Edgepoint wealth management Inc. of Toronto, which launched in the midst of the market meltdown during the autumn of 2008, has managed to garner more than $1.2 billion in assets under management and cultivate a dedicated base of about 1,300 financial advisors.

The young company was started by a small group of founding partners and money managers who were once part of former mutual fund giant Trimark Financial Corp. The partners include EdgePoint’s two fund managers and co-CEOs, Tye Bousada and Geoff MacDonald, as well as company chairman Patrick Farmer.

Farmer is responsible for the day-to-day running of the business; Bousada and MacDonald concentrate on picking securities for the investment portfolios. Former Trimark chairman and co-founder Robert Krembil is also a significant investor in EdgePoint, but is not actively involved in the business or in selecting holdings for fund portfolios.

“To acquire more than $1 billion in assets in such a short period of time during adverse market conditions is quite an achievement,” says Rudy Luukko, investment funds editor with Morningstar Canada. “It speaks to the strong reputation enjoyed by the principals of the company.”

EdgePoint has achieved its early success through simplicity and focus. The company has launched only four mutual funds — Canadian equity, Canadian balanced, global equity and global balanced — and has no plans to expand the lineup. Within the funds, portfolios are concentrated, with the equity funds typically holding fewer than 50 stocks. There is no marketing department, no advertising, no fancy premises, no advisor golf tournaments or other promotions. Fund managers communicate with advisors and their clients through quarterly commentaries that they write themselves regarding the portfolios and their holdings.

“We are not trying to be everything to all people, but are looking to build meaningful relationships with a few,” says MacDonald. “We don’t need a massive marketing department to advertise to people whom we don’t know.”

Nor does EdgePoint want a plethora of products in multiple flavours, with a huge sales force that doesn’t fully understand or make a long-term commitment to any of them, he adds.

The narrow suite of products and close communication with portfolio managers allows the salespeople — “relationship managers” as they’re called — to understand intimately what’s going on inside the funds’ portfolios. That would be impossible to do with a lineup of dozens of funds and multiple fund managers. The makeup of portfolios is discussed in detail at a regular Monday morning meetings between EdgePoint’s portfolio managers and the team of 11 relationship managers. Information is then relayed to financial advisors who distribute the funds.

“We don’t want a marketing-led organization; we want an investment-led organization,” says Bousada. “We bring our advisors close to the nuts and bolts of our investments, letting them know what companies we’ve bought and why, and they can articulate that to their clients.”

Because EdgePoint is not everything to all people, it is not for every advisor, MacDonald says. It does not offer a high-commission, deferred-load fund sales option — only a front-end, low-load product. EdgePoint also requires a minimum initial investment of $15,000 for its funds. This high minimum helps to lower management expenses by ensuring that certain fixed costs are not applied against small purchases, for which they would amount to an unreasonable percentage of assets.

About 1,200 advisors have come on board to sell EdgePoint funds, and the average amount of fund assets per advisor is about $932,000.

“There is selection on both sides,” says MacDonald. “We are building relationships with advi-sors who want a relationship with a company that offers a common-sense investment approach. They get to hear what the investment managers are thinking, and are not being sold something different every quarter. There is a common belief system among the advisors who want to do business with us: they believe that our investment approach is the best way of compounding wealth for clients.”

Bousada and MacDonald are clear that their performance goal is to be at or near the top of each fund’s peer group over a 10-year period. With more than a full year of investment results under its belt, EdgePoint is showing encouraging potential. For the year ended July 31, EdgePoint Canadian Equity Fund had a one-year return of 22.8%, while EdgePoint Global Equity Fund gained 0.55%.

About 40% of Edge-Point’s AUM are in EdgePoint Global Equity, 30% in the Canadian equity fund, and the rest is split between the two balanced funds.
@page_break@“We set out to do three things,” says Bousada. “We want to achieve top-flight performance over 10 years; we want strong relationships with our investment partners, who we define as financial advisors and the end-investors; and we want employees who think and act like owners.”

