Paul Musson, the head of the Ivy team at Mackenzie Investments, acknowledges that Ivy has a reputation for not keeping pace in bull markets. But he doesn't see this attribute as a negative, so long as the managers capture "a reasonable amount" of the market gains.
"We're being careful," says Musson, who is the lead manager of Mackenzie Ivy Canadian, a Morningstar 4-star rated fund in the Canadian Focused Equity category. "We don't know when the bear market will start and our plan is to not capture as much of a down market."
To help protect capital in anticipation of a market downturn, Musson is taking what he describes as a counter-cyclical approach to stock selection. "We have a strict valuation discipline," he says. "By definition, if something is getting more expensive, it's because people are rotating to that sector."
Right now, Musson adds, investors might be rotating to anything that might benefit from U.S. President Donald Trump's trade and infrastructure policies. With the price of cyclical stocks being bid upward, the Ivy team is reducing its exposure to these economically sensitive sectors. Instead, they're adding to their holdings that investors are moving away from.
For these out-of-favour stock picks to pay off, patience is required. Using a valuation model developed in-house, the Ivy team estimates a company's expected returns over a 10-year period. Over a decade, the managers assume that there will be a recession and a bear market.
The Ivy team focuses on top-quality companies with strong balance sheets, brand-name recognition and sustainable competitive advantages. The management culture of a business -- which Musson refers to as the "corporate DNA" -- plays an equally important role in the investment process. "Why do I think a company is sustainable?" says Musson. "What would management do in certain market environments? We agonize over that all the time."
Top-10 holdings in Mackenzie Ivy Canadian that exemplify the managers' patient investing style include Toronto-based Brookfield Asset Management Inc. (BAM.A), a diversified asset-management company, and Onex Corp. (ONEX), a holding company that operates in various industries. "Those two businesses in particular," says Musson, illustrate "very long-term, patient capital, with huge management alignment of interest, investing their own capital in the business."
Among other picks in the $1.1-billion fund is 
Saputo Inc. (SAP), a Quebec-based producer and distributor of dairy products. But even though the investment team thinks Saputo is a very well-run business, the fund's holding in the stock has been trimmed for valuation reasons.
"As the stock started increasing in price, we started reducing the weight," says Musson, "so now it's only a 0.5% weight in the portfolio. We love the business, but we're not crazy about the stock price." As with other holdings, if the stock price goes down, they may add to the weighting if the fundamentals remain strong.
In the financial sector, which has a 21% weighting, the fund has a diversified mix of some of the big banks, such as Bank of Nova Scotia (BNS), along with life-insurance companies. "Personal debt in Canada right now is a bit scary," says Musson, "and banks have suffered as interest rates have come down and the interest margin has shrunk." If interest rates rise, yes, the net rising margin will expand, but some people may not be able to manage the loans that they have taken on. "We don't think it's a solvency issue in Canada with any of the banks," says Musson. "It's more a growth issue and thus a valuation issue."
The fund's weighting by country is 54% in Canadian equities, with a minimum of 50%, and 26% in U.S. equities. Another 10% is in non-U.S. foreign companies, with the remainder held in cash.
"Broadly speaking," says Musson, "we think the U.S. market is the most expensive stock market in the world." Yet, within the U.S. there are some businesses that meet Ivy's investment criteria and are not too expensive. For example, Omnicom Group Inc. (OMC), a global advertising company, is among the top five holdings.
"Obviously," says Musson, "if the world entered into a U.S.-driven trade war this would not be good for our holdings. He adds that his holding in Procter & Gamble Co. (PG), a global leader in consumer packaged products, may not be affected as much. A good "85% of the company's products sold in the U.S. are made in the U.S. That's the sort of analysis we do," says Musson, "when we look at one of our companies."
Despite its current stock-picking preferences, Mackenzie Ivy Canadian has some exposure to cyclical stocks. About 16% of the portfolio is invested in the volatile energy sector. The fund's holdings include Pembina Pipeline Corp. (PPL) and Canadian Natural Resources Ltd. (CNQ)
The Ivy team favours energy producers that have lower production costs and strong balance sheets, and that can withstand a period of very low oil prices. "You want to make sure that the companies you have will be the survivors," says Musson.
