Beyond the numbers: Mackenzie manager spotlight

Darren: I started my career at a bank-owned Canadian asset manager back in 1995, the year of the Quebec Referendum. When I applied for the job, I was given a company to look at called Seagram which was still an iconic, TSE-traded Canadian-based company. I had to present my report to the firm’s board, and they asked me pretty directly, "Well, what happens if the Referendum leads to secession?" I said, "Well, Seagram’s sales are going to go up, and we'll be drinking a lot more." Fortunately, there was a bit more to my analysis and I got the job.

Katherine: I actually started out in retail sales for a very short period of time, because I always knew I wanted to be in investing, and I wanted to help people in an advisory role. Then, very quickly, I realized I wanted to move more to the analytical and research side.

Ome: I started my career on Bay Street at the same place Darren was working at the time. He was very kind to me and very helpful. I had been pretty enterprising in school, so I was doing a few things and I was making a decent amount of money — but I actually took a substantial pay cut to go work with Darren.

Darren: We want to own industry leaders. Whether we're looking at an energy company or a software company, we want to own businesses that have demonstrated top-quartile growth, margins, returns — all the things that you’d associate with a leading company. At the same time, our edge comes from our flexibility. We own companies that look statistically expensive and we own companies that are cheap. The commonality between them is that they’re leaders.

Katherine: Coming from a more traditional value investing background, I think one of the key lessons that I learned is not to put valuation ahead of the quality of a business. Building on what Darren said, it’s not about boxes or classifications. A stock can move from value to growth and back to value again, depending on the price; however, the underlying business model stays the same. 

Katherine: Because when you think about the financial attributes of quality companies, they tend to be the leaders of their industry with very strong competitive advantages.That's what enables them to generate very strong cash flow through very strong margins. In difficult times, they can use that cash flow to actually make their business stronger through research and development, share buybacks, scoop up competitors, or paying dividends.

Darren: Assessing whether or not a company is high quality involves close scrutiny of its operating model and what underpins its profitability and returns on capital.

The first thing we look for is whether the business will still be around in 15 or 20 years. There are the obvious examples: people are still going to feed their pets; they're probably still going to be drinking Johnny Walker scotch and Jameson whiskey. On a more esoteric level, however, there are companies we own like industrial gas companies where customers can sign 20-year contracts: this highlights the quality and long-term stability of the business.

Ome: A moat is a competitive advantage that leads to growth and profits. That profitability has to be defensible. Companies we hold have multiple competitive advantages. They could be differentiated and be a low-cost provider. They might have cornered resources, privileged assets, but the very best have two-sided network economics. In other words, the company acts as an intermediary for two different groups. An example of that would be Visa, which has one of the strongest moats in the world.

Katherine: Just to add to what Ome has said, when we think about moats, we also think about the industry a company operates in. We ask, is there organic growth in the industry and how well positioned is that company to take share? That's where the moat — or the competitive advantage — comes into play. Because if you have strong competitive advantages, you're not only going to grow with the industry, but you’re also going to be the winner in it. 

Katherine: When we think about the growth of a company, we want to look past any potential economic weakness to assess what that long-term growth rate is. The second thing that we look at is its ability to grow in adjacent markets. That's where capital allocation comes into play — the ability of management teams to spend that money wisely to create shareholder value.

Darren: Overwhelmingly, it’s because the thesis has changed. Which is a much nicer way of saying the fundamental view of the company was wrong. If we have a better idea, if we're paying a lower price for what we think to be superior business, then it's an easy decision.

The thing about investing is, no matter how much work you do – how well you know the company, how well you think you understand the business – the world is a fluid and dynamic place, and you can still be wrong. It’s not the winners that will ultimately determine performance – it’s how well you manage your mistakes.

The market can be very short-term in its thinking. We look out beyond one or two quarters, making our judgement calls on what we think a company will look like next year, three years from now, 10 years from now.

Ome: Also, better opportunities. We're not typically traders, but in March 2020, Darren called me at 8:00 AM and I was on my way back from the gym. We were so excited because there were so many things to buy. We were watching stocks such as ASML holdings and LVMH and were able to buy them at much lower levels, respectively, in all our mandates. In times like that, you can actually be more active. Opportunities can drive activity.

Darren: The Global Financial Crisis. I have a greater appreciation for balance sheets today than I did before this happened. For example, the reason why we all love exchanges as opposed to banks is a direct output from our experience at that time because exchanges don't have balance sheet risk. Volatility is their friend, while banks are levered, which works both ways. When times are good, leverage is great. When times are bad, you've got a problem. That was a big lesson learned.

Ome: The Global Financial Crisis taught me about the viability of some leaders. There were some lionized CEOs who presented a strong front, but as things developed, we found out they had less of a grasp on their businesses than we’d thought. It brought to light the thoroughness needed to assess these investments and their management teams when you engage with them.

Katherine: I love my job. I love working with this team. I think anyone in the investment industry has to love learning because you're constantly learning something new every day. And then, even once you’ve learned something, you have to relearn it because the industry changes or new data comes in.

Darren: I come from a small town in Manitoba; none of my family is in this business. I got really lucky when I was in university. I took an investment course and got some exposure to the investment world reading books by Peter Lynch and Warren Buffet. It was such an “aha” moment because there were both numbers and creativity involved. I got lucky finding this career — I've never felt like I've worked yet.

Ome: Amazon.

Katherine: Lululemon.

Although Amazon and Lululemon may not have been on their radar early on in their careers, the team has continued to take advantage of market opportunities as they arise and seek growth for their investors. They remain hyper focused on quality and bringing new solutions to important challenges facing investors.