COVID-19 Updates:

Calming perspectives in uncertain markets

COVID-19 Updates:
Calming perspectives in uncertain markets

Perspectives from our investment experts

Our top experts and Portfolio Managers discuss their approaches to managing through these challenging markets.

Mackenzie Ivy Team

April 1, 2020

James Morrison, MBA, CFA

Vice President, Portfolio Manager

Graham Meagher, CFA

Vice President, Portfolio Manager

Ivy Team Special Weekly Commentary

The Mackenzie Ivy Canadian Fund is managed carefully, in similar fashion to other Ivy Funds, with a focus on investing in high-quality businesses that we expect to generate strong risk-adjusted returns over the course of an economic cycle. Given the unique attributes of the Canadian market, the Fund’s strategy targets to achieve similar risk-adjusted returns as Mackenzie Ivy Foreign Equity Fund with a more cyclical path.

Over the past month, equity markets have sold off at a dizzying pace, spurred by the Covid-19 pandemic. Both Ivy Foreign and Ivy Canadian have beaten their peers and respective markets (see performance tables below), with the key difference in down-capture to date between the two funds being the lower level of cash held by Ivy Canadian going into the downturn (about 10% vs 30% as of February 29, 2020), a more cyclical equity mix, and relatively lower exposure to the strengthening US dollar.

In Canada, the downturn has been exacerbated by The Organization of the Petroleum Exporting Countries (OPEC)’s decision to flood the energy market with additional supply, while demand has concurrently fallen by more than any time in modern history. Although Ivy Canadian has outperformed the market and its peers over this period, down-capture has been greater than we would typically expect, largely as a result of our investments in energy infrastructure. We view these businesses as defensive and supported by long-term contracted cash flows with limited direct commodity price exposure, but these are exceptional times and for now, the market thinks otherwise. In the first month of this downturn, our investments in Pembina, TransCanada and Williams Co. reduced the value of Ivy Canadian by >4.5%.  While this has negatively impacted our downside capture to date, we expect it to similarly improve our upside capture as the fundamental stability of these businesses comes into greater focus.

Of course, we have other investments in great businesses, across a diverse spectrum of regions and industries that have been directly impacted by Covid-19 and have had greater downside participation than we would expect in a normal economic recession. While we did not foresee a pandemic, we invest in businesses where we have confidence that they can navigate their way through uncertainty and we expect these companies will come out of this intact and for some, stronger, as they exercise their capital flexibility to invest countercyclically.

Across all Ivy funds, we continue to proceed with caution, knowing that conditions could become much worse before they get better. However, we believe there are many great long-term opportunities within our funds that we are well positioned to realize.

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

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.

This document includes forward-looking information that is based on forecasts of future events as of March 26, 2020. Mackenzie Financial Corporation will not necessarily update the information to reflect changes after that date. Forward-looking statements are not guarantees of future performance and 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.

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Mackenzie Fixed Income Team

March 30, 2020

Steve Locke, MBA, CFA
Senior Vice President, Portfolio Manager, Head of Team

Join host Matt Schnurr in conversation with Steve Locke, Vice President, Portfolio Manager and Head of the Mackenzie Fixed Income Team. They dive into how Steve and his team are maneuvering through markets during the COVID-19 pandemic, how Steve started his career and what sparked his interest in Portfolio management.

Steve's perspective on COVID-19 starts at 10:00

Listen to this Podcast >

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Mackenzie Bluewater Team

March 24, 2020

David Arpin, MA, CFA

Senior Vice President, Portfolio Manager, Team Co-Lead

Dina DeGeer, MBA, CFA

Senior Vice President, Portfolio Manager, Team Co-Lead

Bluewater Team Special Weekly Commentary

The coronavirus outbreak continued to ramp up across the non-Asian world last week, leading to dramatic and unprecedented government actions. We are now in the process of “shutting down the world” in an attempt to slow or stop the outbreak while a treatment is developed. There is evidence from Asia that the ramp-up in testing capabilities combined with mass lockdown and quarantine slows transmission rates and flattens the curve. If we have been unsuccessful in bending the curve through current policies, governments will need to decide if they will continue to ramp-up measures. If we have been successful, we will need to decide how and when we go back to work.

