June 5, 2023

The portfolio manager explains how EdgePoint has outperformed in the long term

Craig Bagol / The Globe and Mail

Twenty years ago, Geoff MacDonald teamed up with a friend to buy three blueberry farm properties on Prince Edward Island. The forest berry harvest increased due to the spread of the roots on empty plots of land, and the value of the land has increased. The hobby space strategy is similar to the way MacDonald co-manages the EdgePoint Canadian Portfolio Fund with Tye Bousada and Andrew Pastor. The $2.5 billion fund buys undervalued stocks of companies with growth potential and has outperformed the S&P/TSX Composite Total Return Index since the fund’s inception. We asked MacDonald, 52, how it has beaten the index over 14 years and why he finds stocks like Tim Hortons owner Restaurant Brands International attractive.

Your company and funds, including EdgePoint Canadian, were founded in late 2008 during the financial crisis. Why did you do it in a bear market?

We didn’t know the crisis was coming. At the beginning of the year, we analyze the fund industry, which is usually led by sales and marketing personnel. We saw money chasing funds with strong recent returns, but investors who bought a year or two earlier did well. We wanted to use EdgePoint in a different way and make money for investors. A lot of people said it wasn’t a good time to start, but it was. Even if a lot of money didn’t come, it would be invested at attractive prices.

Your fund has outperformed in the long run. What is the secret?

If you want to beat your competitors or the index over time, your fund should look different from the index. Our salary is not tied to a benchmark. If your bonus is based on beating an index, the fund manager will focus on what’s in it, and suddenly the source of risk is the deviation from that benchmark. We treat risk like a businessman, which is the possibility of losing money. Diversification of the fund according to ideas is also important because the benchmark index is dominated by financial and resource stocks. This means we also own smaller businesses. We buy undervalued stocks to hold for at least 3-5 years, looking for growth that we don’t think others are seeing.

Why is Restaurant Brands, owner of Burger King, Tim Hortons, Popeyes Louisiana Kitchen and Firehouse Subs, number one?

We believe that Restaurant Brands can grow 5% in new restaurants annually over a long period of time without the need for capital. It is a franchisor, so it collects fees from franchisees, who use the money to build and improve restaurants. Popeyes, with fewer than 4,000 stores worldwide, compared to KFC with more than 25,000, has a long runway for growth in the United States. We also see significant growth for Tim Hortons, which has 5,300 restaurants. We expect 2,000 new stores to open in China over the next five years. In Canada, Tims struggled during the COVID-19 lockdowns, but people are getting back to work and lineups are back. It also benefits from menu changes with more expensive and better quality products. I’m a fan of the chicken habanero wrap.

Why do you own Osisko Gold Royalties precious metal stock?

Osisko provides miners with capital in exchange for income from gold and silver production worldwide. It doesn’t own mines, which is a capital-intensive business, so its margins are high. We believe it can grow its gold equivalent ounces production by around 40% over five years. Since Osisko intends to be a royalty and streaming company, the valuation many investors pay for this stock is likely to increase in the future.

Your fund owns PrairieSky Royalty, Advantage Energy, CES Energy Solutions, Tourmaline Oil and Secure Energy Services. Why do you like oil and gas?

Despite rising commodity prices, energy producers have been reluctant to increase supply aggressively. It is possible that oil and gas prices will remain high in the future due to increased demand. The transition to renewable energy concerns natural gas for a long time, and oil is still part of developing market economies. The environmental, social and governance narrative against energy companies is changing because many are doing good things. The general fund investors who left the industry need to come back in a big way.

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