Ivy Quarterly Review | Mackenzie Investments

Ivy Quarterly Review

Highlights from the First Quarter Edition


The value of sitting out.

The market rebound that started about the same time Santa Claus came to town brought investors much-needed relief from having to feel as if they were living through another market correction. A quarter later, certainly some investors profited from the subsequent recovery. For example, an aggressive strategy would have turned a tidy profit in less than three months! So what gives? Why didn't Ivy go on a buying spree with some of its cash?

Ivy Quarterly map

The simple answer is the valuations. For methodical growth builders like Ivy, the valuations remained too high even after double-digit declines. The deeper more important answer is our evaluation of the valuations. Many were too high based on the sustainability of their competitive advantage. Other businesses had balance sheets that just didn't justify even their late Q4 (lower) valuations!

This is by no means based solely on opinion. Our analysis of the price-to-sales (P/S) ratio declines just didn't suggest a real buying opportunity. Going from obscene valuations to merely outrageous ones doesn't suddenly create buying opportunities.

There's something more important to consider. No one could have foretold that Fed Chair Powell's comments regarding maintaining interest-rate patience would spark a rally. We'll leave it to the academics to decide what would have happened if he said nothing, or worse, suggested a rate hikes or further tightening (There's unanimous belief that either would be unthinkable).

With a financial system that has amassed $250 trillion (USD) in debt—sovereign, corporate and personal—we should be grateful for his patience. With the global GDP expected to hit $90 trillion (USD) in 2019, that pegs the Earth's debt-to-GDP ratio at 277%. And there's no limit in sight. On this statistic alone, sainthood for Jerome Powell should be considered premature.

It's this type of oddness that's been ruling the markets for far too long. Ten years into a record-setting bull market, all it takes is a quick shot in the arm from a central banker and all is well. The Fed will never let something bad happen. The multiples are to be maintained at all cost! Forget about fundamentals. Inflation is good. Deflation is bad. Lower rates are stimulating.

At times like these, there's virtue in a steadfast—even stubborn—focus on the fundamentals. It helps ensure decisions are based on more predictable internal factors rather than capricious external ones. There's nothing old-fashioned about proven methods that can sustain compounded returns of 5-10% over five, ten and even fifteen years. One could, on a whim, abandon prudence to grow at a faster pace. In hindsight that would have been proven a good idea. But a rally based on a central banker's speech isn't sustainable.  

There's a truism in car racing that applies to investing: to finish first, you first must finish. It stresses the importance of managing all factors that raise the probability of finishing. It means reliability over luck. Staying power trumps raw power. Mastery of all conditions is better than skill in only one. Ultimately, it means surviving to race yet another day.

Read the full commentary for a Q1 rundown and how Q2 may look.

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This document includes forward-looking information that is based on forecasts of future events as of December 31, 2018. Mackenzie Financial Corporation will not necessarily update the information to reflect changes after that date. Forward-looking statements are not guarantees of future performance and risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Some of these risks are changes to or volatility in the economy, politics, securities markets, interest rates, currency exchange rates, business competition, capital markets, technology, laws, or when catastrophic events occur. Do not place undue reliance on forward-looking information.  In addition, any statement about companies is not an endorsement or recommendation to buy or sell any security.