Slow, steady tack prevails in era of ‘sloppy’ growth

A toymaker, a 100-year-old railway and a company that literally prints money are among the eclectic mix of stocks driving Canada’s top-performing equity fund in an era of slow, “sloppy” growth.

“We’re focused on the suspicion that slow growth and deflation is going to continue and we’ve been investing accordingly,” David Arpin, senior vice-president and portfolio manager of the Mackenzie Canadian Growth Fund, said in a phone interview.

The $1.1 billion fund, managed by Toronto-based Mackenzie Investments Corp., returned 10 per cent in the first half of the year, making it the best performing of 61 Canadian-focused equity funds with more than $1 billion in assets under management.

Its strategy is to find stocks that can consistently generate 10 per cent to 12 per cent growth in free cash flow. The fund is divided about 50-50 into Canadian and U.S. equities, with the U.S. holdings providing diversification from Canada’s commodity-heavy stock market.

“We’re a growth investor but we’re not hyper-growth,” said Dina DeGeer, senior vice-president and team lead of the Mackenzie Canadian Growth Team. “We don’t like deeply cyclical businesses, we don’t like commodity businesses, we don’t like capital-intensive businesses.”

Instead, Mackenzie looks for stocks with a strong leadership position in their sector. “We love duopolies because they have pricing power and if you’ve created a big strong business moat you don’t have new competition coming in,” DeGeer said.

One of the fund’s top holdings is Canadian National Railway Co. The Canadian rail industry is a quintessential duopoly, dominated by CN and Canadian Pacific Railway Ltd., and CN gives Mackenzie exposure to natural resources while reducing the cyclicality that’s typical of commodities, DeGeer said.

Another top investment is toymaker Spin Master Corp., which makes up just under five per cent of the fund’s holdings. DeGeer described the Toronto-based company as “a real gem.”

The company counts Hatchimals and PAW Patrol, two of the hottest toys going, in its stable.

“While the industry long-term grows four per cent organically,

they have grown at least two-anda-half to three times that,” she said, citing the innovative culture that won Toronto-based Spin Master three Toy of the Year awards in February.

“I think they’re just in a class of their own.”

Other top Canadian holdings at April 30 included Royal Bank of Canada, Telus Corp., CAE Inc., Metro Inc. and CCL Industries Inc., a labels and packaging manufacturer that entered the moneyprinting business when it acquired Innovia Group for $1.13 billion in December. Innovia makes the polymer banknotes used in Canada, the U.K., Mexico and several other countries.

“It’s a very stable business with four to five per cent organic growth year in and year out,” DeGeer said. “They have made a lot of acquisitions in their history and they have been excellent allocators of capital.”

The Mackenzie Canadian Growth Fund’s strategy of focusing on stable businesses that generate consistent free cash flow growth works in most market environments except when the market “gets very excited and concentrated in one area,” such as the tech bubble of the late 1990s, Arpin said.

That’s not the case this year. The benchmark S&P/TSX Composite Index is flat this year, lagging most of the developed world.