Back in late 2008 a client of mine shared an article with me about a new mutual fund company called EdgePoint. I did the research, and as a result, discovered one of Canada’s premiere investment management firms. Our clients were some of the earliest EdgePoint investors, and that foresight has paid off handsomely for them.
“Depending upon the portfolio you pick, we’ve out-performed between 362-4371 basis points (3.62% to 4.37% per year) against our benchmarks annually compounded since inception. It’s a pleasing start.”
– Tye Bousada
In this rare interview with Tye Bousada, Portfolio Manager at EdgePoint Wealth Management, Tye shared, what I believe, is the reason for their success.
Rona: What motivated you, Tye, Geoff, and Patrick to create EdgePoint ten years ago?
Tye: We saw the industry had changed.
Go back to the 1970s or even a little bit earlier, it used to be run by great investors. You had Bob Krembil at Trimark, Alexander Christ at Mackenzie, Goldring Sr. at AGF, Goodman Sr. at Dundee, Sir John Templeton at Templeton.
All investors, all building their companies by doing right by the end investor. But over a number of decades, those companies morphed from being investment-led to marketing-led. A marketing-led company is all about gathering assets, and in this industry it’s easiest to gather assets when something is easy to sell. But that’s usually the worst time for the end investor to buy.
A good example would be Bob Krembil’s last roadshow, around 1998. He went across the country launching a resource fund.
Gold was maybe $300 then, all the ‘smart’ money was saying it was going to go down to $100. Everyone said Bob’s fund was going to half in value, that the price of oil would drop from around $10 to $5.
You couldn’t even say words like nickel or aluminum – they were bad, bad words. But Bob saw opportunity. He said: “It’s the right thing to do. Maybe we’re not going to gather a lot of interest and investors, but this fund will be one of the best.”
Rona: So nobody wanted it and everybody was buying Nortel.
Tye: Yup, everybody was buying Nortel. Now, fast forward ten years.
It’s 2008, oil’s up tenfold. The fund did tremendously well for investors. Geoff was one of the investment managers of the Fund from May 1998 – September 2002. Investors were hard-pressed to find a better portfolio anywhere, not just in resources. So then, everybody and their brothers are launching resource funds with oil at $120, $130 bucks a barrel. Why? Because it’s easy to gather investors, gather assets. Not because it’s the right thing to do.
We looked at that, and said “There’s room in the industry for an investment-led organization. There’s a small percentage of advisors and their clients who would like to deal with an investment-led organization again.” To this day we still have the same business cards. They say: “owned and operated by investors.”
Rona: When you started the company, what was the goal ten years out?
Tye: We’ve only ever had three goals. You won’t see them painted on the walls, and if you work here you won’t be given a laminated something-or-other. You have to live and breathe them, because every decision you make comes back to them.
The first goal is to have performance at or near the top of our peer group over a 10-year time frame. We’re only 9 years in so we haven’t hit our first goal yet – but we’re off to a good start. Depending upon the portfolio you pick, we’ve out-performed between 362-437 basis points (3.62% to 4.37% per year) against our benchmarks annually compounded since inception. It’s a pleasing start. But it’s not like we’ve finished the race. We’ve always got that focus on delivering value for the end investor over a 10-year time frame.
The second goal was trying to partner with a really limited number of advisors across the country. I mean, 1-2% of the advisory community. Today, we’re partnered with about 900 advisors –around 1% of the financial advisor community.
The third goal was we wanted internal partners that thought and acted like owners. It’s a different level of experience altogether when you deal with an owner – we wanted to make sure that every interaction anyone had with EdgePoint was ownership-level.
Today, 62 of the 66 partners that make up EdgePoint actually own shares in the business (the other four just haven’t been with us long enough). It’s not free – there are no free options, no free DSUs, free warrants. If you are offered the opportunity, you have to reach into your pocket, slam down your wallet and say “I’m buying”. We want true ownership here.
Every decision made here every day by the 66 partners comes back to those three things.
Rona: Were there business growth goals as part of that? Or do you see business growth as a result of doing those other things right?
