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moneysense.ca, 25/05/09
Cymbria Corporation (TSX: CYB)
EdgePoint Mutual Funds, which offers a short line up of just four equity funds, is a new mutual fund short backed by Trimark founder Bob Krembil and star managers Tye Bousada, Patrick Farmer and Geoff MacDonald. While EdgePoint will be an interesting fund company to watch, not least because of the pedigree of its founders and the promise to focus on investment returns rather than shareholder returns, it is not the focus of this post.
The founders of EdgePoint found an interesting way to launch their mutual fund company. They floated a closed-end fund on the TSX exchange last fall called Cymbria Corporation (TSX: CYB) that attracted $222 million in capital. Cymbria provides the founders with a permanent pool of capital to invest as closed-end funds, unlike mutual funds, cannot be redeemed. On its own, Cymbria might be attractive to fans of active management due to its low fees (the management fee is waived for the first three years but there is a service fee paid to registered dealers of 1% and operating expenses of the fund), co-ownership (the founders have invested $22 million of their own money), concentration etc. However, to sweeten the offer to Cymbria shareholders, the founders offered a ownership stake in EdgePoint that in the final analysis was set at 23%. In other words, Cymbria is a closed-end fund run by superb managers with a 23% stake in EdgePoint mutual funds thrown in.
A couple of points should be noted regarding the risks in addition to the usual warnings about active management: Cymbria (CYB) is thinly traded and relatively illiquid and closed-end funds sometimes trade at significant discounts to net asset value (NAV) and there is no guarantee that CYB won’t do so. As of May 22, 2009, Cymbria had a NAV of $10.50 and was trading at a slight premium at $10.85. You can find the prospectus here.
moneysense.ca, 25/05/09
I am a big fan of these founders, and this particular investment. For disclosure: I own it myself, and have the majority of my clients in it to some degree.
To me, this is an investment that in 10-20 years people will say “if you had put $10K in this back in 2009, it would be worth $xx today!” – much like they do with Berkshire Hathaway shares, etc.
Ultimately, EdgePoint should deliver cash dividends to Cymbria which they will use to buy more publicly traded companies. Over time, this extra return will be huge. Berkshire has operated the same way – insurance company makes profits and Warren Buffett uses those profits to buy more public shares shares of companies such as Coke, Gilette, Wells Fargo Etc. This extra return is very powerful over time.
Second, CC mentions in his post that the price of CYB will likely trade both above and below its NAV (the value of the public companies, but NOT including the 23% of EdgePoint).
Think about that – when it trades at or below the NAV, the Cymbria investor is getting the EdgePoint ownership for free! I would expect the managers to see this opportunity and take advantage of it by having Cymbria Corp buy back its own shares. Over time this too will be very powerful in that the 23% of EdgePoint will be shared by fewer and fewer remaining shareholders – it is difficlt to imagine just how powerful this will be over time, but I am sure it will be another key success factor talked about in 10-20 years time.
CC’s site is very pro on passive investing – but for anyone who invests actively for some or all of their portfolios would do well taking a close look at this. I have been doing this for close to 20 years, and I have never found any investment more compelling. It is run by extremely ethical people, they are talented, they co-invest their own money in it, the fees are low, and the portfolio is small and can only grow by performance.
What elese could an active investor ask for?
“It is run by extremely ethical people, they are talented, they co-invest their own money in it, the fees are low, and the portfolio is small and can only grow by performance.
What elese could an active investor ask for?”
The only comment I’ll add for active investors is to also look for low turnover. All too often, active funds turnover their investments at a rapid pace, incurring not only trading commissions but also taxes. It may not be realistic to expect turnover to be as low as index funds but lower turnover indicates that the manager is truly buying stocks with a long-term view in mind.
That is a good point which I should have added the following…..
If the manager’s former trading records at Trimark are any indication of what Cymbria will see, investors will take comfort to see their turnover will likely be very low. At Trimark, trading costs were a super-low 0.05% typically (many high turnover funds can add 2.0 – 3.0% in costs).
Furthermore, this is a closed-end fund so no trading needs to be done when cash comes in with new purchases or leaves due to redemptions. This will also keep it low.
[...] financial advisor, who wishes to remain anonymous, sent the following e-mail on reading my post on Cymbria. I’m publishing it with permission to present the other side of the [...]
comment editing? why have comments if your just going to take them down ?
@dj: Did you add a comment to this post? I use an automatic spam filter and very rarely, legitimate comments do get caught in it. I’m going to explicitly add your IP address to the white list. I do apologize if your comment was caught by the spam filter. Rest assured that I did *not* delete or even edit *any* of your comments.
I do occasionally edit comments to clean up unacceptable language but when I do, I add a note that the comment has been edited.
Not sure if you like to revist stories….CYB.to just got hit today ,down 5% to $13.40, so after one of the best bull runs…it’s up 28% over 2yrs or 14% per yr….too bad their funds didn’t do as well
@dj: I don’t follow CYB because I don’t own it. I thought it was an interesting story but to be fair, you could have invested in pretty much anything equities in May 2009 and you’ll be sitting on some pretty nice gains now. If their funds did not do so well, I’m not entirely sure why. Right now, I see CYB trading at a slight discount to NAV. That may not be enough to tempt bargain hunters.