There is no better way to encourage the ownership mentality among EdgePoint’s “internal partners” than giving them the opportunity to own a piece of the action, he says. Almost all of the firm’s 24 employees are shareholders. They are not granted share ownership through stock options; they must put up their own money. If necessary, EdgePoint will facilitate an employee loan.

“We’ve built a team of 24 people at the top of their game in various functions,” says Bousada, whose definition of the corporate culture is that “employees know the right thing to do without having to be told. They are attracted to the entrepreneurial opportunity and believe in what EdgePoint stands for. When employees think and act like owners, there’s a willingness to work hard and pitch in. And you never hear someone saying that something’s not part of their job.

“Talent attracts talent,” he adds, noting that 21 of the 24 staff members have worked with at least one other staff member at a previous job.

“I’m working with people I’ve known for a long time, and there’s a high trust level,” says Geoff Goss, an EdgePoint relationship manager in Halifax who deals with advisors across the country. “It’s a great opportunity to build something from the ground up and be an owner in the business. How much more exciting can it get — to do what you love with people who share the same beliefs about how an investment firm should be run? There’s one vision, one approach. And everyone is pulling in the same direction.”

To save on costs, some employees have brought in their own desks, and subway passes are shared for trips out of the office. EdgePoint’s offices are in a low-rise building in midtown Toronto, far from the expensive skyscrapers of the financial district. There is no expensive art on display; much of what adorns the walls has been created by the children of employees.

“There a high level of desire to succeed,” Bousada says. “Bringing in your own desk is actually a badge of honour at EdgePoint. As owners of the business, there’s a high level of satisfaction for everyone in achieving cost savings.”

The focus on reducing costs has resulted in the company reaching profitability quickly. In August 2009, after just nine months in business, EdgePoint crossed the threshold to profitability with only $450 million in AUM.

Keeping a lid on costs also has allowed EdgePoint to lower the management fee component of its management expense ratios. For example, EdgePoint Global Equity has a management fee of 1.8%, which, when combined with other costs, results in a total MER of 2.17%. The fund’s MER has declined from the 2.8% it had at launch. According to Morningstar Canada, the average management fee for global equity funds is 2% and the average MER is 2.44%.

“Our fees are among the lowest in the industry,” Bousada says, “even though our portfolios are significantly smaller than some of the bigger players. The cost advantage to investors provides a head start or a tailwind in achieving superior returns. As the business grows, we can continue to take advantage of economies in scale, as our overhead will not grow in the same proportion.”

The investment approach continues the philosophy articulated by Krembil of approaching stock ownership as though actually buying a piece of the business. The goal is to invest in businesses with above-average growth prospects but whose prospects are not yet reflected in the stock price. Krembil continues to provide guidance and insight to EdgePoint partners, but does not discuss the merits of specific investments.

“We might have a conversation about trends and what types of businesses would do well in particular environments, but it’s primarily big-picture stuff,” says MacDonald. “Bob [Krembil] acts as a sounding board for us. He’s a man full of wisdom, with experience in building a fund management company as well as being one of the country’s most successful inves-tors. And we try to tap into that.”

As co-managers of the portfolios, Bousada and MacDonald make joint decisions on the makeup of the funds. If they both like an idea, it has a heavy weighting of 5% to 6%; if one partner likes it and the other thinks it’s just OK, it would have a weighting of about 3%; and if one partner likes it and the other can’t sleep at night, it’s simply not in the portfolio.

“There’s mutual respect, as well as respect for our differences,” says MacDonald. “We have different skill sets, but adhere to the same belief system when it comes to investments.”

Overall, the success of the business depends on doing a multitude of things better than the competition, Bousada says. There is no one “silver bullet.”

As he explains: “There is an opportunity to do a million little things a tiny bit better. And while no one thing in isolation makes a huge difference, our business model is to pull them all together.” IE