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Written by the Mackenzie Growth Team
Based on the futures treasury curve, it seems likely that the peak Fed Funds Target interest rates are behind us in this economic cycle. The future path of further cuts from a timing and magnitude standpoint is uncertain and may well likely be “data-dependent”. The economy has held up reasonably well during a period of elevated monetary policy, but the lagged impacts of interest rate changes are yet to be seen in the real economy. We continue to believe that many consumers, especially those in the lower-income and middle-income classes, are battling hard against the higher prices of everyday goods and services. Food volume data and “pricing wars” amongst many fast-food restaurants reinforce our belief about the devasting impact of inflation on consumption levels.
As a result, we have continued to overweight Healthcare, non-cyclical Industrials, and Information Technology sectors. We added a new technology name in the quarter during the period of August volatility. For those who have a long memory, we purchased shares of Exact Sciences (a name that we held roughly a decade ago) in both our Mackenzie Small-Mid Cap Equity Growth Fund and Mackenzie US Mid Cap Opportunities Fund. Exact Sciences has been a leader in colorectal cancer screening through their Cologuard Stool Collection product. We took advantage of recent market dislocations to re-acquire shares in the business ahead of their blood-based cancer test data readout. Colorectal cancer remains one of the most treatable cancer types if caught early, and we expect Exact’s portfolio of diagnostic tests to improve the lives of many Americans for future decades. Additionally, we recently acquired shares of a small cap medical device company that helps patients suffering from vascular disease. These are both examples of businesses that we believe have differentiated intellectual property (IP) and should not be meaningfully impacted by the US economic cycle or upcoming election.
Within Technology, we have taken the opportunity to redeploy profits in the quarter from some of our better info tech stock performers. We initiated a new position for a company that DevSecOps which stands for Development, Security, Operations in our small-mid growth fund. Customers would describe their main product as a “must-have” rather than a “nice-to-have” especially, as companies have championed larger software development teams where multiple contributors can contribute to the code base. Given the increased levels of bad actors, protecting the tech stack is a top priority for many CIOs and CSOs that we interview. We remain steadfast in our ownership of Akamai technology, the largest tech weighting in both of our funds. As a reminder, Akamai became a leader in content delivery over the past 2.5 decades but more impressively have grown two new verticals, Security (web application firewall, DDoS protection, Bot Management etc.) and edge computing (Linode acquisition). The later two categories now represent over 65% of the revenue in the organization, a huge transformation compared to where the company began. Our large weighting in Akamai is underwritten by their FCF generating capabilities – the company expects to deliver over 1.5 billion dollars in operating cash flows this year as a 16-billion-dollar market cap.
On the industrial front, we continue to like names: EXL Services, Maximus, Verra Mobility. All of these companies have counter-cyclical properties to their business models. EXL Services helps clients deploy LLMs, AI, RPA work that would enable customers to streamline operations, especially during an economic downturn. As a trusted partner, EXL has earned a seat with many of their customers product roadmaps which enables them to plan for long horizon efficiency gains (top 20 customers have an average tenure of roughly 20 years with EXL). Maximus operates a variety of government programs predominately in North America. They are under contract to operate the 1-800-MEDICARE call center, administer the PACT ACT for US Veterans, as well as provide Medicaid Redeterminations, Welfare-to-work programs, collect US Census data from time to time. Verra Mobility is a provider of active safety programs (speed trap cameras, red light cameras, school bus arm cameras) for cities and states, as well as a provider of rental car toll road management (transponders, DMV expertise, longstanding rental car relationships) and parking services (mainly at academic institutions).
As one can see by the recent additions to the portfolios, and the current positioning of our largest weightings, we are owning a set of businesses that could do reasonably OK regardless of the economic environment. These allocations and changes effectively have lowered our beta against the index, which may prove beneficial if the global economies struggle from higher interest costs and sticky levels of inflation.
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