the nearly 10 years since the fund's inception. While return expectations should be tempered going forward -- which the managers themselves have been telling their clients -- investors looking for global equity exposure will be well served with this distinct offering.

Experienced and successful during their tenure at Trimark, managers Geoff Macdonald and Tye Bousada lead a group of nine by example, spending most of their time on fundamental research. This contrasts with other firms, where managers have to focus on portfolio construction and rely heavily on the firm's internal analysts for research insights. The duo seeks meaningful contributions from the other seven members, but they are responsible for any decisions and have the final word on the portfolios.

Focused exclusively on stock selection and fundamental research, this relatively concentrated fund will look different from its benchmark, the MSCI World Index. Management looks for market-leading firms with strong competitive advantages that are run by managers with proven records of good capital allocation. Most importantly, the managers want to only invest in firms into which they believe they have a unique insight. As such, they do not spend any time looking at popular names like  Amazon.com (AMZN) or  Tencent Holdings (TCEHY), as they believe they are so well covered that they would not have such an advantage over others.

They prefer firms that have the ability to grow but will only initiate positions on those trading at a significant discount to their estimated intrinsic value. Instead of constructing complex financial models, the team instead focuses on what they believe the business will be worth five years in the future, and then discounting that to today's stock price, giving them an implied rate of return. If this return meets their threshold, they will add the stock to the portfolio. The fund will be relatively concentrated with about 40 stocks, so stock selection will be the main driver of returns. While the managers manage currency exposures, they do so conservatively with a long-term view.

A company like PrairieSky Royalty (PSK) is the quintessential Edgepoint business. The stock has meandered for a few years now, but the team still views it as possibly the highest quality company in the oil and gas space. Unlike energy producers that have to put all the cash they earn back into the business, PrairieSky's royalty model allows it to generate and grow cash for its shareholders. The same applies to a name like Kubota Corp. (KUBTY), a tractor and heavy equipment manufacturer from Japan. Edgepoint believes the firm has an edge over  John Deere (DE) as it grows its already sizeable market share, which consists of a loyal userbase with strong organic growth in North America, and a huge opportunity for expansion in China where its market share is minimal.

Management defines risk as the permanent loss of capital and tends to ignore the volatility of returns. The risk-management process starts with ensuring the margin of safety between price and valuation is adequate. The managers will also diversify the portfolio in terms of business models and assess the portfolio's aggregate macroeconomic risk exposures.

When evaluating Edgepoint's investment returns, context is important. The firm started during the financial crisis of 2008, and as such was able to buy many attractive businesses for bargain prices, and the team in its current iteration has yet to go through a severe market correction. That being said, the global fund's returns are still outstanding: A 18.5% annualized return since inception (as of July 31, 2018) for the fund's F series compares favourably to the MSCI World's 13.5%, and just 10.8% for the average peer in the Global Equity category. Given the fund's relatively concentrated nature and management's disregard for the index, the fund's volatility has been higher at 13.5% versus 10.3% for the benchmark, as measured by standard deviation of monthly returns. On the whole, on a risk-adjusted basis, the fund's returns over that span rank in the top decile in the category, meaning investors have been well rewarded for their patience.

Given their investor-first ethos and the fact that management have significant personal investments in the funds they manage, it is not surprising that the fund's fees are attractive. Despite a higher minimum investment, meant to serve as a screening mechanism for investors who might focus too narrowly on short-term returns, the fund's commission-based and fee-based series both rank in the top quintile of their respective distribution channels.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Amazon.com Inc1,757.99 USD-1.65
Deere & Co173.92 USD1.03
Kubota Corp ADR79.00 USD1.32
PrairieSky Royalty Ltd15.32 CAD-3.34
Tencent Holdings Ltd ADR41.65 USD-0.95

About Author

Shehryar Khan, CFA

Shehryar Khan, CFA  Shehryar Khan, CFA, is a senior investment analyst for Morningstar’s Investment Management group.