It is important to understand the current containment playbook (which is being followed by major governments globally) appears to come from a single source—a model of the impact of various strategies produced by the Imperial College London.  While researchers attempted to model the impact of various measures on the spread of the virus, they did not attempt to model the impact of various strategies on society itself, forgetting that “sometimes the cure is worse than the disease”. If the cure (taken to an extreme) requires the complete freeze of society to the point where 360 million people in North America starve, history will not judge us to have been successful, despite the virus having been eradicated. This is a conversation that we have yet to see take place at the government level, although it has begun in the epidemiology community. 

Clearly at this point, we do not know the state of the world in a month’s time.  Will we see a rapid return to work? Will we segment society, with those deemed high risk (elderly and individuals with certain ailments) remain under lock-down, while the rest of us take our (much better) chances with the virus? Will we find a miracle drug? Will we give-up on containment in the face of a global failure to bend the curve? Finally—our problem—how do you manage a portfolio of equities in the face of such a wall of uncertainty?

The first piece of the answer is to step away from what we don’t know, and to think about what we do know. Global pandemics have happened before, and some have been vastly worse than this one. Unlike the aftermath of a conventional war, we do not expect the widespread destruction of our ability to produce knowledge and goods. This allows for a much faster recovery and lessens the risk of longer-term economic damage and hyperinflation. During extraordinary events in the past, there have been characteristics that have allowed companies to survive, and even thrive. As a result, we continue to target those businesses that have limited competition, durable free cash flow streams and strong balance sheets. As we look forward, it appears that there are certain epicenter industries that will be changed for the worst under most scenarios. Businesses involved in travel, tourism, and large group gatherings face extreme uncertainty and a difficult path to recovery. These businesses are experiencing extreme stress and the investment case for them seems to rely on correctly anticipating the structure of future government bailouts.  In our view, this makes them un-investable.  As discussed in last week’s piece, we eliminated/reduced exposure to these areas as rapidly as the market would allow. For other industries, the impacts should be much smaller—areas like basic consumer and healthcare products, certain information technology (IT) and data and analytics companies, even simple and obvious areas like grocery stores and telecommunications.

As an example, Accenture is a company we have always admired for their resilient business model, discipline and consistent execution. This past week, Accenture reported second quarter earnings and provided guidance for the remainder of 2020. Their results were solid as expected, but impact of Covid-19 on results has not shown up yet. In an environment where many companies are withholding or pulling 2020 guidance because of the unpredictable economic impact, Accenture put forward updated guidance.  This company services a wide range of industries throughout the economy and is global in where they operate. Their guidance for the upcoming quarter calls for flat sales growth and a slight increase in margins, while for the full year Accenture expects to grow their business while generating free cash flow of roughly US$6 billion.  Although these numbers are slightly lower than the company’s previous expectations, the change is minor. In addition, Accenture has a pristine debt-free balance sheet with approximately US$5.4 billion of cash. They have always been a net cash position since we have owned them. Given that the severity and duration of this economic downturn is impossible to predict, financial strength is critical to any investment.  The business is stable, they consistently outgrow their peers, and it is an IT service business that is capital light. In this environment, their guidance was nothing less than remarkable. 

We know through long experience that it is impossible to build a portfolio that will outperform in all possible future states. Instead we look to build a portfolio that will perform well over time in most environments. This is an extraordinarily difficult environment because the level of uncertainty is so extreme and the economic impact is so broad. We will continue to actively seek out new information from governments, healthcare authorities, and companies and will continue to modify our views and our holdings as events occur and new information becomes available. We suspect that the next 1 to 2 months will be the period of greatest uncertainty, with the path forward becoming clearer as we progress through it.