No big deal…i was just trying to get to the bottom of why the story was post in frist place and comments by Rob were sort of a pump , but advisers love to make it on both ends.
CC – I appreciate that you start by sayign you don’t own it so you don’t follow CYB, but I must say that found your reply to dj’s comments somewhat glib which is different that how I see your typical comments and writing.
DJ – I just saw your comment from back in late April. That was before the weekend and I have tried to leave this alone. I hate myself that I can’t just leave things like ill-informed comments alone, but I can’t so let me address them:
First, “advisers love to make it on both ends”? Not sure what that means, other than CYB owners indirectly own 21% of EdgePoint mutual fund company. My original responses to all of these are now gone, which is a shame… but the main point is this would be one of the stupidest investments an advisor could use if their goal was to screw their clients. If that is there goal, there are a million products designed to do just that. CYB isn’t one of them. Also, not sure how this is bad for EdgePoint owners, or CYB owners – unless you think advisors are going to encourage their clients to buy EdgePoint so their CYB shares are worth more. Again, the only response to this is there are a million products designed to do just that and would accomplish this far more effectively than CYB. Doesn’t make sense.
THE HIT?
CYB is illiquid, so your comment about it being “hit” applied to a very few number of shares. CYB has typically traded above NAV, but there has been painfully little volume below NAV (more on why this is painful in a minute). The “hit” you describe is simply the effect one or two larger shareholders getting out for what could be a plethora of reasons. This will happen repeatedly and I hope there are more (more on that later).
Anyone owing CYB should only own it understanding the pros and cons of illiquidity. CYB owners are compensated by getting to own a piece of the EdgePoint mutual fund company.
PERFORMANCE
So let’s talk about the investment results based on the Class A share NAV (the J class of shares will be even better as they had no underwriting fees). Let us also use December 31st of each year, and then again on June 30th of each half year, because those reports are nicely prepared for us in CYB’s annual report. Figures here are audited by KPMG and the report is publicly available on their website.
From http://www.edgepointwealth.com/documents/Cymbria%202010%20Annual%20Report.pdf – Page 2
In the short period since inception on Nov 4th, 2008, CYB has had a cumulative growth (after fees) in NAV of 34.98% compared to its benchmark (MSCI World on C$) of 18.71%. Note that this is cumulative, and not annualized outperformance. In other words, it has certainly beaten its benchmark. But they and I will be the first to say that this as WAY too short a time period to gauge long-term success. All this early success does is give them a good start on their goal to perform in the top quartile over 10 years.
We can look again soon after the June 30th semi-annual report comes out and keep track of this on the CC site if you (and of course RAM) likes. I don’t think they will beat their index in every period – but I believe this will beat it over the long term period and we can watch along the way to see how CYB is doing.
The Global Portfolio mutual fund is doing equivalently well to CYB based on NAV… the only difference being the effect of cash flows in on the open-ended fund, and the slightly higher fees in the mutual funds.
SORT OF A PUMP?
As for your comment “sort of a pump”. I have no interest in you and nothing to gain by you or any of CC’s readers liking this investment. I originally sent this CYB idea to Ram, not for a post, but just as an idea if he wanted any active management in his portfolio. He confirmed this in later comments which have also been deleted. He turned CYB into a post (which is 100% his right to do if he wants). But to think this is a grand master sinister plan of mine to promote the investment and trick people is a little weak. A site where people hate active management is not really an effective forum to do that.
On the contrary, I actually want people to have zero interest and hope it continues to trade at prices below NAV. When it does this, CYB can buy back their own shares and get all their stock ideas in the fund on sale so-to-speak and concentrate the EdgePoint ownership back for the benefit of remaining CYB holders.
SHARE BUY BACKS
CYB has been frustratingly trading slightly above NAV for the vast majority of trading days. This has made it very difficult for CYB to buy back and cancel shares. Recently, they were able to buy a few hundred back, and I hope there are doing it as we speak since it has finally traded at worthwhile discounts in the last month or so.
By the way, buying back and cancelling shares reduces management’s fee income, but helps investors. Please help me understand why this is bad because I am sure you can come up with a reason
SUMMARY
DJ – you are likely similar to me in your cynicism of the industry. I can assure you that I am extremely cynical after working in it for 21 years and seeing first hand all of the crap that goes on. Similarly, the founders of EDGEPOINT (Tye Bousada, Geoff MacDonald and Patrick Farmer) are ethical guys who find the industry just as frustrating. They could have made a lot of quick money for themselves playing in that game, but they have chosen instead to take a longer-term approach and make an investor-focused firm in response.
If I seem passionate about this product, please accept that it may be because I have a hell of a time finding investments I think are good for my clients.
If you want to continue to monitor and evaluate this investment, lets do it semi-annually on the site, using facts and not just pre-conceived biases. Fair?
@Rob: Guilty as charged! I should have taken the time to compare CYB returns with its benchmark before commenting.
@dj: I can confirm that Rob suggested looking into CYB for my own account. I wrote a post on it after asking him if it’s okay to do so. I thought it is an interesting story even if it’s not the kind of investing many readers do here.