Tye: You answered it! We believe if you take care of the end investor through good performance, and take care of the financial advisor through good relationships, and have people walk around thinking like owners all day long – good things will happen.
Rona: I can really relate!
What we focus on here and how we make decisions is really driven by one thing – the name of the firm – Caring for Clients. If anyone has a question as to what they should do, they refer back to our name and the decision is obvious. You don’t need to talk to me, you don’t need to talk to anybody.
Whatever you do should be an expression of caring for their financial and personal well-being. It creates shortcuts in everything we do, because we always have our north star. We’re like you, but not like most in the industry; we don’t have sales or asset or plan targets. I was trained to think about those targets decades ago, but I rebelled big-time because I’ve always believed that if you do the right thing, success will follow. Not just success, but sustainable, durable success. So, I really relate to what you are saying!
R: Let’s shift a little bit and talk about product. Mutual funds, at least in the media, have been getting a whole lot of negative attention. Why do you think that is?
Tye: It’s because the mutual fund industry worked hard for a lonnnng time to lose the trust of end investors. I think that. I really do.
As these firms morphed from being investment-led to sales- and marketing-led, they emphasized their focus on taking care of the shareholders of the firm, as opposed to the investors in their portfolios. That meant selling investors the wrong thing, at the wrong time –whatever was easy to sell, while advertising like crazy.
I’m trying to think of an example without calling out specific ridiculous ones. Basically, an end investor doesn’t need to be advertised to by wealth management firms. They should trust an advisor to help them find the right path. All that money that goes into advertising is essentially coming out of the end investor’s return. There’s multiple ways this industry has betrayed the trust of the end investor for a long, long time. They deserve their reputation.
Rona: The failures of the mutual fund industry have been fuel to the fire of the popularity of ETFs. What is your view on this trend towards low-cost passive investing?
Tye: Our view is extremely selfish, I’ll call that out right now. It’s that we want it to continue. Sounds counterintuitive – we’re active managers. You may think: “Why would EdgePoint want more people buying passive funds?”
The reality is, as more and more people buy passive funds, there are fewer and fewer trying to understand what the value of the underlying businesses are. That gives us an edge.
A big element of our investment approach is trying to identify growth, but not pay for that growth today. When you have ETFs that buy something because it happens to be in an index, and buy more of it because the price is going up, or selling it because it’s going down, without asking questions like – “Why is the price going up/down? Does that make sense?” – that gives us an edge.
Imagine being at the starting line of a sprint, daily. And every day on that line there are fewer and fewer people trying to win the race. That’s what’s happening, and we kind of like that. We’re this little niche player and we like the fact that every day we look left and we look right and there are fewer people trying to win. That helps us.
Rona: You’ve met a lot of financial advisors, you partner with about 900, likely the cream of the crop. What do you think Canadians should expect from a full service wealth advisor these days?
Tye: I think it starts with someone who listens to what their goals are.
A financial advisor, I would imagine, has to sit down and really talk to their client about what their goals are first, and listen to what their hopes and aspirations are financially. Then, I think a very big job of the financial advisor is to tell the truth, regularly, and sometimes more regularly than the end client might want to hear.
The more I do my job, the more I realize it’s a big element of a financial advisor’s job to act as a psychologist. To prevent the client from making mistakes when it’s too easy to do so.
Telling the truth starts on day one with the assessment of their financial position relative to their goals. If one of my three younger brothers was sitting in front of a financial advisor, I hope they would hear something like: “You have all these aspirations, this is where you are today, it may not be easy to get there.” Or: “Here are the tough decisions you’ll have to make to get there.”
Keeping it to my brothers again, they may think they’ll work 60-80 hours a week to earn a living, provide for their families, and maybe go on a nice vacation once a year. Then, at the end of the year maybe save some money to turn over to their financial advisor, and miraculously it’s going to be easier to make money in the stock market or through investments than it was in their careers.
If that was the case, the world would be way richer than it is. But it’s not!