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Mackenzie Resource Team

March 24, 2020

Benoit Gervais, MSc, CFA

Senior Vice President, Portfolio Manager, Head of Team

Mackenzie Gold Bullion Class Commentary

When asked about gold and the amount or weighting that should be held in a portfolio, we have consistently suggested 5-10%. We call that risk insurance.  People who own gold as “insurance” could now be wondering if they have a worthless policy as it has not paid off.  We think not. We have seen this before when markets sell off and investors surrender, correlations tend to go to one as liquidity is the only goal.  All risk assets move in the same direction - be that stocks, commodities, gold, real estate, etc.  Rising correlations is the shorter-term risk that goes underappreciated. But it happens when investors try to offset losses in one position by selling something that is still showing a gain. But after the big sell off, what happens? Investors start looking for the asset classes that might recover first.  Gold is often that asset. 

Where to from here? Over the last two weeks, we have seen significant announcements from all major central banks. Most have lowered rates, and most have introduced programs to inject more liquidity into the financial system. Sovereign debt levels are expected to jump, as large fiscal packages are introduced to shore-up aching economies. What does that mean?  In short, this could mean that there is a lot of more money coming your way. A substantial increase in money supply is often accompanied by a loss of purchasing power.  When the value of money declines, the value of hard assets, such as high-quality companies, real estate and gold, tend to rise. The historically unprecedented quantity of money that is about to be injected into the economy would likely provide a structural support to gold.  Recent history warrants our constructive outlook. In the two-months following the collapse of Lehman Brothers during the Global Financial Crisis the only assets that performed well were bonds, cash and USD during that period.  While gold initially fell (and gold equities actually sold-off with the broader equity markets), it was up sharply six months later.  Even gold equities outperformed all other asset classes.  Thus, in a time of crisis, gold knee-jerked but ultimately the “insurance” paid off.  Gold did well.

At this point, we can only show the performance of the same asset classes since the outbreak of COVID-19 just under two month ago. Like the start of the Global Financial Crisis in 2008, gold bullion has increased a modest in Canadian dollar terms while down in US dollar at the time of writing.

There are obvious risks to drawing this analogy. At this time, our main concern is that real yields (nominal yields minus inflation expectations) have increased over the past few days; contrary to the desire of central banks which have quickly reduced benchmark interest rates to the “zero bound”. Historically, rising real yields have been a headwind for gold. However, it is reasonable to assume that central banks will apply every tool possible to bring real yields down, as low yields key to restarting a stalled economy. Thus, when the immediate liquidation pressure subsides, and treasury yields start to decline due to central bank intervention (quantitative easing), we believe that gold could fulfill its historical role as risk insurance.

In the long term, aggressive monetary and fiscal easing, “zero bound” interest rates, and accelerating money supply suggest that investors should focus on high-quality companies, ‘hard’ assets and gold, as we recently outlined in a timely whitepaper titled “More money is coming your Way,” which can be viewed here.

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Greenchip Financial Corp.

March 24, 2020

John A. Cook, CIM

President and Director

Mackenzie Global Environmental Equity Fund Commentary

What are the recent challenges and opportunities?

• We were very comfortable with our positions at the end of February and other than small trades to rebalance, have made very few changes to the Fund. Cash was 14% at the end of February and is slightly lower now. We continue to see great value in our holdings relative to market averages. That said, fundamentals are largely being ignored right now and we will be patient with any changes to our weightings.

• That said, U.S. markets which have outperformed EAFE each year for over a decade, and particularly U.S. growth stocks, strangely seems to be the place investors return to on any equity bounce. As such, International value generally continues to lag further behind.

• In sectors important to this Fund, renewable utilities and some food stocks have generally been less volatile than the broader market. Exceptions to this are our two European renewable utilities ENEL (Italian utility company) and EDP (Portuguese electric utility company). They definitely fared worse in early March than North American renewable utilities like Brookfield Renewable and NextEra Energy, Inc. We realize that Europe was the more recent epicenter of Covid-19, but ENEL and EDP have global reach and were already so much cheaper than their North American competitors, the divergence seems very strange to us. Sectors important to the Fund that fared worse than the markets include renewable equipment manufacturers and auto parts manufacturers.

