According to U.S. mid-cap veteran Phil Taller, everyone wants to buy a quality company, but if the company is great and everything is going great, usually it's priced that way too. That's why his three-member team prefers to factor in market risks well in advance and focus on resilient companies and conservative forecast models to reduce volatility.
"Quite often, we're buying companies where the stock is down because there's some problem," says Taller, senior vice president at Mackenzie Investments in Toronto and the lead manager of Mackenzie U.S. Mid Cap Growth Class A. "With our models, we are valuing the next 30 years of free cash flows. "So whatever today's stories are, and whatever volatility erupts, you can take a longer-term view. We think a lot of our edge ends up being that long-term focus and the psychology to deal with things that aren't going so well."
As an example, Taller cites the newly proposed tariffs on imports of steel and aluminum by the United States. "In general," he says, "a long-lasting trade conflict will not be positive for anyone." Taller does not own many companies that are heavy consumers of steel and aluminum, but he believes the tariffs might generate some volatility on which his investment team could act to increase exposure to metal buyers, if the prices reflect enough pessimism.
The overall investment strategy in the Morningstar 4-star rated fund is focused on companies that the team believes have the potential to grow faster than the economy. But Taller says they also try to bring to the table a strong discipline on what price to pay for that growth. "Valuation is a big part of our risk control," says Taller, "and the cheaper the better."
Taller defines the mid-cap space in which his team invests as somewhere in the US$2 billion to US$20 billion range of market capitalization. "It's demonstrably the best part of the U.S. equity market," he says.
Overall, that mandate of approximately 40 holdings uses a bottom-up approach, factoring in macroeconomic influences. The research discipline includes extensive travels to companies, their customers and competitors, as well as both quantitative and qualitative analysis.
One tool used for reducing cyclical risk is managing weightings among the sectors. For example, Taller says you'll probably very rarely see resources in the fund, and not a lot of utilities, telecoms and materials. According to Taller, those sectors are more challenged to grow in a high return on capital way. As well, "we would argue that Canadians have lots of exposure to resources through their domestic equities."
The choice of companies within the sectors is also focused on managing risk. "Our industrials are a pretty big weighting in the fund," says Taller of this 32% sector weight, "but our industrials are a very far cry from steel mills and making widgets."
For example, "the big weightings we have in industrials," says Taller, "are fairly highly technology driven, such as 
CoStar Group (CSGP) and Verisk Analytics (VRSK). CoStar is a company that provides data and analytics on commercial real estate and multi-family apartment buildings to the people in that industry. So there's a dominant provider, and it's a much less cyclical business than many industrials."
"Verisk Analytics is a provider of data and analytics to mostly the insurance business," says Taller, "some financial services, and a little bit of resources, but mostly insurance driven, so that's a pretty stable business."
In terms of cyclicality, Taller says we've had a really great run since the big equity downdraft in 2008 and 2009. Since then the U.S. equity markets have "given us all a wonderful gift."
"We have no clue whether we are late in the cycle or not," says Taller, "but eventually cycles do end." So over the last couple of years, cognizant of risks such as sector shifts and macroeconomic and trade issues with Canada, the managers have been slowly reducing the cyclicality of the portfolio quarter by quarter.
For example, about two years ago, the financial services sector was a 25% weighting in the fund and much of that was invested in banks. Today, financial services represent 16% of the mandate, and there are more holdings now in insurance companies than in banks.
As well, healthcare represented a pretty low weighting in the fund a couple of years ago. After "healthcare had a really bad year," says Taller, the team added to the weighting in companies that met their criteria and the sector represents 12% of the mandate today. "So we search the waves of opportunities," says Taller.
Looking ahead, Taller says the outcome of the proposed U.S. trade policy move is hard to predict. "We know we cannot forecast exactly," says Taller, "but we can take action where prices include either excess optimism or pessimism. Many of our companies do business mainly in the U.S. or sell products and services that are based on intellectual capital and compete globally with other U.S. companies."