It’s super difficult, and I think financial advisors have a huge responsibility to tell the truth about how emotionally difficult investing can be. That gets back to the psychology element as well. I think financial advisors have a responsibility to tell the truth about that importance of living in a narrow emotional band, investing-wise.
When things are going well, and let’s call that the last nine years since the financial crisis – don’t get too excited, because it’s not always going to be going this well. Likewise, when things aren’t going as well, let’s call that 2008 and 2009, don’t get too down, it is going to get better.
The best investors have the ability to live in a narrow emotional band. Financial advisors have a responsibility to tell clients about that, and guide them through being in that narrow emotional band as much as possible. A good summary of my learnings from working with financial advisors, for a really long time, is the best ones have the ability to do that.
Rona: I remember in the financial crisis, I would go the odd roadshow and be surrounded by lots of other advisors. One of the moments that really captures what I had been hearing, was when I was sitting at a table and there was an advisor beside me – and this was very close to the bottom of the crisis, early March of 2009 – and they turned to me and said, “So what are you telling your clients?” I thought to myself: “You’re asking me what I’m telling my clients? You don’t know what you should be telling your clients right now?” The whole room, it was a bunch of just shell-shocked, freaked-out people. I think the only advisors that are going to be able to help their clients live in that narrow emotional band understand that it’s about patience and discipline, and have that emotional fortitude themselves.
Tye: You can’t teach someone to do something unless you know how to do it yourself, I totally agree.
Rona: Human nature is what it is, I think there’s a small percentage of people who can manage their emotions, whatever type of professional you are – a doctor, an accountant, a financial advisor. I think some of the most successful people are the ones that can manage their emotions.
Tye: I would agree. But it doesn’t come naturally. We’re genetically encoded to move in packs, there’s safety in numbers. So if euphoria is the name of the game and everyone is buying something, you are genetically predisposed to want to do the same thing. Likewise, when everyone is scared, you are genetically predisposed to running away from whatever it is everyone is scared of.
Rona: “There must be a tiger here somewhere, I shouldn’t just be standing here waiting for it”
Tye: Exactly. I think most people are genetically predisposed to being greedy when others are greedy, and fearful when others are fearful.
Something else that gets lost on a lot of people? The stock market, investing as a whole – it’s a zero sum game.
If you’re a doctor, for every ten people you save, you don’t have to go kill ten. If you’re an engineer, for every building you erect, you don’t have to knock one down. But every time you make an investment, you’re either making a mistake or capitalizing on the mistake someone else made.
Someone who sold us Anthem shares eight years ago at a quarter of the price of it is today? Their relative loss back them was our relative gain.
Rona: What are you looking for in your 900 partners? If you’re looking for another 50 partners over the next year, what are they going to look like?
Tye: Let me start by saying we are not trying to be everything to everyone. Fortunately, many of the 66 partners that have worked here have been in the industry for a really long time. We have probably had the chance to meet the vast majority of the 70,000-90,000 financial advisors out there.
What we’re really looking for in financial advisors is someone who has a similar belief system to our own. That starts with putting the client’s interest first in everything they do.
We try to do that internally, we are only trying to partner with people who do that as well. You’re a financial advisor so you know this. But I’m not sure if your clients know this – there are a lot of advisors out of those 90,000 who may choose to put their own interests ahead of their end clients’ interests.
I’m not pointing fingers here, but in the mutual fund industry it happens all the time. They put shareholder interests ahead of the end client’s interest by selling products when everyone wants to buy, as opposed to selling investment portfolios that are good on a return perspective.
And financial advisors are just as guilty as the industry – but not all of them. So we’re trying to find and partner with the ones that put the end investor first in everything they do.
The second thing is trying to identify financial advisors who are not trying to just buy our historical performance. Right now, it looks like we know what we’re doing. But there have been four or five periods of time since we started where we looked just plain dumb.
Sometimes you have to look wrong in the short term to be right in the long term. But there are a lot of financial advisors that can’t tolerate that deviation, let’s say, from an index. We’re making sure they can more than tolerate our investment approach; they have a solid understanding, a belief. Those are high hurdles.
