The volatility that rocked the markets from late July through the end of August could well be the start of a longer-term trend. When there is no rising tide, clients need to rely on experienced security selection teams to raise their fortunes.
EdgePoint Wealth Management might not be a household name, given its marketing budget—zero—but its founding partners are well known to financial advisors across the country.
And these gentlemen are not afraid of market dislocation.
“Volatility is always good if you know the true value of a company,” says Geoff MacDonald, one of the founding partners of the firm. “An awful lot of people in the stock market don’t like volatility. The reason why people often can’t handle volatility is they don’t know what their investment is worth.”
MacDonald says investments are the only purchases people make without knowing the value of what they are buying. They may know what a camera is worth, or a pair of jeans or a new car. But when it comes to the stock market, many investors buy based on momentum, interest rates or the infamous hot tip. These bad investment decisions are just fine with him.
“It gives us a wonderful opportunity to buy businesses for less than they’re worth,” he says. “This last month has been an exceptional time for us.”
The investment decisions made in August 2011 will have a definite impact on the funds’ performance over the coming years, he says.
“You have to always be looking to buy growth and not pay for it, but that’s exceptionally important in today’s world,” says Tye Bousada, the other founding partner of the firm.
Globally, markets face stiff economic headwinds—high unemployment, sovereign debt risk, high personal debt levels—which will persist for years to come. Since the vast majority of companies rely on economic growth for their own profit growth, there’s a good chance the markets will remain choppy for the next three-to-five years.
“In that type of environment, you have to find the minority of businesses that can grow irrespective of what happens in the economy and not pay for that growth today,” he explains. “When fear is ever present in the market, it becomes easier not to pay for that growth.”
Despite their focus on the growth prospects of each investment, they are loath to call themselves “growth managers.”
There is a strong desire among fund analysts, advisors and investors to place portfolio managers within a style box: either large-cap or small-cap; value or growth. Some managers see value in remaining true to one of these pigeonholes, and this can affect their investment decisions.
“We don’t manage in that fashion. The quadrant that we’re looking for is the ‘make money’ quadrant; we want to be in that one,” Bousada says. “If someone came in and said: ‘You used to be in this quadrant, and you’ve shifted over to this quadrant,’ that wouldn’t concern us too much.”
A quick glance at the Morningstar style map bears this out. The EdgePoint Canadian Portfolio’s weighted average lands pretty close to the centre of the overall grid, with a slight bias toward larger companies on the value side. The Global Portfolio is similarly medium-high on the cap weighing, but tilts toward growth.
Besides, the separation of growth from value is artificial, MacDonald argues.
“How do you value a company without knowing its growth?” he asks. “The value of any business is the cash you can put in your pocket every year as the owner of that business. The business is not worth any more or less than that.”
Click through below for their investment philosphy.