We believe that excess investment returns are achieved by taking a long-term, value-oriented approach to investments based upon detailed, fundamental research. When considering investments, our primary concern is to select quality companies that are priced conservatively.
Long Term Fundamental Value
Long Term: Investing means buying ownership stakes in companies, not buying and selling pieces of paper. You need to give management time to build the company. We tend to hold our positions for 4-5 years, holding some companies for much longer.
Fundamental: We want to understand fully the operating characteristics of the companies in which FGP invests. This means analysis of their track records, including:
Growth in revenues, earnings, shareholders’ equity
Profit margins, asset turnover, return on equity
Balance sheet strength and cash flow
Value: Our ultimate objective is to own good quality companies acquired at reasonable valuations.
Source: Foyston, Gordon & Payne
Equity Investment Management
Our decision to select and own shares of companies is based on a thorough assessment of each company’s fundamental strength and its position within its industry on a global basis. Our investment ideas are generated primarily through internal research. The focus is on analyzing quality companies whose shares are out of favour and, therefore, could offer favourable long-term growth. Our belief is that investment value will tend to grow persistently over time as companies realize an increase in their net worth through the reinvestment of earnings. There are two aspects to our buy and sell decisions: first, an evaluation of a company’s quality characteristics; second, if the company passes the required quality tests, an evaluation of the attractiveness of its share price.
A company is considered of sufficient investment grade only if it meets our tests of balance sheet strength and profitability. As part of our research process, we assign each company an investment quality ranking based on its track record of growth and profitability, financial strength, management focus, industry characteristics and outlook. Our objective is to have a diversified group of stocks by type of business, size and investment grade.
We hold our investments for many years and, as a result our firm’s portfolio turnover rate, tends to be quite modest (on average 20% – 25% a year). However, if a stock’s price rises rapidly such that we no longer consider it fairly priced compared to its intrinsic value, we will consider reducing or selling our position. Similarly, we will consider selling a stock if its fundamentals begin to deteriorate such that we no longer feel it can meet our quality criteria.
Fixed Income Management
Our first step is to establish an overall forecast for the direction of interest rates based on our macroeconomic and technical analyses. Within this framework, we identify bonds that have optimal risk/return characteristics.
We use both interest rate anticipation and sector/security selection strategies in varying degrees depending on the stage in the economic and interest rate cycle. This process involves a constant evaluation of our portfolio, in light of changing interest rate conditions and changing valuation of bond sectors and individual issues.
We manage the duration of the portfolio relative to the duration of the underlying benchmark. The minimum/maximum duration of the portfolio is ±2 years relative to the benchmark duration. As an active manager a neutral duration is not considered as a portfolio position. Changes in duration are made in increments of 0.5 years.
We utilize not only the resources of the fixed income staff, but also the insights offered by our equity analysis staff. Given that our equity philosophy is a value philosophy, there is a natural overlap between our fixed income and equity analytical processes. This synergy gives us an advantage in determining the credit worthiness of bond issuers.
Asset Mix Philosophy
While we recognize that over time equities tend to provide the best preservation of purchasing power, asset mix decision are designed within the context of our clients’ investment objectives and guidelines.
Ranges for each of the asset classes are quantified in conjunction with the client’s guidelines to provide a framework for making appropriate investment decisions. We use the following four steps:
Evaluate economic and capital market considerations;
Implement asset mix within guidelines established with client;
Vary the mix as relative values change.
Source: Foyston, Gordon & Payne
Stephen P. Copeland, Vice President Investments & Chair of the FGP Investment Committee
John C. Berry, Vice President & Portfolio Manager
Bryan W. Pilsworth, Vice President & Portfolio Manager
Robert J. Head, Vice President & Portfolio Manager
1 Adelaide Street East, Suite 2600