By Cheryl Long
Produced By Tom Cunningham
When Frank Baylis and Kris Shah, two highly successful Canadian businessmen, decided to sell one of their companies and invest the profits, they soon discovered that the practices being employed by many investment managers didn’t sit well with their own ideas about wealth management.
Their solution was to invest and manage the money internally by founding their own family investment office. In 2010, they hired Talbot Babineau to execute their vision: build and manage a portfolio that would produce consistent and attractive returns while preserving their original hard-earned capital. Based in downtown Toronto,the family office evolved to become an independent boutique investment management firm under the name IBV Capital, and shortly afteropenedup to externalinvestors interested in investing alongside the two families.
“We had a tremendous amount of success over the years as a family office, and I approached them to discuss the possibility of allowing others to invest alongside us,” said Babineau, who co-founded the firm with Baylis and Shah, and is now President & Chief Investment Officer. He suspected other investors were experiencing the same issues that prompted IBV’s founders to manage their own money; overly complex niche investment strategies, a focus on short-term returns rather than generating long-term wealth, and portfolio manager interests that weren’t aligned with their investors.
“What we do at IBV is we offer a simple strategy well-founded in business fundamentals. The strategy is extremely effective over a long-term investment horizon,” Babineau said. “Short-term trading is not how you generate sustainable long-term wealth.”
Patient, disciplined and focused
Babineau describes IBV as a firm that is highly patient, disciplined and focused on investments in high quality securities at attractive prices. The firm’s“IBV” stands for“Investment By Value” and its namesake fund, theIBV Capital Global Value Fund aims to do just that. The fund invests in both stocks and bonds of public companies. This flexibility gives them the ability to react to ever evolving market conditions in order to achieve their objective of producing consistent and attractive rates of return.
And it’s working. The firm’s trailing three-year return on an annualized basis is 19.8 percent, Babineau said, which is more than 10 per cent higher than the average reported by the industry. The fund, which has investments in developed markets around the world, has been designed to evolve with shifting market cycles. They’re approaching the five-year mark and to date, the firm has been able to consistently outperform global benchmarks and their peer group by a significant margin, Babineau said.
“We’ve been able to do it without taking much risk,” he explained. “We don’t believe greater returns require greater risk and to some extent that is because we define risk differently than the market does.”
Building in a margin of safety
Much of the industry defines risk as volatility, which doesn’t take into consideration the underlying value of the investment. How much a particular stock price fluctuates on any given day is less relevant than the changes in underlying fundamentals of the company, Babineau said. IBV instead defines risk as the probability of a permanent loss in capital. They also build in a margin of safety by only investing when a security is trading significantly lowerthan what they believe is its true value. This mitigates risk on the downside and increases profits on the upswing. “That’s why we’re able to earn excellent returns without taking significant risk.”
Managing a fund takes more than a little patience and discipline, and Babineau’s uniquebackground prepared him for navigating the markets over the last five years. Whileworking in the real estate industry through the heart of the 2008 financial crisis, Babineau saw first-hand the impact the crisis had on firms that were overleveraged. This experience stayed with him over the years and has helped shape his conservative investment approach.
Before Babineau’s career in finance and investing was underway, he worked as a professional umpire in the Gulf Coast League. “A lot of the discipline in being a professional umpire applies to what I do today. You’reintensely focused on consistently developing your craft to be an expert at it.I believe focus ultimately leads to success,” he explained.
Research is key to IBV’s success
That focus is one of the characteristics that make IBV unique in the industry, and it’s the rationale behind the firm operating only one fund and one committed strategy. The IBV team spendsanextensive amount of time performing in-depth research and visiting companies in their search for new investments. They’re looking for key features: business stability, long and successful track records, products with longevity, and a minimum of disruptive factors within that particular industry.Rather than snapping up every low-priced stock, they’re looking for quality investments in companies that have proven to be able to withstand harsh economic conditions.
“We do a substantial amount of research in each individual position we take which gives us the comfort to only hold 10 to 20 investments,” he said. “It’s a concentrated portfolio that allows us to know each individual company very intimately and it’s proven to work very, very well.”
The IBV Partnership Model
To align IBV’s interests with its investors, they offer something virtually unheard of within the industry. If the fund doesn’t consistently perform, IBV has committed to returning fees back to their investors. “I’ve yet to find a firm that’s willing to do that,” Babineausaid. “Our firm is only going to be successful as a by-product of how successful our investors are, not despite how successful our investors are.”
In addition, the three co-founders have invested substantially all of their liquid assets with the firm so they view new investors as partners who co-invest alongside them.“We probably have more of our personal wealth tied up in the firm than an advisor would typically recommend,” Babineau said, chuckling.
To learn more about IBV Capital, visit ibvcapital.com.