The EdgePoint way to invest
We're long-term investors in businesses. We view a stock as an ownership interest in a company and endeavour to acquire these ownership stakes at prices below our assessment of their true worth.
We believe that the best way to buy a business at an attractive price is to have an idea about the business that isn't widely shared by others – what we refer to as a proprietary insight.
We strive to develop proprietary insights around businesses we understand. We focus on companies with strong competitive positions, defendable barriers to entry and long-term growth prospects that are run by competent management teams. These holdings generally reflect our views looking out more than five years. We firmly believe that focusing on longer periods enables us to develop proprietary views that aren't reflected in the current stock price.
Our approach is deceptively simple. We buy good, undervalued businesses and hold them until the market fully recognizes their potential. Following this approach requires an ability to think independently, a natural curiosity necessary to search out new ideas and a commitment to embrace the thorough research required to uncover opportunities the market doesn’t fully appreciate.
Watch our video to learn more about our investment approach.
We do the research you'd expect us to do. We often follow a company for years before investing. We study financial statements, interact regularly with different levels of the company’s management team, perform competitive industry analysis, attend industry-specific conferences, consult with industry experts, and read volumes of information about the company, its competitors and the industry in which it competes. At times, we're able to connect various pieces of such information into an idea generally not understood by others.
We invest in an idea only when we can buy an interest in a business below our assessment of its true worth. By definition, we're considered “value” investors. However, in addition to value, we want businesses capable of growing their value over time. This, by definition, makes us “growth” investors. At EdgePoint, we want to buy “growth” companies at “value” prices.
We're long-term investors in businesses. Generally, our investments reflect our view of a company's prospects looking out more than five years. Focusing on longer periods enables us to develop unique views often not reflected in the current stock prices of the businesses we're studying. Fortunately, most market participants focus on the short term: what's just happened, what’s currently happening and what's about to happen. This difference provides an opportunity for EdgePoint to add value.
We invest with conviction. As a result, our portfolios are concentrated in our best ideas. This concentration allows individual portfolio holdings to have a meaningful impact on returns when the market recognizes our estimate of their value.
This often allows us to have more in-depth knowledge about the companies we own. Thoroughly understanding a company helps to reduce the potential risk of an investment.
Although our portfolios are concentrated, they're diversified by business idea. Each investment is based on a well-researched proprietary idea. Our investment managers go to great lengths to ensure that the collection of businesses in the portfolios isn't based on the same or similar ideas. Thus, our portfolios – while concentrated – are diversified.
Investment success is often defined exclusively by investment returns. However, when we invest, we weigh the risk of that investment against its potential return. We believe that most investors focus exclusively on returns and neglect to ask what kind of risk was taken to achieve those returns.
We believe that risk in the investment business is the potential for permanent loss of capital. We take an old-fashioned view of risk summed up in the questions, “How much money can we lose, and what is the probability of that loss?” Much of our thinking around risk focuses on company-specific factors such as increased competition, management competence, profitability compression and the business's underlying valuation relative to our assessment of its true worth. Noticeably absent from our definition of risk is volatility of a company’s share price relative to the market. We don't believe volatility is risk.
We sell a security for one of two reasons. First, if our thesis about the company is deemed no longer valid. If we can no longer stand behind our thesis, we can no longer stand behind an ownership interest in the business and the position is sold. Second, there's a constant culling process whereby we continuously strive to upgrade the quality of our portfolios with better ideas. For example, if one of our ideas becomes well recognized and this is reflected in its share price, it's removed in favour of a more attractive opportunity.
Fixed-income investing at EdgePoint
We approach fixed-income investing in the same way we do equity investing. We’re long-term investors who seek to acquire ownership stakes in quality businesses at prices below our assessment of their true worth. On the fixed-income side, we look for securities that provide us with an attractive return through coupon payments and/or capital appreciation while focusing on the borrower’s (bond issuer’s) ability to meet its debt obligations through the payment of periodic coupons and the return of the original principal at maturity.
Fixed-income managers tend to manage to the index and don’t deviate materially from duration, sector or credit ratings. At EdgePoint, we have the ability to look different and have shown that we aren’t afraid to look different. While we’re aware of the index, we don’t let it dictate our investment approach.
EdgePoint’s Growth & Income Portfolios have broad mandates that allow us to invest where we see the best potential return. We can increase or decrease the allocation to equities or bonds as opportunities present themselves and we aren’t forced to overweight an asset class we find unattractive. Our fixed-income allocations can generally vary from 25% – 60%. We have the flexibility to invest in both investment-grade and high-yield bonds.
We can invest in all forms of corporate debt including senior secured bonds, subordinated debentures and convertibles – structure will never limit our investment ability. Sovereign governments, provincials and asset-backed securities are also available to us if the opportunity arises. We’re more confident in our ability to analyze the credit of a business or government than trying to predict interest rate movements or the shape of the yield curve.
Here’s a quick summary of how we manage risk:
- It’s our job to ensure we’re appropriately compensated for any risk we take. In situations where we feel the risk/reward tradeoff isn’t favourable, we don’t invest
- We don’t rely on credit rating agencies and always perform our own credit research
- We don’t make predictions on future interest rates, nor do we trade based on the potential future shape of the yield curve. Rather, we follow a more simplified approach and ask ourselves if we’re being compensated for the additional interest rate risk inherent in long-term bonds
- We hedge the currency of our non-C$ denominated bonds
Our top priority is capital preservation. No investment is worthwhile if the underlying fundamentals of the business aren’t solid and don’t offer an attractive risk/reward potential. We also avoid investments we don’t fully understand.
Our equity research helps to uncover lesser-known stories and undervalued fixed-income issues. Many of the bonds we own were issued by companies whose equity we also hold. In making investment selections, we can decide between equity, fixed-income or a combination of the two.
EdgePoint Growth & Income Portfolios are the ultimate go-anywhere investment vehicles. We scour the world looking for attractive debt and equity investments, and have the flexibility to allocate capital to either asset class depending on where we see the best potential return opportunities.
While we always strive for perfection, we know we’ll never achieve it. Though we try to minimize the impact of any mistake by building portfolios diversified by business idea, we believe in owning up to any we do make and learning from them. Here are some examples, the thought processes behind them and the reasons we were wrong.
When investors are particularly pessimistic about what the market may do (or is doing), we’re often asked how we sleep at night. Over the years, we’ve put together some things we think about as we try to get some shut eye. Here’s our version of a cup of chamomile tea. Enjoy!