Mackenzie Growth Team
US equities performed well. The Russell Mid Cap TR index returned 6.1% (CAD). The information technology and energy sectors were the biggest drivers of returns, with health care and industrials also contributing positively. Conversely, utilities, telecommunications and consumer staples sectors detracted from performance. Expectations rose that the Federal Reserve (Fed) would increase rates again before the end of 2016, but not likely before the US election in November.
Outlook & Strategy
What are the key opportunities you see?
- In the U.S., wages have started rising after several years of remaining flat. We believe this rise may prompt companies to begin taking action to improve productivity with the intention of maintaining profit margins. 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.
What are key risks that need to be managed?
- We believe that the US economy has weakened recently, and, like many other economies, faces structural challenges in the form of high debt levels, overcapacity, and declining profit margins. Across the globe, governments have too much debt to be able to boost growth in a major way. With that macro-economic backdrop, we believe the world will continue to proceed in a low growth environment.
- Ever since the financial crisis of the last decade, we believe that there have been two key risks for equity investors: investors are being either too pessimistic or too optimistic. We expect market volatility will continue as we approach the U.S. presidential election in November and the building rate hike speculation surrounding the Federal Reserve meeting in December.
How are you positioning portfolios in response to this outlook?
- What we aim to do is to know as many great businesses as we can, and learn what they might be worth. When markets offer us attractive share prices for these businesses, we become buyers.
- Given our more pessimistic outlook for the U.S. economy, we have focused our attention on owning highly innovative, secular growth businesses. These types of companies offer products and services that make the world better, cheaper, and faster – enabling them to grow at a much faster pace than the overall economy. We believe that growth investing prospers in a world where growth is scarce.
- We focus mainly on free cash flow as a metric for company valuations. This measure has become even more important in recent years, as companies have moved increasingly to present earnings in an “adjusted” fashion which may obscure reality. In our view, accounting risk has risen and we believe securities regulators are becoming increasingly concerned with these “adjusted” disclosures based on recent guidance.