Portfolio manager dishes on how EdgePoint has outperformed over the long haul

Craig Bagol/The Globe and Mail

Twenty years ago, Geoff MacDonald partnered with a friend to buy three blueberry farm properties on Prince Edward Island. The yield of the wild berries increased as roots spread to empty patches of soil, and the land value has appreciated. The strategy on the hobby farm 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 it has outpaced the S&P/TSX Composite Total Return Index since the fund’s inception. We asked MacDonald, 52, how it has beat the index over 14 years and why he finds stocks such as Restaurant Brands International, owner of Tim Hortons, attractive.

His firm and funds, including EdgePoint Canadian, launched in late 2008 during the financial crisis. Why did you do that in a bear market?

We didn’t know a crisis would happen. Early that year, we analyzed the fund industry, which is generally run by sales and marketing people. We saw a pattern of money chasing funds with strong recent returns, but it was investors who bought a year or two earlier who did well. We wanted to run EdgePoint differently and make money for investors. Many people said it was not a good time to launch, but it was. Even if a lot of money didn’t come in, it would be invested at attractive prices.

Your fund has outperformed over the long haul. What’s the secret?

If you want to beat your competitors or an index over time, your fund should look different from the index. Our compensation is not linked to a benchmark. If your bonus is based on beating an index, a fund manager will focus on what is in it, and suddenly the source of risk comes from differing from that benchmark. We approach risk like a businessman would, which is the chance of losing money. Diversifying the fund by ideas is also key because the benchmark is dominated by financials and resource stocks. That means we own smaller companies, too. We buy undervalued stocks to hold for at least three to five years, and we look for growth we think others don’t see.

Why is Restaurant Brands, owner of Burger King, Tim Hortons, Popeyes Louisiana Kitchen and Firehouse Subs, a top holding company?

We believe Restaurant Brands can do 5% growth in new restaurants yearly for a long time without needing capital. It’s a franchiser, so it collects fees from franchisees, who spend the money to build and upgrade the restaurants. Popeyes, which has fewer than 4,000 stores globally versus KFC with more than 25,000, has a long runway for growth in the US We also see substantial growth for Tim Hortons, which has 5,300 restaurants. We expect that 2,000 new outlets could open in China within the next five years. In Canada, Tims struggled during COVID-19 lockdowns, but people are returning to work, and there are lineups again. It’s also benefiting from menu changes with pricier, higher-quality items. I’m a fan of the chicken habanero wrap.

Why do you own Osisko Gold Royalty, a precious metals stock?

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

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

Despite higher commodity prices, energy producers have been reluctant to aggressively bring on more supply. There’s a chance oil and gas prices will remain high in the future because of rising demand. The transition to renewable energy will involve natural gas for a long time, and oil will still be part of emerging-market economies. The environmental, social and governance narrative against energy firms will change because many are doing good things. Generalist fund investors who left the sector will have to come back in a big way.

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