• We continue to see a significant disconnect between the valuations ascribed to our solar holdings and their current and likely future profitability. The same could be said for the power electronics equipment manufacturers.

We often get questions about the relationship between the price of oil and the economics of renewable energy. Given the drop in the price of oil to the mid $20 level, we thought that we would address the question - will cheap oil slow the push to renewable energy?

• The short answer is the economic relationship between oil and renewable energy is very weak. Surprising to many, the market forces that drive oil and renewables are very different. This is largely due to how or where oil is consumed: 65% for transportation (cars, trucks, ships, airplanes), 25% for non-energy (plastics, chemicals, and textiles), and 10% for other uses. According to the U.S. Energy Information Administration (EIA) only 3% of oil is used for residential heating, 2% for commercial heating and 1% for electric power. Of the 100 million barrels per day (mb/d) globally consumed in 2019, only 1% was used to generate electricity. Oil is mostly used for transportation and petro-chemicals.

• Our Fund invests in renewable energy and that means we are mostly focused on electricity generation. Hydro, wind, solar, and geothermal account for about 15% of global electricity generation vs. oil which accounts for only 1%. Only about 1% of electricity is used for transportation (vs the 65% oil). And while much of the balance of electricity is consumed for industrial and residential uses, these uses are totally different from how oil would be consumed by industry and homeowners. There is another significant difference. While oil is a global commodity and exposed to global supply/demand forces, electricity is a more regional energy source. And due to long term contracts, electricity prices are generally much more stable than oil prices.

• One final thought. Renewable energy is not all turned into electricity. Renewable fuels, like biodiesel and ethanol mostly produced from oil seed and grains respectively, are blended with fossil fuels. But this is a tiny fraction of primary energy supply. They make up less than 3% of the total fuel used for transportation. It is a very regulated market that depends heavily on subsidies and blended fuel standards. As such, the price of biodiesel and ethanol are protected from but related to global oil prices. This Fund has two companies that produce biofuels: Renewable Energy Group, that produces biodiesel and renewable diesel. The other is a diversified agricultural/transportation company called The Andersons, which has an ethanol manufacturing division accounting for about 30% of their revenues.

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Mackenzie North American Equities Team

March 19, 2020

Martin Downie, CFA

Senior Vice President, Portfolio Manager, Head of Team

Mackenzie Canadian Equity Fund Commentary

With global stock markets having just registered the fastest ever correction into a bear market, and with markets continuing to slide, the experience has been surreal. What has been particularly dismaying is the pace at which sentiment has shifted from one of relatively insignificant logistical disruptions and an initially contained health risk, as the virus was centered around Asia, into a potential economic disaster as credit liquidity begins to deteriorate and global monetary authorities have been called to action. For those of us trained to consider a wide range of potential outcomes, anxiety has become elevated, as the direst scenarios become potentially realizable, even if those outcomes remain highly unlikely.

Portfolio Positioning
Coming into the year, we had positioned the portfolio as reasonably defensive. We were overweight consumer staples like Loblaw, Empire, Alimentation Couche-Tard and Jamieson Wellness; overweight utilities like Fortis and Northland Power; overweight REITs like apartment owner Boardwalk REIT and bond-like CT REIT; underweight energy, with the significant proportion of our energy holdings in pipelines like Enbridge and TransCanada; reasonably well positioned in gold given meagre historic returns in that subsector; underweight other economically sensitive mining and chemical companies; overweight high-quality industrials like CN Rail and CP Rail; and overweight high-quality banks like Royal Bank and TD Bank.

Over the course of the past year we had eliminated all of our smaller cap energy holdings; reduced our exposure to lower quality banks in favour of better quality; reduced weights of more fully valued small and mid cap companies while mostly maintaining weights in larger more liquid ones; and added a small number of higher quality mid and larger cap companies.

