Q4 2016 Commentary – Mackenzie Growth Team | Mackenzie Investments

Q4 2016 Commentary

Mackenzie Growth Team

Market Review

  • US equities performed well, particularly after the November elections. The Russell Mid Cap TR index returned 5.7% (CAD). Expectations rose that economic growth levels would increase in 2017, driven by the new presidential administration’s policies.

Outlook & Strategy

What are the key opportunities you see?

  • In the US, 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.
  • We believe that the US Congress may have some success with tax reform at the corporate and individual levels.  We own many companies that pay relatively high tax rates, and may benefit from a reduction in corporate rates.
  • In general, growth companies have fallen out of favor as investors focus on more cyclical sectors of the market.  We see opportunities in technology and health care to own attractive business models that are reasonably priced.

What are key risks that need to be managed? 

  • We believe that the US economy, like many others, 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 that the world may continue to proceed in a lower growth environment compared to history.
  • 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.  There has been a recent rise in optimism that warrants caution on both prices paid and the types of companies owned.

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.
  • The market has moved to a very favorable outlook for growth and thus has boosted the share prices of more cyclical companies.  Given our more nuanced view of 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 faster pace than the overall economy.  We see this as a more “all weather” approach – our companies can do well in a rising economy, but also perform reasonably well in a difficult economy.
  • 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.

Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns as of December 31, 2016 including changes in unit value reinvestment of all distributions and do and not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in the investment products that seek to track an index.

To the extent the Fund uses any currency hedges, share performance is referenced to the applicable foreign country terms and such hedges will provide the Fund with returns approximating the returns an investor in a foreign country would earn in their local currency.

This document includes forward-looking information that is based on forecasts of future events as of December 31, 2016. We will not necessarily update the information to reflect changes after that date. 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.

The content of this commentary (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.