Philip Taller, senior vice president and lead portfolio manager of Mackenzie US Small-Mid Cap Growth Class has achieved a feat his peers would love to emulate.
Since he took over the reins of an earlier incarnation of the fund in 2002, the fund has experienced only a single losing year on a calendar basis. Even then, it slipped just a scant 0.1% in 2005.
At July 31, the fund boasted top quartile returns for both short and long periods. The fund boasted a 15-year average annual compounded return of 11.1%, exceeding the 8.4% return of benchmark index, the Russell 2500 total return index.
For the year-to-date, the fund was showing a slightly negative return of -2.1%, still better than the -4.4% return of the benchmark.
“There have been times when the fund has been down, such as last spring, but we’ve recovered,” says Taller, who manages the fund along with vice president and portfolio manager Sonny Aggarwal and John Lumbers, associate portfolio manager. “There is no magic wand that will allow us to always avoid down periods.”
Tall Orders
Taller may not have a magic wand but in choosing stocks from the sizable U.S. small and mid-cap universe he keeps two things in mind. One is that the businesses must be superior to their competition, and the product or service they provide must be vital to the customer.
“The business must stand out in terms of quality, delivery, innovation and industry leadership,” says Taller, who is also head of Toronto-based Mackenzie Investment’s growth team.
Secondly, the team is careful about the price paid to acquire a stock and watches carefully for signs of overheating.
“There are a lot of great businesses that are not good investments at current valuations,” Taller says. “We take a cautious view on what a company can achieve, and are particular about the price we pay as well as the price at which we keep a company in the portfolio. We don’t catch all of the upside sometimes, as we will push out of something when the price becomes too expensive relative to what a company is worth.”
He also keeps a close eye on a company’s ability to generate free cash flow, particularly during difficult times such as the second quarter of this year.
“Cash flow is a good indicator about whether a company is economically profitable,” he says. “We are also cautious about leverage, and have sold down a few companies that have highly leveraged balance sheets and where the future is looking cloudy. Some of these companies may have been able to survive a normal recession but this is not a normal recession that we are in now.”
For example, earlier this year, budget airline Spirit Airlines Inc. (SAVE) and restaurant and entertainment chain Dave & Buster’s Entertainment Inc. (PLAY) were eliminated from the portfolio due to their vulnerability during the COVID-19 pandemic.
Trends over Policies
Taller stays away from attempting to predict the direction of the economy or interest rates, but instead tries to discern currents in the waters and looks for companies that can benefit. For example, he likes the prospects for businesses providing communications infrastructure that can capitalize on trends such as employees working from home. Information technology is the largest sector exposure in the fund, accounting for 34% of fund assets.
A recent investment has been LivePerson Inc. (LPSN), which offers a suite of solutions for text and mobile messaging, real-time chat and content delivery.
“Workforces are spread out and there is a growing need for bandwidth, speed and capacity,” he says.
Taller has also made some investments in cyber-security that have done well. The portfolio includes SailPoint Technologies Inc., a provider of identity management solutions, and Tenable Inc, a provider cyber risk assessment and solutions. The fund previously owned Varonis Systems Inc., a provider of data security software, but it was sold it earlier this year after the stock appreciated substantially.
Online education is another growing trend with stay-at-home activities on the rise, and the team has invested in Pluralsight Inc., a provider of online educational content primarily focused on professional tech training for businesses and individuals.
“We have invested in good quality businesses at prices that are not outrageous,” Taller says. “There are always interesting opportunities in the small mid cap world and so many names to look at. Nobody knows them all. With large caps, right now a lot of the performance is concentrated in a small number of names. We don’t have that kind of concentration risk.”
Lately, Taller has been adding some cyclical companies that became attractively priced when stock markets fell in the spring and should benefit from an eventual economic recovery.
Both Types of Growth
“Many of these companies are facing challenges but there are good reasons why they will do okay down the road,” Taller says. “It’s a bit of a barbell approach – some companies in the fund will benefit from secular growth and others are cyclical with good growth drivers. Things may not get better right away, but what was priced in a few months ago was an extremely pessimistic scenario and some stocks were good buys.”
For example, a recent purchase has been XYLink Inc., a provider of audio and video conferencing systems and cloud services to business customers.
One of the largest and oldest holdings in the fund is Progressive Corp. (PGR), a property and casualty insurance firm that was bought as a mid-cap and has grown over time. It specializes in auto insurance but is branching into home insurance. Progressive has been consistently profitable due to management’s skills in analyzing data and calculating risk, Taller says.