Certainly, though, while we always consider balance sheet risk as a key part of our investment thesis, we did not anticipate a repeat of the credit crisis of 2008-2009. We are not there yet, and hopefully do not get there, but the market is certainly worried about this scenario. As a result, almost any company with more than a little debt on its balance sheet, and any smaller company with any debt at all, has generally seen its share price ravaged over the past few weeks. In this period of extreme volatility, a lack of trading liquidity in smaller names has also led to deteriorating returns. In our view, there is no question that in the longer run, current share prices are almost ridiculously attractive. But, in the short run, smaller companies that will need to access debt markets or have even a tangential exposure to energy markets have been severely punished.

Our portfolio turnover has always been, and remains, low. After the positioning we undertook coming into 2020, we have not, and will not, be making wholesale changes to the portfolio as a result of recent developments. Our approach has always focused on being pro-active as opposed to re-active. Furthermore, we believe in being fully invested. It is worth remembering that markets tend to go up over time. Our conservative approach to valuation and portfolio construction has generally served us well, even during glaring bull markets when a valuation-based approach has not been well rewarded. We believe the portfolio is well-positioned to compete when returns turn positive and fear once again makes way for greed in a continuation of this time-honoured though currently painful tradition.  

Mackenzie Canadian Small Cap Commentary
A key component of our investment process has been to hold higher quality names in our portfolio. These tend to be companies with strong balance sheets, robust internal cash flow generation, and steady business fundamentals. Our view is that these companies are well positioned to manage through this tough time and will come out of this situation with minimal financial impact.

During the months of January and February we increased the Fund’s exposure to more defensive investments, adding to our utility and REIT holdings, as the Covid -19 virus began to seriously impact the Chinese economy. As well, we took some profits on some strong performing smaller cap names and re-deployed the proceeds into names with larger market caps, which tend to be less risky and have lower volatility.

We had sold down some of our energy holdings at the beginning of the year and have not been adding to the space. Over half of our energy holdings are in what we believe is the lower risk non-producer space, (pipelines and distribution). We have no intention of adding to the energy space at this time, and plan to maintain the positions that we have currently. We believe that many of our energy holdings, which are on the high end of the market cap spectrum we invest in, have the balance sheet strength to hold themselves through the recent plunge in the price of oil.

While our mandate is to be fully invested, we have taken proceeds from an index exposure and are re-deploying into some of our higher conviction names that have seen their stock prices come under pressure. With the significant compression in valuations, we view this as an opportune time to be buying.

Mackenzie Canadian Dividend Fund Commentary

The global health situation - related to coronavirus - has resulted in a high degree of uncertainty and volatility in financial markets. For example, the Canadian equity market has gone from a record high on February 20, to plummeting by 30% in just 17 trading days to market close on March 16, 2019.  One of the fastest corrections on record. Measures of volatility in equity markets are now approaching levels that we last saw during the financial crisis.

Canadian markets have been further impacted by an approximately $20 decline in the price of Crude Oil, due to the inability of Russia and Saudi Arabia to agree on production cuts.

More generally, while the last few weeks have been a bit of a jolt, governments are starting to take strong action. For example, the Bank of Canada recently cut interest rates by 100 basis points and the Canadian Bank regulator reduced required bank capital levels by 1.25%. Both are steps to improve liquidity in financial markets. In addition, the U.S. Federal Reserve recently cut interest by 100 basis points to near zero.

Further, there is an expectation that strong fiscal stimulus measures are still to come targeting industries and individuals hardest hit by the economic impact from the Coronavirus mitigation efforts.

Canadian Banks have strong capital levels and although low energy prices will impact their energy loan book, they only account for approximately 2 to 3% of loans.

The new capital regime, with an OFSI required domestic stability buffer of 2.25% (before the very recent reduction to 1%), is proving to be an excellent tool to allow banks to continue lending and supporting their customers during periods of extreme stress.

Portfolio Positioning
The correction in the equity markets has been broad based and has given us the opportunity to invest in several high-quality dividend paying stocks that were previously trading above our estimate of fair value.

Valuations of the Canadian banks is compelling, but we believe there will be some near-term pressures from rising loan losses, and net interest margin compression from the recent cuts in interest rates by the US and Canadian Central banks.