We have to find someone that defines risks in the same way we do. Let’s say we stop 100 people on the street and ask: “How do you define risk as it relates to the stock market? I think 100/100 would say risk is volatility.
Not us. We think the truest definition is the opportunity for permanent loss of capital.”
We’re looking for the financial advisor who understands that volatility is the friend of the investor who knows the value of the business, and the enemy of the investor who doesn’t.
Finally, we want a financial advisor that encourages their clients to buy more of a portfolio when it is uncomfortable to buy that portfolio. The clients that have done the best with us have bought more of the portfolio when we haven’t looked as intelligent as we do today.
That’s a recipe for compounding wealth at a faster rate. Find an investment approach that you think works or may have a track record of historically working, stick with it as long as you think the approach continues to work, and add to it when it doesn’t necessarily look as smart as it has historically. Those aren’t easy hurdles to clear, and it speaks to why we are not cut out to be partners with everyone – so far, one percent of the entire financial advisory community.
Rona: How do you control who buys your funds?
Tye: We make a lot of effort to ensure that people understand who we are. We have relationship managers, some would call them salespeople, but we don’t encourage them to go out and sell.
We encourage them to go out to the financial advisory community and communicate what we are trying to do here, and ensure interested people have a solid understanding. That’s step one.
We communicate open and honestly. We not only tell you about the successes we’ve had, we also tell you about the mistakes. Right away and in plain sight. Go to our website and you’ll see lots of disclosures about the mistakes and our learnings. We try to give full disclosure on who we are so that people understand who they might be partnering with. So they can make a better decision.
Sometimes we have advisors who join us without having met a relationship manager. So, any new financial advisor that decides to do business with us – every single one – gets a letter from Patrick (the CEO) that says: “Welcome to EdgePoint and thank you for placing some of your trust in us to manage your client’s money, we appreciate that. You should be prepared for a material drawdown in the market. By the way, we require you to meet with one of our relationship managers within the first six months of this purchase. And if you don’t we’re going to block your ability to do business with us. Because we want to ensure we’re not just attracting people who are chasing our historical performance.”
Rona: I’m guessing you’ve experienced pushback on that?
Tye: We have, not surprisingly. It upsets some people. They say: “Who are you to tell me I have to meet with you if I want to do business?”
But it’s our requirement. Again, we’re not cut out for everyone. We’re only looking to partner with 1-2% of the entire industry in Canada, and we want to make sure there’s a meeting of the minds. We’re asking for thirty minutes of someone’s time. And I think that their clients at the end of the day would want them to at least meet with the company they’re investing with.
Sometimes, no matter how much effort you make, some advisors make it through the process and they, or we, discover that it’s not a good fit. We are not afraid of having those tough conversations saying maybe we have to go in separate directions.
Rona: What do you enjoy most about what you are doing these days?
Tye: I absolutely love business. I enjoy learning about what clever business people do and how they use their skills to build attractive businesses.
My job allows me to do that. I get to meet very clever people from around the world at the most senior levels of the largest companies and figure out how they apply their skills to build value for their shareholders.
Sometimes the stock market gives you the opportunity to buy these clever people and the gorgeous businesses they have built at prices well below what they should be trading at. That’s extra exciting.
Say you’re passionate about business and meeting clever people who have built great businesses? Now, compound that with the idea that there’s this mechanism called the stock market that gives you the ability to buy that fantastic package of attributes at far less than it is worth, then partner with these people for far less than it should cost. What’s not to like?
I spend my days gathering facts about people and businesses, trying to apply reasoning to those facts about whether it makes sense to partner. Makes me happy, every day.
When we started the business, I undervalued how beautiful it is to be able to pick your own partners and surround yourself with people that you really want to work with every day, people whose company you enjoy. We’ve surrounded ourselves with 66 partners that we like, trust, and admire. I come to work every day and spend a lot of my waking hours surrounded by those people. There’s no better way to spend your day.
Rona: I was going to ask how the industry may evolve and EdgePoint’s role. But I think it really doesn’t matter, because you’re doing what you’re doing. Your future is going to be driven by what you create, what you build, and how it helps end investors. What the rest of the industry does doesn’t factor in all that much.
