Cymbria Investor Day - 2023
Investment Analyst Adam Szypula was in attendance at Koerner Hall in Toronto for Cymbria's 15th Annual Investor Day. While the Cymbria name may not ring a bell, they are a leading investment manager and thought leader in Canada. Below are some of his takeaways from the talk and Q&A with the founders and investment team. This note has also been linked to commentary put out by the EdgePoint team for those looking for further reading on any of the topics discussed below.
The majority of the discussion was by founders Patrick Farmer, Geoff MacDonald and Tye Bousada while the Q&A featured more of the investment team. For a breakdown of the "who" behind Cymbria check out Our Team.
What is Cymbria?
Cymbria is a publicly traded investment vehicle listed on the TSX (Ticker: CYB). It provides investors with exposure to EdgePoint Wealth Management along with a portfolio of both public and private “best investment ideas”. These ideas are also held in the various EdgePoint portfolios.
In their own words:
What’s Been Happening with CYB stock?
Patrick Farmer discussed how the stock is currently trading at ~6% discount to NAV (net asset value). Last year it was trading at 14% premium to NAV. This was a large driver behind stock price depreciation in 2022.
The team feels stock is undervalued and have put their money where their mouth is. Over $3.6M in stock has been repurchased over the last 6 months.
What's Your “Edge” Today?
Geoff and Tye believe their approach and structure are their two greatest competitive advantages.
Approach
Their process continues to be the same: buy growth for free.
This process is based on human nature, which doesn't change. They have a different view of business than owner selling.
They’re always looking to exploit behavioural biases.
Behavioural Bias In Action: Ahead of the meeting they send out two surveys to attendees. One asked “What has you most excited about markets?” the other “What has you most concerned about markets?”. Following this was a question on expectations for S&P 500 over the next 12 months. Those who got the “Excited” question predicted the S&P 500 would be +7.2% over next 12M while those who got the “Concerned” question predicted S&P 500 +5.5%. While this might not seem like a huge difference, compound that spread over 10 years and the difference in outlooks start to get massive. This is an example of anchoring.
Look for a “Granny Shot Culture”: In Wilt Chamberlain’s 100 Point game an overlooked stat is he went 28/32 from the free throw line. He took “granny shots” which is a highly unorthodox but incredibly effective approach. Nobody in the NBA shoots free throws this way because of the league culture and a stigma of doing something “too different”.
At EdgePoint, they looks for companies that do something unconventional, especially if it usually causes other investors to overlook it, but that adds value for those who can see past it.
Views On Risk vs. Uncertainty: The best scenario for investing is low risk, high uncertainty. To outperform you need a differentiated view. Heightened uncertainty means attractive prices. Low risk means mistakes don't take you out of the game.
Structure
Unique "Ownership" Culture: In markets, you’re going to look very wrong at some point. They’ve built a culture that allows you to maintain conviction in tough times. Too many Portfolio Managers (PMs) have poor incentives such as beat your benchmark returns by a fixed amount, keep portfolio allocation within a tight a band (meaning you must invest in ideas and sectors you don’t like). This leads PMs to invest client money differently than they would invest their own. That's not the case at EdgePoint.
Skin In The Game: All new portfolios are seeded by employees. Of EdgePoint's total asset base, $363M is employee capital.
Industry redemption rate: 16%
EdgePoint: 10%
Their structure offers a stable capital base allowing the team to be opportunistic during tough times.
Performance Measured Against Peer Group, Not an Index: They never want to benchmark to an index; that's how you start to look like the benchmark. Matching an index doesn't mean 0 risk but many firms disagree (ex. The S&P 500 returned -18.1% last year. Being down -17.9% might be a win elsewhere, but not at Cymbria).
Aligned Compensation Structure Means No Silos: Their investment team is all rowing in the same direction. The Equity team gets a portion of their compensation based on the Fixed Income team’s performance and vice versa. This leads to a culture of sharing of ideas and collaboration. The fixed income team has an incentive to pass along research if they don’t like the bonds, but think the stock is worth a look and vice-versa.
75% of their bonus is based on 5-year returns, 25% on 3-year returns. This longer-term focus allows freedom to look wrong in the short-term, while maintaining the ability to be right in the long-term.
They are surprised nobody has copied this approach. No compensation consultants were needed to come up with this structure. The industry has gone the other way towards shorter-term focus for bonuses and am emphasis on being right now vs. doing the right thing long-term.