Energy stocks are suffering from the double impact from Coronavirus and the breakdown of OPEC.  Although prices are not sustainable at these levels, the timing of a recovery is unclear, and the longer prices stay depressed the greater the financial stress on the companies.  Our focus is on the pipeline companies and the strongest large cap names that we believe can ride out lower prices.

Financial markets are expected to remain volatile until there is some indication that the spread of the coronavirus is moderating, the timing of which is very difficult to forecast. However, valuation levels on a longer-term basis look compelling with the Canadian equity market trading between 12 to 13 times trailing earnings and offering a dividend yield of approximately 4%, which compares favourably to the 30-year Government of Canada bond yield which now sits below 1.5%.

Having a long-term investment horizon is as important as ever given current compelling valuation levels and the possibility of a rapid recovery in equity markets once the uncertainty and volatility surrounding the coronavirus begins to dissipate. It is very much a question of time horizon – in the short-term extreme uncertainty and fear, but in the long-term a very compelling buying opportunity.

The Mackenzie Canadian Dividend Fund remains well diversified, with approximately 78% of the assets in Canadian equities and 22% in Global equities..

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Global Equity & Income Team

March 17, 2020

Darren McKiernan, CFA

Senior Vice President, Portfolio Manager, Head of Team

As of Monday, March 16, 2020, global markets were down almost 30% YTD and the day of March 16, U.S. stocks plunged the most since the 1987 stock market crash. The selling has been widespread and indiscriminate (unless you happen to own Zoom Video Communications or the odd grocery retailer). The culprit, as everyone knows by now, is the novel coronavirus known as COVID-19. This was first considered an exogenous event which was causing a hit to global aggregate supply by disrupting trade from China. It has now turned into a worldwide public health crisis causing a major disruption in global demand. Almost all industries and government agencies are being affected via school closures, private and public event cancelations, travel and border restrictions, and the banning of large public gatherings, among other things. The impact could very well drag the global economy into recession.

While the hit to the portfolio has been fast and significant, we are not standing still. Over the past three weeks we have turned over 20%+ off the portfolio, selling down or eliminating 24 names and adding 16, a net reduction of 8 names and counting. We asked ourselves a simple question several weeks ago before the sell-off began in earnest: what businesses do we own that we would not be thrilled to add to if they were down 25%? If there was any question about our conviction – or we felt they might not have the balance sheet to withstand significant stress – the position was sold and/or replaced. Some of the sales have been fortunate – we significantly reduced our energy exposures before OPEC decided to flood the market. In other cases, we were too sanguine about some companies near term prospects and did not reduce our exposures enough to account for the fact that their business may be disproportionately impacted by the pandemic over the medium term. This might read as somewhat trite given the sea of red on our screens we are all looking at today, but I feel better about the portfolio now than I did three weeks ago. I am one of the largest individual unitholders and will continue to add to my holdings throughout this period of uncertainty. One year’s worth of earnings and cash flows likely disappearing will impact our companies near term prospects. For the vast majority of businesses that have the balance sheet to weather this storm and offer products and services that will be in demand once the world is able to work its way out of this frightening moment in history, their long-term intrinsic values have not been impaired.

Right now, the market’s volatility is reacting in real time to different potential outcomes, some not so bad (as the Friday, March 13 move would indicate) to potentially catastrophic (what March 16 felt like). It is our view that that world will get through this and adapt, as it has always done. It may take months, or it may take the rest of the year and beyond. While that feels like a lifetime from now, it is not. In the meantime, besides doing our part as a member of society to stay safe and help those in need, we will do our best to position the fund such that when the clouds part and the sun comes out, we will have the best-positioned portfolio since joining Mackenzie.

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Mackenzie Growth Team

March 14, 2020

Phil Taller, MBA, CFA

Senior Vice President, Portfolio Manager

Given recent market volatility, we wanted to share some thoughts in case they may be of value.

It does appear to us that much recent trading has been driven by fear. The VIX volatility index has been at historically high levels along with credit spreads. We are told that a high percentage of trading is being generated by ETF’s and computer trading algorithms.

