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Why are Cymbria shares trading at such a discount?

The folks at EdgePoint Investment Group Inc. and its affiliated fund company, Cymbria Corp., have a neat self-assessment quiz for prospective employees.

One of the questions, as detailed in Cymbria's recent annual report: "Most important to investors should be: a) To see their fund company advertised on television; b) Growing their long-term wealth; c) Personalized stationery as a gift for opening an investment account."

Tee-hee! The quiz – which is humour rooted in truth, rather than an actual part of the screening process – is a perfect encapsulation of the spirit of Cymbria, with its below-average fees, significant stakeholder ownership and investor focus.

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Missing from the quiz, however, is perhaps the most important question: Why are Cymbria shares trading at such a discount?

Neither the principals of Cymbria, nor I, seem to know the answer. But it suggests that we might consider buying the shares in case the gap – outside the firm's historical norm – disappears.

First, a little background: The founders of EdgePoint and Cymbria – Tye Bousada, Patrick Farmer and Geoff MacDonad – made their names in the heyday of Trimark, the Canadian fund family known for its disciplined value approach. With retired Trimark co-founder Bob Krembil offering advice and some financial backing, the three started EdgePoint in 2008, kicking off their investor road show the day after Lehman Brothers filed for bankruptcy.

Only in hindsight do we know that was nearly perfect timing for a long-term, value-based investment strategy.

Cymbria Corp. raised $234-million as a "closed-end" fund. Rather than a traditional mutual fund, where investors can redeem shares and get their cash back, "closed-end" funds keep the cash – investors must sell shares on an exchange to exit. It is, the Cymbria managers say, "a permanent pool of capital."

Cymbria owns one-fifth of EdgePoint, which in turn makes the stock picks for Cymbria. The EdgePoint stake is a little less than 4 per cent of the Cymbria portfolio, which is 90 per cent invested in equities.

What kind of equities? "Global companies with strong competitive positions, defendable barriers to entry and long-term growth prospects that are run by competent management teams," Cymbria says. And, of course, they try to buy in at prices below their true worth.

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Not particularly unique, on its face, but so far, so good: Since inception, on Nov. 3, 2008, through Dec. 31, Cymbria's net asset value climbed 32.1 per cent, versus 15.3 per cent for the MSCI World Index.

Success stories include car-stereo maker Harman International Industries , which Cymbria bought as low as $10 (U.S.) in November, 2008, and sold in the mid-$40s in May, 2011. Current top holdings – 5 per cent of the portfolio or more – are Wells Fargo & Co. , British airline Ryanair Holdings PLC , U.S. health care company WellPoint Inc. and insurer Progressive Corp. .

However, something funny has happened on the way to all that NAV growth: Cymbria's TSX-listed shares, which were once at a 33-per-cent premium to NAV, traded at a discount, sometimes substantial, for most of 2011. While Cymbria's NAV dropped 2 per cent in 2011, its share price dropped 11 per cent.

Earlier this month, the discount to NAV approached its record high of 12.8 per cent; this week, the discount remains close to 10 per cent. Tuesday's closing price of $13.39 (Canadian) was below the NAV of $14.87. (The stock closed Wednesday at $13.36.)

"We don't know why we've traded at a premium in the past, or why we trade at a discount now," Mr. Bousada says. "We believe that every company we own in Cymbria is trading for below what it is worth, and as such, having the ability to buy Cymbria at a discount just increases the attractiveness of Cymbria in our minds."

It might help in this climate, perhaps, if Cymbria shared the wealth; EdgePoint pays Cymbria a dividend, but rather than pass it along, Cymbria re-invests the cash.

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"This doesn't mean we won't pay dividends in the future," Mr. Bousada says– instead, Cymbria has been "unbelievably excited" about the investment opportunities so far, and with Cymbria now trading at a discount, "we believe the long-term interests of shareholders are best served today if we can buy back shares in the marketplace. … If the discount didn't exist, we'd acknowledge that a dividend would make more sense than a buyback."

In this yield-crazed world, Cymbria's contrarian streak on the dividend issue may be suppressing its share price. But the company's partners seem not to mind; they have, after all, a long-term view. Value-oriented investors who can postpone income may find Cymbria shares fit their long-term view, as well.

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