When screening for attractive U.S. stocks, Philip Taller likes to factor in negative scenarios. "What I try to do with the model," he says, "is to try to find a fair value for a company as if things aren't super-wonderful. Then, if we can buy a company at below the fair value that the model spits out, that's a pretty good margin of safety."
Taller, a portfolio manager at Toronto-based Bluewater Investment Management Inc., has managed the Mackenzie Universal American Growth mandate for Mackenzie Financial Corp. since November 2002.
As a growth-driven manager who is risk-averse, Taller relies on his quantitative model to offer conservative predictions on the growth rates, margins and tax and discount rates of businesses.
The strategy of taking potential bad news into consideration proved its worth during the 2008-2009 bear market. In 2006, Taller factored in a recession in his investment model, continuing with that premise in 2007 and 2008.
In keeping with the price discipline, anything that looked expensive relative to the model got sold. "If you look at what got hammered in 2008," says Taller, "financial services, consumer stocks and companies with really ugly balance sheets, we owned none in the U.S. fund."
While Taller did not anticipate the severity of the U.S. crisis, his cautious approach has paid off. The Morningstar 5-star rated Mackenzie Universal American Growth (Unhedged) Class, Series A has a five-year annualized return of 7.2% versus the median loss of 0.3% in the U.S. Small/Mid Cap Equity category, as of April 30. (Other versions of the fund, some employing currency hedging, are also available.)
Taller, 50, draws on his broad business background. A graduate of the University of Waterloo, he received a bachelor's degree in mathematics in 1985. After graduation, he joined a Kitchener, Ont.-based technology company that no longer exists. In mid-1986, he moved to TIL Systems, a data-communications company.
Pursuing further studies, Taller returned to university in the fall of 1989 to enter the MBA program at York University. After graduating in the spring of 1991, he joined Bunting Warburg Inc. in Toronto as an oil and gas research assistant.
In 1994, the year that Taller received the CFA designation, he moved to Jones Heward Investment Management Inc. as an equity analyst, specializing in Canadian equities. In 1995 he joined the then named Trimark Investment Management Inc. as a vice-president and portfolio manager.
While at Trimark, Taller co-managed close to $10 billion in Canadian equities. He joined Bluewater in December 1998, and is currently responsible for almost $300 million in assets under management.
As the sole manager of Mackenzie Universal American Growth, Taller concentrates fully on U.S. stocks, travelling frequently to visit companies. His research process includes historical and quantitative analysis, and talking to the management of the companies, along with their competitors. His "sweet spot" is the mid-capitalization segment of the U.S. market, but he'll also seek good investment ideas outside that range.
Taller holds a concentrated portfolio of 25 to 30 names. With his emphasis on companies with high margins, strong barriers to entry, and no ugly-looking balance sheets, "I think just by their nature, they're less volatile," he says.
Currently, the Mackenzie fund is weighted 29% in technology and 21% in health care and is broadly diversified within those sectors. "Every Canadian probably has a fund with a bunch of oil and gas, energy, materials and banks," says Taller, "so this fund offers businesses that Canadians often don't have exposure to."
A top, long-standing holding is Altera Corp. ALTR, a California-based semi-conductor company. More than 45% of Altera's end market is communications, both wired and wireless, "so when you are seeing huge spending in China for third-generation wireless systems, there are Altera chips in all those cellular stations," Taller says.
Another long-term holding, Edward Lifesciences Corp. EW, is the world leader in surgical heart valves. Also based in California, the company represents another high- margin business with a high barrier to entry. "They'll be selling $250 million of the new heart valve in Europe this year," says Taller. He adds that on the basis of the results of clinical trials, the Food and Drug Administration (FDA) is likely to approve the product in the U.S.
Looking ahead, Taller considers the investment climate to be positive, despite the bleak news headlines and the U.S. government's huge deficit. "In Q4 (the fourth quarter) of 2010, corporate profits in the U.S. were up 70% in two years," he says. "That's the fastest recovery in history. And there's been a renaissance in U.S. manufacturing. There's a culture of innovation and entrepreneurism that hasn't been extinguished."
