WINNING STRATEGY
An eclectic mix of stocks, including a toymaker, helps Canadian fund stay on top,
Strong leadership, duopolies part of the strategy used by Mackenzie to create 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,” said David Arpin, senior vice-president and portfolio manager of the Mackenzie Canadian Growth Fund.
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 Canadianfocused 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.
“We’re a growth investor, but we’re not hypergrowth,” 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 capitalintensive 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 (CN). The Canadian rail industry is a quintessential duopoly, dominated by CN and Canadian Pacific Railway, 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 5 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, in its stable.
“While the industry long-term grows 4 per cent organically, they have grown at least two and a half to three times that,” she said, citing the innovative culture that won Spin Master three Toy of the Year awards in February.
Other top Canadian holdings included Royal Bank of Canada, Telus Corp., CAE Inc., Metro Inc. and CCL Industries Inc., a labels and packaging manufacturer that entered the money-printing 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 other countries.
“It’s a very stable business with 4- to 5-per-cent organic growth year in and year out, always getting operating efficiencies and very big free cash flow,” 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.
“In markets like we’ve seen for the last five or so years, which have been sloppy, slow, sluggish, that’s probably our best environment,” Arpin said.