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Portfolio Manager Monthly Insights
Adam Gofton, CFA
Vice President, Portfolio Manager
Mackenzie Ivy Foreign Equity Fund
Ivy’s consistent dedication to a long-term mindset
The most striking phenomenon over the past few months has been the dramatic reset with respect to the market’s expectations of Federal Reserve interest rate cuts due to continued economic strength in the United States. While we do not attempt to forecast movements in interest rates, there are implications for the performance of your Ivy portfolio. The Ivy portfolios have meaningful weights in defensive, dividend yielding companies such as Pepsi, Nestle, and Emera that have seen underperformance in part due to the equity market adjusting to “higher for longer” interest rates. We believe the long-term fundamentals of our companies falling in this bucket are largely unchanged given offsets to inflationary pressure such as increased productivity and automation, pricing power, and new product innovation. Given the materially unchanged long-term fundamentals, we have maintained our position in such companies despite recent underperformance. Tolerating short-term underperformance when long-term fundamentals are unchanged is a common feature of long-term investing and is also the precise reason it is so hard to do.
Why is long-term investing hard to do?
Investing for the long term is generally regarded as sound advice, but there are several barriers that can prevent successful implementation. Some are as simple as the pressure to show strong performance numbers over short time periods. Others are more nuanced and relate to human fallibilities such as our collective bias to action, rather than patience, when we do not get the results that we want in the short term.
Ivy has been built to overcome such barriers through an emphasis on communication and a thoughtful approach to building the team. For many years, we have been communicating to clients how we invest and why, emphasizing that we can look quite different from the benchmark and that this will not lead to outperformance every year. The intensive communication has led to a set of unitholders who are also long-term oriented and can tolerate relative underperformance over shorter time periods. Our supportive unitholders are complemented by Mackenzie Investments whose understanding of the Ivy value proposition and the patience it requires allow for us to implement our investment philosophy. And last, the Ivy team has been built over the years by seeking out individuals who have the patience and discipline to implement a long-term investment philosophy, as well as the independent thought and intellectual honesty to identify and avoid the biases that can hinder a long-term view.
Why does long-term investing work?
Ivy’s long-term investment philosophy requires striking a balance between investing in high-quality companies and not paying too much for them. High quality refers to the select set of companies where we believe there is a higher degree of predictability associated with long-term financial results based on our in-depth analysis of industry dynamics, competitive advantages, capital allocation, and corporate culture. Not paying too much refers to the valuation of the shares. If we pay too high a valuation, it can overwhelm the benefit of a growing underlying business, resulting in poor investment returns. By combining a quality constraint with valuation discipline, the Ivy portfolios benefit from the growth and cash generation of the underlying businesses (in which we have conviction due to our quality constraint), while reducing valuation-related risk. While some may call it boring, it’s the best risk-adjusted way we know of to make money in the stock market.
How is Ivy Foreign’s portfolio consistent with long-term thinking?
We apply a long-term investment philosophy by de-emphasizing risks that we do not expect to be relevant over the long term, while also incorporating risks that are possible over a longer-term horizon but are not having an impact on today’s numbers.
An example of the former in Mackenzie Ivy Foreign Equity Fund are our positions in Danaher and Merck KGaA. Both companies saw negative share price impacts from concerns over a destocking cycle and a depressed funding environment for early-stage biopharma companies during 2023. We saw neither risk as being particularly relevant over the long term and added to our position in Danaher in 2023 (while reducing more recently) and initiating a position in Merck KGaA (also during 2023).
The latter often manifests itself in what we don’t own rather than what we do. The most prominent example is how we incorporate recession risk. We have no idea when a recession will occur, but we do know that a recession will occur at some point over the next 10 years. So, we include recession risk in all our forecasts, which contributes to our tendency to have a large weight in defensive companies.
The bottom line
Long-term investing is hard, but we believe it works. Ivy’s approach can lead to periods where we don’t fully keep pace with the market, but over time has resulted in a smoother ride for clients (good risk-adjusted returns). We believe our current portfolio is well positioned to continue to provide the same sort of performance profile in the future.
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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 May 6, 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.