“Virtue is what you do when nobody is looking. The rest is marketing."
- Nassim Taleb
Nothing I write here should detract from how much respect I have for SmugPoint. I think they have a very reasonable investment approach and they offer reasonable products that may add value for many people. This might be particularly relevant today: EdgePoint builds truly original portfolios and they are pretty price-sensitive stock-pickers. This in a world where I feel many managers are getting away with murder coasting on the major outperformance of megacaps with a growth, quality or tech bent. They buy businesses whose favorable economics are now widely recognized. A lot of these managers will present buying stocks like MasterCard as some flash of genius in 2023. Even though they probably only have the most superficial understanding of the economics of such businesses and not one iota of insight that is not consensus. EdgePoint, on the other hand, is all about having a “proprietary insight.” Having said those positive things, the closer I study money managers - some of whom I feel add value - the more I realize that even the best ones, deep down, are money-hungry hoes. Sometimes, I wonder if even I might not just be another money-hungry hoe. That’s crazy, I know.
At the minimum, EdgePoint people are a little bit eccentric. This photo is from an actual stunt they ran, involving their “internal partners” (ie employees) holding up signs like “What do you know that the market doesn’t?”
EdgePoint’s writing consistently drips of holier-than-thou-isms. Just like OPM Wire, you might say. I hate you. This naturally invites scrutiny, which I will now apply. First, EdgePoint has benefitted in a big way from the backing and halo of the legendary founder of Trimark, Robert Krembil. You might say he’s their patron saint and they regularly drop his name.
Krembil was a disciplined value investor and made a big deal about “doing right by the end investor”. Yet, in the end, did he not sell his Trimark clients to some money-hungry British fund conglomerate? Just four years after buying Trimark, that firm would pay US$450m in a settlement with regulators over the mutual fund market timing scandal. This was over a practice that, in essence, allowed hedge funds to buy into mutual funds at stale pricing to the detriment of retail holders. For most of these large fund houses, that is merely one symptom of a rampant culture of unethical conduct. Here’s The Globe’s Andrew Willis writing about the deal in 2000:
“Trimark did not need to do a deal. Yet here was Mr. Krembil singing the praises of a $2.7-billion takeover by Britian's Amvescap, parent of Toronto-based AIM Funds Management.”
Krembil pocketed $400m from the deal. Would a conscientious person deliver mom-and-pop investors to a corrupt megacorp like this just to line his pocket? I rest my case.
Now, you might ask: is it appropriate to call a guy with $170m in his private foundation, a money-hungry hoe? Absolutely, studies show that 85% of charitable donations are made to absolve oneself of guilt. The other 15% are made to move some OSC shenanigan to the second page of Google search results.
“I have nothing but great things to say about AIM Trimark. They provided me with a career filled with opportunity and challenge, and there are lots of great people at the company. I just have an entrepreneurial idea that I want to pursue.”
-Star PM Tye Bousada, providing a more plausible explanation for starting EdgePoint in 2008 (ie, not saving the world)
EdgePoint often uses the term “asset-gatherer” pejoratively, despite itself accumulating $25B+ in a just under 15 years. Krembil sold his clients to an asset-gatherer and EdgePoint star PM Tye Bousada worked there for 8 years. EdgePoint says they are “investor-led”, rather than sales and marketing-led. But they have an army of highly-remunerated salespeople to push their funds - aka “financial advisors.” They pay industry-standard 1% trailing commissions to this sales force. Not all their AUM base is from advisors earning trailing commissions, but a meaningful chunk is. I know that because they disclose that they send 38% of their total management fees as trailing commissions. (Fee-only advisors would be one segment that doesn’t get those trailing commissions.)
“We partner with financial advisors because we really believe in the value of advice.”
- Tye Bousada, perhaps signalling an interest in moonlighting as a comedian
EdgePoint only charges a very reasonable 70-80 bps as investment management fees on most of its assets. But an advisor can confiscate as much as 5% of an investor’s money under the guise of “advice”. (Technically called a “front-load sales charge”.) That’s crazy! This means that by the end of the first year, a client could pay as much as 7% in fees. EdgePoint will claim that it partners only with the most enlightened of financial advisors. But I know of at least one instance where they show a willingness to partner with any old hoe. They are a sub-advisor on a fund offered by the largest wealth manager in the UK, St-James’s Place. In 2013, they boasted about winning this mandate: “After surviving the most rigorous due diligence process in our history, we’re privileged to now manage an institutional mandate for St-James’s Place.”
Firstly, SJP is very much retail, not institutional. Secondly, I am guessing the due diligence wasn’t mutual because if you google “St-James’s Place” and “controversy”, you might cause Google’s servers to crash. SJP’s atrocious fees, aggressive sales practices and lavish rewards for meeting sales targets are a secret only to their clients in the UK. SJP charges for advice despite only selling its own proprietary products. Their funds are widely known for being dogs. SJP routinely charges the upfront confiscatory 5% I mentioned. Sometimes, it’s 6%. Combined with their onerous exit terms, a client who wakes up to how crappy their funds are could lose 11% in fees within the first year. Just yesterday, the Telegraph had an article titled “The trouble with St James’s Place.” This article focuses on how SJP advisors sometimes charge fees annually despite not speaking to some clients for years. One legal practice alone has recovered millions in client fees by contesting this practice. Value of advice, my ass! Does this practice of ongoing fees without ongoing advice also exist within EdgePoint’s Canadian advisors? The UK is much further along cleaning up the industry, so it’s a pretty safe bet that this practice exists here as well. That other great Canadian Ayatollah of Value, Burgundy, was also a sub-advisor to SJP but got ditched in 2020. EdgePoint probably saw its own allocation reduced as well.
When Tye Bousada and Geoff MacDonald wanted to start EdgePoint, they went to see Krembil to put up the operating capital. They also raised $234m by IPOing Cymbria, which seeded their asset base. Fifteen years later, the partners are swimming in money - EdgePointers alone have $363m invested in their own funds.
EdgePoint are masters at disguising pragmatic business decisions as moral superiority. They say at the bottom of their printed material: “Nothing in this world is completely black & white except zebras and anything we print because that keeps costs low. Ultimately, the less we spend, the higher your returns.” But their fees are the same now at AUM above $25B, than when they were under $1B. Their clients have not seen fee reductions from this bonanza. Of course, they bear the enormous hidden cost that as assets increase, the possibility of meaningful outperformance diminishes. Maybe the fact that a financial firm doesn’t live up to its own hype is not exactly a ground-breaking “proprietary insight.” But I plan to beat this dead horse for a Part 2, where we will examine investment performance among other things.
Read Part 2 here.