Our fixed income investment approach
Our approach to investing is deceptively simple. We buy good, undervalued businesses and hold them until the market fully recognizes their potential.
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.
Our ability to look different
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.
Our ability to invest across the corporate structure
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.
Our approach to risk management
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.
Leveraging equity research
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.
The EdgePoint advantage
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.