Tye: It really doesn’t. You’re exactly right. And we’re not seeing evidence the industry is changing from its bad ways. Geoff’s office door has advertisements plastered all over it, just from the past couple of weeks. It’s the same old, same old, trying to sell what’s hot, trying to use buzzwords like low volatility, guaranteed rate of return, all the stuff people want to hear to make them feel warm and fuzzy. When it’s probably the exact wrong thing for them to be buying at that point in time.
Our plan hasn’t changed. We’ll continue to focus on those three things: top flight performance for the end investor, being a good partner to a limited number of advisors across the country, and having internal partners that think and act like owners. If we can deliver on those, we’ll continue to be happy.
Rona: That’s all the questions I have, is there anything else you want my clients to know?
Tye: I could count on one hand, literally, how many interviews I’ve done over time; I rarely do this.
Over the years, you’ve demonstrated you eat your own cooking. Before suggesting your clients put money into our portfolios, you put your money in, and, I’ve come to understand, some of your family’s money too.
You identified us way back in 2009. You did the work to find us when we were one year old, no track record to speak of. It’s a lot easier to support us today after nine years, and we tend to look smart right now. But in 2009 the world was tearing apart at the seams. As I remember, you first purchased us in April 2009, one month after the trough. That was a very scary period. But you did your due diligence, you found EdgePoint on behalf of your clients and invested their hard-earned money in us. Talk about having faith in an investment approach!
1Series A Portfolio total returns as at November 30, 2017, in C$. Inception date: November 17, 2008. Refer to standard performance at end of document.
2US$
3Series A Portfolio total returns as at November 30, 2017, in C$. Inception date: November 17, 2008. Refer to standard performance at end of document.
Annualized net of fees returns as at November 30, 2017EdgePoint Global Portfolio, Series A EdgePoint Canadian Portfolio, Series A EdgePoint Global Growth & Income Portfolio, Series A EdgePoint Canadian Growth & Income Portfolio, Series A These are the benchmark indexes we’ve chosen for our portfolios:EdgePoint Global Portfolio: The MSCI World Index is a market-capitalization-weighted index comprising equity securities available in developed markets globally. The index was chosen as it’s a widely used benchmark of the Global equity market. EdgePoint Canadian Portfolio: The S&P/TSX Composite Index is a market-capitalization-weighted index comprising the largest and most widely held stocks traded on the Toronto Stock Exchange. The index was chosen as it’s a widely used benchmark of the Canadian equity market. EdgePoint Canadian Growth & Income Portfolio: 60% S&P/TSX Composite Index, 40% ICE BofAML Canada Broad Market Index.The S&P/TSX Composite Index is a market-capitalization-weighted index comprising the largest and most widely held stocks traded on the Toronto Stock Exchange. The ICE BofAML Canada Broad Market Index tracks the performance of publicly traded investment-grade debt denominated in Canadian dollars and issued in the Canadian domestic market. The blended benchmark was chosen because the former is a widely used benchmark of the Canadian equity market and the latter representative of fixed-income opportunities consistent with the Portfolio’s mandate. EdgePoint Global Growth & Income Portfolio: 60% MSCI World Index/40% ICE BofAML Canada Broad Market Index The MSCI World Index is a market-capitalization-weighted index comprising equity securities available in developed markets globally. The ICE BofAML Canada Broad Market Index tracks the performance of publicly traded investment grade debt denominated in Canadian dollars and issued in the Canadian domestic market. The blended benchmark was chosen because the former is widely used for the Global equity market and the latter representative of fixed-income opportunities consistent with the Portfolio’s mandate. Why our performance may not be similar to their benchmarks: While the Portfolios use these indexes for longterm performance comparisons, each is not managed relative to the composition of the index. There are differences which include security holdings, geographic and sector allocation which impact comparability. As a result, the Portfolios may experience periods when their performance differs materially from the index. |
This information is of a general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc. assumes no responsibility or liability.
