Monthly commentary - Mackenzie Ivy Team

Portfolio Manager Monthly Insights

James A. Morrison, MBA, CFA
Vice President, Portfolio Manager
Lead Manager: Mackenzie Ivy Canadian Fund and Mackenzie Ivy Canadian Balanced Funds

In this monthly commentary, we discuss how investor focus on the Magnificent 7 is generating opportunities in the overlooked, and how Mackenzie Ivy Canadian Fund offers the best of both worlds in Canada and abroad.

Opportunities in the overlooked

The rise of the Magnificent 7 has dominated market returns and investor attention. In Canadian dollars, the S&P 500 generated a total return of 19% in the first half of the year, while an equal-weighted basket of the same stocks trailed considerably with a return of less than 9%. In other words, seven stocks have been responsible for over half of the US market's return this year. Although diversification has proven a hindrance in this narrowly led market, it is the bedrock of a prudent investment plan and key to avoiding unabsorbable setbacks. One never knows what lies around the next corner.

Across the Ivy fund line-up, we strive to build all-weather portfolios, comprised of high-quality businesses with varied exposures. Although we have benefited from our measured exposure to artificial intelligence (AI) and related themes through diversified, global leaders such as Microsoft, Alphabet and SAP, the attention garnered by the information technology and communications sectors presents an opportunity to find attractive investments with lower valuation risk elsewhere. We increasingly see attractive opportunities in underperforming segments.

Despite Canada making its first rate cut of the cycle, there’s been no discernable improvement in sentiment toward some of our higher yielding investments, such as Telus, Emera, or Fortis, which continue to offer an attractive combination of growth, yield, and protection. We also see opportunities in several holdings with exposure to the lower income consumer, such as Alimentation Couche-Tard and Restaurant Brands, where share prices have reacted to slowing near-term growth prospects, despite long-term fundamentals remaining healthy. Outside of Canada, we see attractive risk-adjusted returns in less thematic but highly profitable healthcare companies, such as Johnson & Johnson, Abbott Laboratories, and Roche. Overall, we are cautiously positioned with regard to valuation risk within the information technology and communications sectors, while encouraged by the current opportunity set of attractively priced, resilient businesses elsewhere. We see opportunities in the overlooked.

The best of both worlds

The top two contributors to Mackenzie Ivy Canadian Fund's performance this year have been Alphabet and Dollarama. This represents an eloquent analogy for what the strategy stands for, in that we aim to invest in the best of what Canada has to offer, complemented by world-class businesses that can't necessarily be found in Canada. Within Canada’s borders, many businesses benefit from supportive industry structures and / or incumbency that can support attractive returns on capital and lower levels of volatility. For example, the ubiquity of Dollarama's brand does not require advertising, allowing the business to invest in lower prices that result in superior value for its customers. Similarly, Intact Financial is able to leverage its scale to achieve better risk selection, which has consistently resulted in 500 bps of return on equity (ROE) outperformance in relation to its peers. Looking at the Canadian banks, the constructive regulatory environment has fostered a responsible balance of oversight and profitability that reinforces the stability of the overall financial system, while allowing the banks to achieve globally leading returns on capital.

While we believe the case for Canada is strong, we aim to enhance the risk-adjusted returns of the fund by investing in select, world-class businesses that provide attractive absolute returns and diversification benefits. There is no Alphabet equivalent in Canada, nor is there a Danaher or a Compass Group. Alphabet's financial resources and dominance in search has allowed it to leverage its data to consistently reinvest in innovation and reinforce its edge. Danaher is a world-class life sciences business with a mastery of kaizen business practices and exposure to some of the most attractive end markets in healthcare. And Compass Group is able to leverage its leadership position to provide catering services that are safer, lower cost, and higher quality than its fragmented industry peers. When we put it all together, we get the best of both worlds.

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The contents of this document (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) are 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 may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of July 16, 2024. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.