Eyeing cream of crop
FUND SEEKS EDGY COMPANIES IN LOW- GROWTH WORLD
Going back 15 years or so, it was easy to find companies growing their top line at double-digit rates. But with global growth remaining persistently low since the financial crisis, finding companies that meet that criteria on a sustainable basis and over a full economic cycle, is very difficult.
That’s why portfolio managers like Dina DeGeer and David Arpin at Mackenzie Investments look to sectors that are outgrowing the broader economy, and within those sectors, ensure they own the best businesses.
“Reality has set in given this low- growth environment,” DeGeer said, noting that the $680-million Mackenzie Canadian Growth Fund typically has positions in 30 to 35 companies, with a very aggressive U.S. component.
The award- winning team from Bluewater Investment Management that also includes Shah Khan had been a sub-adviser for 20 years, but it joined Mackenzie Investments in January 2016.
Arpin used the U. S. housing bubble of the early 2000s to demonstrate how signs of a structural change were in place. He noted that as much as US$ 800 billion was being taken out of the property market and being spent in the economy.
“That should have led to extremely robust growth, but growth was very average,” he said. “Post the financial crisis, it’s also been worse than expected.”
This is a primary reason why the portfolio managers are looking for businesses that can generate a stable total return, as opposed to targeting those that are rapidly growing sales.
That’s taken them to service-oriented businesses like global consulting firm Accenture PLC and IT forecasting firm Gartner Inc. — areas that are growing, while others shrink.
DeGeer also highlighted holdings such as Toromont Industries Ltd., a Caterpillar equipment sale, rental and maintenance provider that has been doing fairly well despite the tough economic environment.
“All of this infrastructure spending on roads and bridges will provide decent support for the business for many years to come,” she said.
In an environment where growth is scarce, the managers are also seeking companies that are growing their market share, and doing something better than the competition through a technological or manufacturing edge.
Gildan Activewear Inc. has a history of reinvesting very aggressively in lowering manufacturing costs, and now has a roughly 25- percent cost advantage versus its competition. At the same time, time chief executive Glen Chamandy has been reinvesting in yarn- spinning to improve the quality of the end product.
“It’s all about taking share in a subdued market,” DeGeer said, noting that Gildan recently displaced the Cherokee brand in Target’s U.S. stores, after winning the Wal-Mart contract in the U.S. three years ago.
Finding companies that can innovate, such as Spin Master Corp., and are outgrowing their respective industries, is also part of the strategy in Canada.
DeGeer noted that the entrepreneurial team behind this toy company is responsible for big hits like Bakugan many years ago, and Paw Patrol and Little Charmers more recently. However, they’ve also built strong brands behind t he t oys by making licensing deals with content producers like Nickelodeon and Nelvana to create daily children’s programming.
“They also have a great skill at buying old products for very little money, and recreating the product to make another big hit,” DeGeer said. “It has great financial metrics and is not capital-intensive — they’ve outsourced their manufacturing to China.”
While the fund has very low exposure to commodities, it does have a position in Canadian Natural Resources Ltd.
Arpin noted that the company should see a very large increase in free cash flow as projects come on in the next couple of years.
“They are going to become a very low- cost global producer,” he said, noting that many Canadian producers won’t be able to take advantage of the technological changes U. S. shale oil companies have.
“A lot of these companies have great long- term track records, but that record is predicated on the environment continuing the way it always has been.”
He also thinks companies like PrairieSky Royalty Ltd. can still prosper in this environment, particularly because it doesn’t use its own capital, but rather has others drill on its land, and then strips off a royalty stream.
Arpin noted the shift happening in terms of oil demand, as well as the fact that growth in U. S. shale production means supply is unconstrained.
He believes that by early next decade, electric vehicles will start to become the same price or cheaper than fossil fuel vehicles.
“So although an electric vehicle today has too short a range, too long a charge time, and costs too much, Tesla is already looking to sell 400,000 units of its latest model,” he said.
“There is something structural going on.”