Why Do You Underperform in Down Markets?
To answer this question, there are 2 types of downturns.
1. Recurring Drawdowns (Answered by Geoff)
You won't remember what set off these downturns, but they happen regularly. Think of them as just clouds on the horizon, but you must take the road if you want to get to your “Point B”.
These little storms create opportunity. Clouds let behavioural biases run wild as uncertainty increases.
Before buying any business, they believe we are either in the middle of a thick cloud or it's very visible on the horizon. These clouds are a precondition for investment. Businesses with uncertainty can go down more in a decline.
When you layer uncertainty upon more uncertainty that causes stock prices to decline. The inverse view is that as price declines, value is increasing. They can deploy capital in these drawdowns while others head to the exit.
It's not about short-term declines. It's the consequences of your actions during the storm.
Cymbria has only underperformed in 50% of down markets historically. Geoff joked maybe the question should have been: "Why do you outperform in down markets?". From the day before a downturn in markets to 3 years later, Cymbria has outperformed 5/7 times.
2. When Bubbles Pop (Answered by Tye)
Predicting bubbles is easy, timing investment is the tough part.
Bob Krembil is a legend who has successfully navigated many bubbles popping. They learned from him and Tye highlighted his track record from the '70s until today.
The math behind drawdowns in far from intuitive. For example, ARKK's -59% drawdown means an investor needs a +244% return to get back to breakeven. ARKK is the poster child of growth at any price and free money.
Focus on earning a pretty good return over the longest period of time has made us very good at avoiding bubbles over the years.
Investor Q&A
Any commonalities among mistakes made during your careers?
Andrew: Mistakes of omission were that of businesses that are path dependent. Starting point shows a clear path to growth, when environment changes these businesses aren't resilient. Weaker businesses or management teams surprise to the downside. Good businesses are resilient and grow through tough times.
Thoughts on coming recession?
Geoff: See talk above on uncertainty and opportunity.
Recessions bring bargain prices, create opportunities and mean a target rich environment.
What's The Team's "Sell" Discipline?
Sell a position for one of two reasons:
- We made a mistake. If you can't still stand behind your original thesis anymore, you need to exit.
- Idea has played out. If you no longer have a proprietary view, you need to exit and go to cash or redeploy into a new idea.
How do you handle employee turnover?
Tye: It's a multi-faceted answer. The best and brightest want to work for the best. They want to work around others who share their thinking. Ideally somewhere they have an equity stake in too. On top of this Cymbria has strong camaraderie and a unique culture: hard to believe but taking care of the end investor is still a novelty. They also try to strike a good balance of incentives. Hire the right people and let them run free. Geoff and Tye's job is mainly to make sure they don't demotivate these high performers.
Patrick: It comes down to their investment led culture. Invest the way you'd invest your family's money, not what your boss tells you to do. They do everything they can to remove hierarchy and bureaucracy.
Jason: It takes a long time, a lot of effort and hard work to build wonderful things. They've been putting in the sweat equity to build their culture.
Claire: structure allows you to invest the way you actually want. No outside influence (ex. Short-term flows), quarterly performance rankings, or managing to benchmark.
ChatGPT & AI: What's The Impact on Portfolios?
Used the example of chess and humans vs. computers. Computers started winning consistently in the 1990s. Centaur chess of human and computer vs. only a computer regulaly win. AI will complement humans and is a tool with large implications but it will not replace humans.
Thoughts On Fixed Income?
Patrick: "What do you mean by fixed income?" Lots of firms took massive interest rate risk, took some significant lumps last year and have been telling investors the good times will come back. They have transformed into recession cheerleaders who want rate cuts.
We are in a new environment where you don't have to take interest rate risk to get yield.
Derek: 8/10 years of his career, rates have been at 0. The rate on cash held in funds is now 4.5% in CAD, >5% in USD. "I'm a kid in a candy store." Finally starting to make some real money here.
Borrowers used to have all the power and put pressure on lenders to offer funds more attractively. Today it's a complete turn of events from 12 months ago where lenders hold all the power and can dictate deal terms to borrowers.
How Are You Insulating The Global Fund From The Decline in USD?
Geoff: Shouldn't be targeted to just USD. All currencies decline. Inflation is always around just looks different. Ask a 20 year old if they think they'll be able to afford a house. It was just asset values before. Need a business that can outgrow inflation and don't pay for that. Need real returns. Don't own gold.