Hovig Moushian, Head of the Mackenzie All Cap Value Team, explains his team's philosophy and process and how they realize value with conviction-based investing.
HOVIG MOUSHIAN: On the Mackenzie All Cap Value Team, we believe the key to long term outperformance lies in a disciplined investment strategy that is tactically applied across the market capitalization spectrum of stocks. We believe that markets are efficient in the fullness of time, but that opportunities can be presented in the short term where pricing dislocations caused by emotional events or temporary events can cause stock prices to look attractive.
The key to recognizing these opportunities lies in the deep pool of experience of our seven investment professionals. On average, they have 20 years of experience combing through these stocks through numerous market cycles. Also importantly, most of that time has been spent working together as a close-knit, highly interactive team. And as a result, we share a common view to what defines value, one that is based on a strong free cash flow generation in the context of a competitive business environment that a company operates in.
So as these opportunities present themselves, we want to take advantage of them, because ultimately we believe that stock prices will return higher towards their fair market value, which is our definition of an efficiently priced security. Our process therefore is structured around our determination of fair market value. And fair market value is comprised of two elements.
On the one hand, you have the multiple. We determine the multiple based on a look back at where our stock has traded on average historically, where it's traded at trough levels, where it's traded at peak levels. We use the multiples that have been paid in acquisitions of similar types of businesses. All of that gets embedded into our determination of the multiple.
The underlying cash flow assumption that's determined by our forecasting is also done quite conservatively. We assume that a business operates in a competitive environment and therefore can only achieve returns, and therefore free cash flows that are reflective of a competitive industry dynamic. We apply that multiple to the cash flow to determine our fair market value estimate.
We're obviously trying to buy stocks that trade at a discount to their fair market value. And our risk management process allows us to incorporate stocks into the portfolio effectively through time. Typically following a market correction, or in the early stages of a recovery, there are more value opportunities to be had. And the discounts to fair market value tend to be larger. These are periods when our conviction is at its highest, and this is reflected in more risk-taking, vis-a-vis our ownership of small and mid cap stocks.
In the latter stages of a bull market, when evaluations tend to be elevated overall, there are fewer stocks that trade at a discount to their fair market value. And those discounts tend to be smaller. These are periods when our conviction is diminished, and that is reflected in our reduction in our exposure to mid and small cap stocks. On the whole, the application of this discipline value strategy combined with the experience of our team is how we expect to help our clients achieve their long term financial objectives.
Philosophy & Process
The Mackenzie All Cap Value Team invests in what they identify as the best value opportunities across North America. We believe that small- and mid-cap stocks are the biggest drivers of outperformance over the long term. Our expertise lies in the ability to tactically allocate across the market cap spectrum to potentially realize value from the best opportunities in the marketplace. We are disciplined, bottom-up investors that focus on the price we pay for a security, weighed against the relative risks to the portfolio for including that security. The team looks for companies that are diligent capital allocators with potential to generate sustainable cash flows. We believe in constructing well-diversified portfolios that have balanced exposures to different industries and sectors.