Mackenzie Growth Team
What happened in the previous 3 months? What contributed positively to performance? What detracted from performance?
In general, markets offered mixed returns this quarter. The S&P 500 was up 1.8%, while in Europe the Euro Stoxx index was down 7.2%. In Asia the Nikkei was up 5.1% while Chinese markets declined. Most of the decline in Europe was driven by the UK referendum on Brexit which occurred late in the quarter. In the US, small and mid cap equities outperformed large cap, with the Russell 2500 index rising 2.7% for the quarter.
Mackenzie International Growth Fund declined 0.8% in the second quarter. Stock selection in consumer discretionary, industrials and information technology contributed to performance, and an underweight exposure to financials also helped. At the country level, stock selection in Japan and the United Kingdom was beneficial, as was the underweight exposure to Japan. At the sector level, stock selection in consumer staples and energy along with an overweight position in consumer discretionary were all detractors. Stock selection in Hong Kong and an underweight exposure to the United Kingdom detracted from performance. On June 21, 2016, the Mackenzie Ivy Team took over management of Mackenzie International Growth Fund. The portfolio is in the process of transitioning the holdings of the previous management team to holdings that fit the strategy of the new portfolio management team.
Mackenzie Global Growth Class fell 1.0% on the quarter. Stock selection in consumer discretionary and information technology contributed to performance. From a geographic perspective, stock selection in Japan and the United Kingdom was beneficial, as was exposure to Luxembourg. Stock selection in energy and materials detracted from performance. From a geographic perspective, stock selection in the US detracted. Cash positioning was also a detractor from performance on the quarter. On June 21, 2016, Ashley Misquitta, also lead portfolio manager of Mackenzie US Growth Class, was added as lead portfolio manager on the fund.
The larger cap oriented Mackenzie US Growth Class was down 0.7% in the quarter. Weakness came from stock selection within energy, financials and information technology. Positive contributors included stock selection in health care – Exact Sciences was a particular standout as it received a favorable regulatory decision. Within the United States the team continues to see attractive opportunities, particularly in innovative sectors where health care and technology stand out.
Mackenzie US Mid Cap Growth Class was up 3.5% in the quarter, aided by outperformance by the portfolio offset by some currency effects. The Fund entered the quarter with its largest sector weighting being in technology. During the quarter three of the Fund’s technology holdings were acquired – Demandware, FEI and Textura – and this had a large positive effect. The Fund also benefited from strong performance by its healthcare companies, with six of the seven holdings up by 16% or more. The main negatives in the US Mid Cap Growth Class came from the Industrials sector, where Spirit Airlines, MSC industrial and Team were all weak, and from the Consumer Discretionary sector, where Polaris and Ralph Lauren underperformed.
Outlook & Strategy
What are the key opportunities you see?
Our operating assumption on the macro economy has been that growth will be mediocre. Across the globe, governments have too much debt to be able to boost growth in a major way. Governments also appear unwilling to make structural changes that might cause near-term pain in exchange for a better long term growth profile. So the world continues to muddle along.
In that context, while we don’t see growth taking off, there are periods of volatility that come and go. A case in point is the UK referendum result that roiled markets so much late in the quarter. What we aim to do is to know as many great businesses as we can, and to know what they might be worth. When markets offer us share prices for these great businesses that are reasonable, we become buyers.
What are key risks that need to be managed?
Ever since the Great Financial Crisis of the last decade, we believe there have been two key risks for equity investors – these are being either too pessimistic or too optimistic. Markets have swung between extremes of enthusiasm and despair. We believe investors need to stay vigilant on the valuations paid for businesses, and need to use a price discipline as both a risk management tool and a help to have the courage to buy when conditions look grim.
We focus mainly on free cash flow as a metric for company valuations. This measure has become even more important in the last few years, as companies have moved increasingly to present earnings in an “adjusted” fashion which may obscure reality. In our view accounting risk has risen.
How are you positioning portfolios in response to this outlook?
We believe that growth investing should prosper in a world where growth is scarce. We are focusing on companies that have secular growth opportunities that can help them do better than the overall economy.
In the US, wages have started rising after several years of remaining low and flat. We believe this rise may prompt companies to begin taking action to improve productivity. In seeking to improve productivity, companies may invest in new technology and services that can help them get work done more efficiently. We think several of our companies can assist in this effort.