When volatility is your friend

Our Investment Committee recently met with Tye Bousada of EdgePoint Wealth Management Inc., one of the three specialist money managers retained for the Newport Global Equity Fund. EdgePoint has performed well over the nine years since we invested with the firm. While they are pleased with that, their focus is more on finding quality businesses and minimizing permanent loss of capital.

Given the dramatic volatility that recently returned to global markets, we thought to share the takeaways from Tye’s perspective, which, as always, was thoughtful, well-prepared and passionate.

In a nutshell, EdgePoint welcomes market volatility because it is overdue, they hold cash that can be put to work at better valuations and price movement during tough markets historically provided the underpinnings for their strong performance.

Here are some of the highlights on EdgePoint’s activities:

• Selling high: In recent months, EdgePoint took profits as valuations of many of its businesses rose to levels wherein, “we no longer saw something in the company that the market didn’t see,” as Tye explained. This led them to reduce or eliminate top-performing holdings like AIG and JPMorgan, and their cash levels rose to among the highest in EdgePoint Global Portfolio’s history.

• Continually looking for undervalued quality businesses: EdgePoint’s distinct approach is “to invest in companies that can grow regardless of what the economy is doing, and not pay for that growth.” There are nine people on their investment team whose job is to uncover at least six new ideas per year. Over the past several days, EdgePoint deployed almost 2% of the cash into some of companies that previously looked too expensive. Tye gave the example of a European luxury goods provider that he followed for the past 15 years but never owned. “We had visited the company in Europe, attended their product shows and done our homework on it. We had been waiting in the weeds for an opportunity and only recently did all the dots connect so that we finally had a chance to invest.”

• Assessing the risk of current investments: In addition to finding and investing in new ideas, the EdgePoint team spends a significant amount of its time assessing risk across its Portfolio. The team reviews its holdings to determine “non-obvious correlations” with the potential to harm the Portfolio. As Tye explained, “within the 38¹ businesses in our Portfolio, we try to determine how much exposure we have to certain risks – a slowdown in China for example. Or rising interest rates – good or bad effect? Not every company in our Portfolio is going to be a winner, so if we make a mistake anywhere, we want to ensure it is as uncorrelated to other holdings as possible.”

• On the recent volatility: In short, Tye and his colleagues see times like these as an opportunity to re-set the portfolio for future growth. If history is any guide, about 40%² of their past performance is owed to decisions taken in tough markets. They have proprietary views of the businesses they own or want to own and look to profit from dislocation in the market. And thanks to well-timed selling, they have the cash to act on their views.

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1. As at January 31, 2018.
2. As at December 31, 2017.