Don't Pay For Growth Prospects: Manager

How this medallist Canadian equity mandate delivers alpha by being 'different'.

Diana Cawfield 28 April, 2022 | 4:48AM
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Chess pieces

What sets the silver-medallist Edgepoint Canadian F mandate apart from many of its peers is how much it differs from the index.    

“If you look at the S&P/TSX Composite Index,” says Tye Bousada, co-founder and portfolio manager at Edgepoint Wealth Management in Toronto, “and then look at the largest Canadian portfolios in this country, we look very different.” He says the so-called ‘active funds’ on the Canadian side look like they’re hugging the index because of the overlap in many of the top names in the index. “We have one,” says Bousada.  

“We try to look at a business like a rational business person would,” says Bousada, “and think about how big it can be in the future, what its prospects are, and then ask ourselves, is the market asking us to pay for the growth that we see in this business over the next five years.”

Unknown Growth Only

The investment process is to “scour the Canadian market” and look for ideas irrespective of sectors or market cap to buy growth and not pay for that growth. Based on a strictly bottom-up approach, a potential idea is then critically analyzed before buying, paying attention to the macro environment.

“Because of our flexible mandate,” says Bousada, “we have the ability to create a diversified collection of leading businesses and that is a real point of differentiation.”

As well, a significant percentage of the companies in Canada are less than $5 billion in market cap.  Bousada says their approach allows the team to own a business that the average Canadian manager doesn’t own. He says that the investment approach has been the centre of what’s driven the performance of the portfolio over the last 13-plus years since inception.  

Investment Team’s Invested

The firm that began with just Bousada and joint co-founder, Geoff MacDonald, has grown to 16 on the investment team today. The entire team tries to add value to all the portfolios and is like-minded, without a “silo” approach. All of their titles are the same, everyone is a partner, and everyone is a business analyst first, says Bousada.

As well, the investment managers are very much aligned with their investors. There are obligations for individuals who work on the investment team to have multiples of their salary invested in the same portfolios as the end investor. “In my case,” says Bousada, “I’m all in.”

The fund that includes approximately 55 holdings also differs when it comes to the approximate 25% weighting in financials. The index is very weighted in Canadian banks but that is not the case in the portfolio. “There’s nothing wrong with owning the Canadian banks,” says Bousada,” they’re very good businesses and you’ll do well owning them over the very long term.” In the case of Edgepoint, they try and diversify away from obvious correlations such as having a quarter of the portfolio in Canadian banks. 

Favoured Stocks

For example, the largest position in financials, among the top five holdings, is Fairfax Financial Holdings Ltd. (FFH). “One of our favourite hunting grounds is transformation,” says Bousada, “and Fairfax would fit into that transformation category.” In the five years or so, he says that Fairfax has made remarkable strides in increasing the profitability on both the underlying insurance business and the investment side. In addition, the company was very cautious from an interest-rate perspective and held a huge cash position of 40% of their investments. Recently, as interest rates have gone up, Fairfax has redeployed that cash into higher-yielding securities and that’s benefited them as well. “The returns of the business are increasing and we think it’s got a long way to go given all the tailwinds that it has.”

Then there’s Restaurant Brands International Inc. (QSR), among the top holdings. “If you look at it as a business owner,” says Bousada, “Restaurant Brands is really a royalty on the growth of others. It’s really the nicest business that you could possibly own.” For example, it owns Tim Hortons, Burger King, Popeyes, and Firehouse Subs, and Restaurant Brands collects a royalty off the sales of those franchisees. As the franchisee’s sales grow, their business grows. “Today the world is very worried about inflation,” says Bousada, “and Restaurant Brands is a business that can protect against inflation.” For example, if your local Tim Hortons, the local franchisee, has to raise the price of coffee as coffee prices go up, Restaurant Brands is going to collect their share of that price increase without having to deploy any capital. “So it’s a very attractive business model in the space of inflation," Bousada says.

Another holding among the top five is Onex Corp. (ONEX), a private equity investor and asset management firm. Onex is another example of a company that has gone through a transition and has a new management team in place. “The first thing the new management is doing,” says Bousada, “is growing the pool of investments with their own money invested in it at about 10%  a year. I’m buying those investments today for, let’s say, 75 cents on the dollar and those investments should grow about 10% a year. So we’re buying their existing asset base for less than it’s worth today, and their asset base is going to grow double-digits rates we believe over the next five years.”

Using a long-term approach, the mandate has a low portfolio turnover of around 29%, holding some favoured names for over a decade.

Don’t Follow a Falling Index

“If you look at the index and how the average investor is positioned today,” says Bousada, “we’re a little bit more worried because it’s going to be tougher. If interest rates rise, those interest rates are going to act like gravity on asset prices and pull asset prices down. It’s going to be very hard to add value relative to the index if you look just like the index.”

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
EdgePoint Canadian Portfolio Series F49.01 CAD0.83Rating
Fairfax Financial Holdings Ltd Shs Subord.Vtg1,564.03 CAD0.91Rating
Onex Corp Shs Subord.Voting97.72 CAD0.11
Restaurant Brands International Inc92.29 CAD-0.03Rating

About Author

Diana Cawfield

Diana Cawfield  An award-winning writer who has been a regular Morningstar contributor since 2000, Diana's numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.

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