Matt Moody, vice-president and portfolio manager on the Ivy team at Mackenzie Investments, says that valuations on the stocks of high-quality, larger-cap global companies headquartered in developed countries are stretched.
"The developed world's equity market is generally expensive by historic standards," says Moody, who is involved in managing the team's global and European equity portfolios.
At the end of July, the benchmark MSCI World Index, which represents 1,642 large and mid-cap companies across 23 developed markets, traded at a "fairly lofty" 19.6 times trailing 12-month earnings per share. By contrast, when using forward earnings per share at that date, the index's P/E multiple was 16.4 times.
"While the benchmark's P/E multiple on forward earnings appears to be more reasonable," says Moody, "financial analysts are persistently overly optimistic in their earnings per share forecasts."
He points out that given the slow-growth and highly competitive economic environment, particularly in Europe, "it will be challenging for many constituent companies in the index to produce the robust earnings-per-share growth implicit in the forecasted numbers."
The bull market in developed-market financial assets, accompanied by the elevated valuations on both high-quality stocks and bonds, has largely been driven by the "huge monetary and fiscal stimulus packages introduced in the aftermath of the global financial crisis," says Moody. "Despite this massive stimulus, growth in the developed economies is sub-par and corporate revenue and earnings growth is lacklustre," he adds.
Of Continental Europe, Moody says that the European Central Bank's significant quantitative-easing program will do little to address the underlying structural challenges facing the region and the currency.
Given the size of its economy, the ongoing financial problems in Greece are unlikely to cause much damage to the European economy, says Moody, "but the concern is if the larger economies of Spain and Italy fall back into crisis."
From the Ivy team's perspective, says Moody, "there still are a number of major European-based multinational companies, which are doing well despite the challenges in their domestic markets."
At Mackenzie Investments, the Ivy team has a wide range of mandates, including Mackenzie Ivy Foreign Equity, Mackenzie Ivy European Class and Mackenzie Ivy Global Balanced.
The global and European equity portfolios currently have fairly high levels of cash or cash-equivalent holdings, "reflecting the high valuations on high-quality best-in-class larger cap stocks," says Moody.
At the end of July, the flagship Mackenzie Ivy Foreign Equity, with 32 names, had 26.8% in cash held in a basket of global currencies. At that date, Mackenzie Ivy European Class, with 18 names, had 30.1% in cash held in a basket of the major European currencies.
"These cash levels are not based on any attempt to market-time, nor are they the result of concerns about the prospect of a steep market decline," says Moody. "It is not our discipline to forecast the market." But it is the Ivy team's discipline to buy high-quality companies that are growing their businesses and that trade at reasonable valuations, he says. "We also trim existing holdings where valuations exceed our strict valuation parameters; this helps to mitigate the valuation risk in the portfolios." The net result, he says, is that there has been an increase in cash in both funds.
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| Matt Moody | |
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Essentially bottom-up stock pickers, the Mackenzie global team has a long-term investment horizon, says Moody. The team will follow a company for some time before making a decision to invest in it.
The Ivy team's focus is on companies that have an identifiable and sustainable competitive advantage either globally or in the markets they serve. The targets must also have "a corporate culture that is both committed to and able to grow the business profitably," says Moody.
In many cases, the companies that meet the Ivy team's criteria are consumer-related with well-established global brands and have, in some cases, a growing presence in emerging markets.
At the end of July, Mackenzie Ivy Foreign Equity had 20.1% in consumer staples and 13% in consumer discretionary stocks, for a total of 33.1%. Mackenzie Ivy European Class had 20% in consumer staples and 15.9% in consumer discretionary stocks, for a total of 35.9%, at that date. The third largest sector weighting in both portfolios was industrial stocks at 12.6% in the global fund and 13.5% in the European fund, at the end of July.
Geographically, Mackenzie Ivy Foreign Equity had 40.6% of its holdings in U.S.-based companies. "This is the largest geographic weighting in the portfolio, but the U.S. weighting has come down, as we have been taking profits in these stocks," says Moody. "The U.S. market in general has had a strong run."
Europe constituted 23.8% of the global fund at the end of July, with the United Kingdom, France and Switzerland representing the highest country weightings in both the global and European funds. "The larger-cap, more liquid European stocks tend to be in both funds," says Moody.
Looking at the global portfolio, U.S. consumer-related stocks that the Ivy team has taken profits in include 
Nike, Inc. (NKE) and Colgate-Palmolive Co. (CL). But the team has added a new U.S. consumer staples name, The Procter & Gamble Co. (PG), to Mackenzie Ivy Foreign Equity.
Moody says that Procter & Gamble was out of favour after delivering disappointing sales numbers, and the stock pulled back. "We are patient and disciplined long-term investors and this shorter-term setback for P&G provided an entry opportunity." The company still has "an excellent portfolio of brands" in areas ranging from personal and beauty products to household cleaners and health care products. P&G has plans in place "to right the ship and produce sustainable long-term growth and we are comfortable with these," he says. At the end of July, the stock was among the top-10 holdings in Ivy Foreign.
The story is still intact with Nike, says Moody, but it was a question of valuation. This company, which is classified as a consumer discretionary stock, has "excellent global brands in its specialties -- athletic footwear, apparel and equipment." The company has "a strong corporate culture committed to the long-term support and expansion of its brands." The company also has a "strong balance sheet, which is important to the Ivy team." In all, "Nike still meets our investment criteria, the reduction in our weighting reflects our discipline in managing the valuation risk."
The same valuation discipline applied to consumer staples company Colgate-Palmolive, says Moody. It is a dominant global player in the oral, personal and home-care products market and is also prominent in pet nutrition, he says. "Colgate-Palmolive has a significant reach in emerging markets; its Latin American region, for example, is a major bottom-line contributor."
| Nike, Inc. | Colgate-Palmolive Co. | Procter & Gamble Co. | |
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| August 24 close | $103.87 | $61.95 | $69.14 |
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| 52-week high/low | $117.72-$78.27 | $71.56-$50.84 | $93.89-$65.02 |
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| Market cap | $88.8 billion | $55.8 billion | $187.5 billion |
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| Total % return 1Y* | 32.4 | -1.8 | -14.0 |
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| Total % return 3Y* | 30.1 | 7.7 | 4.5 |
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| Total % return 5Y* | 25.3 | 10.6 | 6.2 |
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| *As of August 24, 2015 Source: Morningstar |
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The Ivy team has also taken profits in a number of its European consumer-related stocks, which have been long-standing holdings in both the global and the European fund. These include global dairy giant Danone SA, which is based in France.
Danone is the world's leading yogurt producer, says Moody. It is also a major producer of brand-name bottled water, including Evian, and of baby foods. More than half the company's sales are in emerging markets, he notes. The Ivy team has held this stock since 2000 and it featured among the top-10 holdings in both Ivy Foreign and Ivy European, at the end of July.