At times like this in the stock market and in life, it is important to remember that panic is never a good strategy.

A sense of urgency from authorities about COVID-19 is, however, probably a good thing. Recent examples of countries in Asia that took aggressive action, and those from more distant history, seem to show that social distancing is worth it. We have listened to many epidemiologists and virologists, and the key thing is that social distancing measures serve to flatten the peak number of cases and may ultimately lower the number of fatalities. Flattening the peak helps to avoid overwhelming the health care system. Although it has been too slow in coming, we are starting to see increasing efforts in the United States and Europe to act on social behavior.

At the same time, monetary authorities are lowering interest rates and intervening in capital markets. While this does not have a health care impact, it may serve to provide some support and to inject liquidity.

Another part of the approach is fiscal measures, which we are starting to see. Governments around the world are looking to provide support to health care providers, businesses and their employees.

Social distancing, whether voluntary or enforced, is likely to slow the global economy. We do not know whether there will be a slowdown or a recession. Either way it will eventually pass. Our base case assumption in our valuation models has been a coming recession, and we have had this in place for over a year. We didn’t know this situation would be the reason, but it has been our assumption, nevertheless.

The fact that share prices for our holdings have been driven to massive discounts to our models during this episode tells us that markets are probably divorced from fundamentals. A great example is Gartner, a technology research company we have owned for over a decade and which we know well. Gartner has a $4 billion top line, with about 10% of that coming from its Events business. Most of the company’s revenue comes from its research business, which has a very high gross margin and is delivered largely online and through analyst calls. Gartner’s guidance for 2020 has been that the Research business would grow 9.5% - our model has been assuming 0% since last year. Our model value at the start of 2020 was around $160 per share.

Given the virus issues, we have tried a few different scenarios. Eliminating the events business for all of 2020 takes the model down slightly. Eliminating the events business forever and including a knock-on effect where new client recruitment is affected would still only take the model into the $140’s. The share price recently touched $100.

Another major holding of ours is Carter’s. We get that retail activity will decline, and that the company has significant sourcing from China. However, children’s clothing is less discretionary than other apparel categories and Carter’s already does about a third of its business through digital channels. At a conference this week, management said its Chinese suppliers (about 15% of total sourcing) are back up and are working hard to get to full production. They see two to three-week delays for some early Fall deliveries but as of now Labor Day (which is the company’s second biggest holiday season) looks like it is on track. Carter’s has the largest market share by far in the North American children’s apparel market. This position gives it more heft with suppliers and a dominant cost advantage. If anyone is going out of business in children’s clothes, it will likely not be Carter’s.

A market with obvious concerns is air travel. Last week, we had dinner with Spirit Airlines’ CEO. While he certainly expected weakness in the months ahead, the company has $1 billion cash on its balance sheet, the highest level relative to size in the industry. Spirit also has a cost advantage relative to other airlines, and since it does not have any corporate travel to speak of, it is less cyclical than other airlines.

Last week we also met with the CEO and CFO of Premier, in which we are one of the biggest shareholders. Premier’s core business is a GPO or group purchasing organization for health care providers. As one of the largest GPO’s in the United States, Premier manages a significant percentage of supply chain activity in the health care industry. It is true that there are issues getting access to Personal Protective Equipment, especially N95 masks. The company is doing its best to allocate supplies where they are most urgently needed. There are some positives – the CDC has allowed for the use of Industrial and “expired” masks which should increase supply by 20%, there are a few domestic manufacturers who have unused annual capacity to make 60 million masks, and Chinese suppliers are back online. As for test kits, while progress has been slow, they did believe 4 million test kits would be sent out this week.

We could go on and on about our companies, but in the final analysis we believe that all of them provide products and services that make their customers’ lives better, faster and cheaper. We also believe that all of them can survive an economic recession and come out of it in good shape to grow and prosper.

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Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investment funds. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated.
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.
This document includes forward-looking information that is based on forecasts of future events as dated above. Mackenzie Financial Corporation will not necessarily update the information to reflect changes after that date. Forward-looking statements are not guarantees of future performance and 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.