When Paul Musson took over as lead manager of Mackenzie Ivy Canadian in 2009, he tweaked the fund's process by adjusting the quality threshold downward for its domestic holdings. This allowed the fund to become a more well-rounded performer and stop languishing in strong market rallies. Ultimately however, the ability to limit losses in market downturns will always be this fund's calling card, and its track record of doing so means investors should consider this fund as a core Canadian-focused holding in a portfolio.
Musson leads the Canadian equity strategy and also heads the team at Ivy, which operates independently within Mackenzie Investments. Musson is a strong leader who has been with the firm since 2000. The team went through a period of personnel turnover among the analyst ranks but has been rebuilt and has demonstrated stability since 2014. The dynamic is one that promotes independence, as analysts cover specific sectors, but are held accountable by other members of the team by a rigorous review process to ensure they are confident in the quality of the names being added to the portfolio.
When searching for stocks to own, the Ivy team targets those with strong businesses models and good management teams, emphasizing those with leading market share that can sustain their competitive advantages in a variety of market scenarios. The majority of the portfolio is in such well-known large- and giant-cap names as Brookfield Asset Management (BAM.A), Alimentation Couche-Tard (ATD.B), 
Oracle (ORCL) and Loblaw (L). These firms aren't highfliers but are stable and growing businesses with defensive qualities.
Ivy's trademark conservatism is echoed in the team's valuation approach, coupled with a high return threshold. The team forecasts base earnings over the next 10 years, and also includes a recession in its assumptions. Only companies providing more than a 10% expected annualized return over the 10-year period can be added to the portfolio, although the higher valuations of the last few years have forced the managers to adapt to the present environment and sometimes accept a return below that. Their long-term time horizon will also allow them to look past short-term weakness in a stock to determine if it should still be a long-term holding.
Current holding H&M (HNNMY) is a good example, as the stock is down more than 21% since the start of 2018 (as of March 1) but remains a top holding as of the end of January. While there have been issues with its sales growth and a public relations crisis, H&M remains one of the largest apparel retailers in the world and the Ivy team believes sluggish sales will rebound and that company management is rising to the challenge of e-commerce with its improving online presence; its market share has increased in markets where online shopping has become popular.
Management prefers concentrated portfolios -- typically between 25 and 40 stocks, differentiating them from the index. By lowering their quality criteria, the firm was able to account for the fact that there are fewer high quality companies in Canada that met their quality threshold, which was causing the fund to lag behind their peers in racier markets. Each stock is assigned a rating based on its quality and an expected level of return, and these ratings guide the portfolio's stock weightings. The rating approach to portfolio construction is beneficial, as it forces the team to continuously assess the quality and valuation of a holding and how it stacks up to other securities in the portfolio.
This quality bias and valuation discipline gives the fund a unique performance profile. It has lagged some rivals in frothy markets but lost considerably less in downdrafts. Measuring it against an appropriate benchmark is important, given the fund's considerable foreign exposure. We use a benchmark made up of 50% S&P/TSX Composite, 25% S&P 500 and 25% MSCI EAFE. While the fund has struggled to outperform since Musson took over, returning an annualized 8.3% against the benchmark's 12.4%, that stretch has been a largely one-sided bull market, so the fund has not been able to highlight its defensive qualities.
There are still signs of its strengths, though. The fund's volatility over that stretch is the lowest among its peers, with a standard deviation of just 6.8% per year against the benchmark's 9.1%, meaning investors have had a much smoother, more consistent ride. As such, risk-adjusted metrics look much stronger. In the same vein, the fund has captured just under 57% of market declines, limiting their investors' losses when markets correct. While it is understandable that investors may be frustrated with the absolute numbers, in our view the fund is, for the most part, still delivering what's expected.
Mackenzie charges a 2.46% management-expense ratio for the commission-based option of this fund, a fee which includes an embedded 1% trailing commission that is paid to compensate advisors for their services. Despite the fund's lower turnover, resulting in a lower trading expense ratio (TER) than average, the fund's combined costs land in the 3rd quintile, making it more expensive than the average fund.
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