Consistent and Sustainable Growth– Managing Risk by Finding ‘Easier’ Areas to Invest
Portfolio Manager, Head of the Mackenzie Bluewater Team
Investment Director – Equities
Investors don’t like surprises so understanding what to expect from investments is critical. We manage risk by investing in industries with characteristics we find attractive. These areas provide what we believe are the best opportunities to generate above average returns with limited volatility and superior downside protection.
Industry Characteristics that Matter to Us:
Investing in less competitive areas removes a large layer of risk. Low competitive-intensity allows companies to achieve dominant scale and strong margins, which can lead to steady, stable, and sustainable results.
Industries crowded with competitors make for difficult operating environments. The more intense the competition, the more profitability deteriorates, and this is usually bad for shareholders.
An ideal example of businesses with a dominant position is the longstanding Coke and Pepsi duopoly, with the two companies owning about 75% of the ‘cola’ market. Both companies have been highly successful over time.
We prefer non-cyclical businesses because there are fewer surprises. These businesses tend to be steady, stable, and sustainable through a full cycle.
An example below shows how the cyclical Automotive industry performed relative to the more stable Health Care industry during the past two downturns. Stable businesses tend to hold up better during large market pullbacks.
We focus our capital within industries that are growing at above average rates.
As industries expand, new opportunities are created while older areas often come under threat. If you are looking for conservative growth businesses, you will usually find them in areas with a natural tailwind.
For example, Blockbuster, the chain of movie rental stores, eventually went bankrupt because of the rapid growth of movie and music streaming. Blockbuster simply couldn’t adapt their business model fast enough to respond to the technological threat. On the other hand, Netflix, Google and Apple have enjoyed growth in their streaming services given the natural tailwind in this area.
Structural Secular Threats
Disruptive technologies can rapidly impact industries. When a threat is identified, we avoid these areas altogether.
It’s difficult to predict how quickly disruptive technology will impact an industry, but when traditional business models are upended, the impact on stock prices can be severe. When a threat is identified, we prefer to stay away from the industry altogether. There are plenty of opportunities in other industries.
The long-term investor experience with Bluewater has been positive returns in up markets and downside protection in difficult markets. We believe this experience is reflective of our disciplined investment approach. As seen in the charts below, Bluewater funds have captured more upside over the long term and less downside than the peer group.
* Upside and downside capture ratios calculated for the period from September 1, 2016 to July 31, 2019.
^ Since Portfolio Manager change, effective August 9, 2016.