Although some of the optimism around global economic prospects has recently worn off, veteran stock picker Katherine Owen is maintaining a focus on high-quality industry leaders that can weather any economic weakness.
“Since the end of last year, when a lot of people were really worried about a hard landing, sentiment had swung almost 180 degrees, to ‘no landing’ and continued economic growth in another up cycle,” says Owen, co-manager of the five-star $4.8 billion Mackenzie Global Dividend F (also available in Series D). “Now it looks as if we are swinging back to a more pessimistic view where more people are expecting a soft landing or even a mild recession. The risk may be growing, that we could be heading for a hard landing scenario that people worried about almost a year ago.” A 27-year industry veteran, Owen is a vice president at Toronto-based Mackenzie Investments and a U.S. equity specialist who shares duties with Darren McKiernan, senior vice president and head of the global equity and income team, and Omeonga Saidi, vice president. Owen has earned an MBA from Dalhousie University and joined Mackenzie in 2020, after working for firms such as Franklin Templeton Investments.
Positioning the Portfolio for Protection
Owen and her team prefer not to make macroeconomic calls and rather focus on stock-picking and building a portfolio of 78 names that have the resilience to withstand economic shocks. “But we are aware of the trends that are taking place and will tilt the portfolio ever so slightly toward one direction or another. When you look at economic data points coming out, concerning global manufacturing, for instance, it does look like we are seeing a deceleration. And consumer spending in the U.S. could be as good as you can get. Although the GDP number came out quite healthy today that’s backward-looking,” observes Owen, adding that there is a lag effect between the time that higher interest rates kick in and when their impact is felt on companies’ earnings.
Owen notes that the team has become a little more defensive and has reduced some of the economic sensitivity in the portfolio and lowered the exposure to higher-valuation stocks. “One of the attributes of the fund is that it tends to be pretty resilient, across different market environments. There have been times in the last 10 years, when the market has been more value-driven, and then growth-driven. And there was a time of low inflation and low interest rates, and now we’re in higher inflation and higher interest rates. But more often than not, the fund has been pretty resilient. We may not always be in the top decile. But when we head into rockier times, the fund does tend to hold up better.”
Long-term Global Dividend Fund Outperformance
Year-to-date (Nov. 13) Mackenzie Global Dividend F has returned 9.85%, versus 10.11% for the Global Equity category. On a 3-, 5- and 10-year basis, the fund has returned an annualized 6.96%, 10.11% and 10.87%. In contrast, the Global Equity category has returned an annualized 3.97%, 7.05% and 7.92% respectively.
Owen argues that the great risk of making a call is that it might be wrong. Consequently, they hedge their bets, by keeping one foot in the value camp, another in the growth camp, another in the defensive camp, and so on. “That’s what keeps us in the game. We’re being open-minded. So, at the end of the day, we are style-agnostic. That’s so important to our process,” says Owen. “If you look at technology, it’s gone from growth to value, and back and forth and we’re not sure where it’s going to end up in the next couple of years.”
Tilting Around Energy
The exception might be the energy sector, Owen adds. “Going back to 2020, at the beginning of the pandemic, we sold out of all of our energy holdings. If people are not going to drive, there will be lower demand for oil. We reacted quite quickly and sold out. But when the vaccines were discovered at the end of 2020, we re-assessed our position. We thought that when the world did recover one of the first places that it would show up was in demand for oil, with people flying again, and more manufacturing activity. At the beginning of 2021, we actually began to rebuild our position in energy. Today, it makes up five stocks and just over 7% of the portfolio.” The team remains constructive in its long-term view because of the industry’s structural under-investment over the past five years, which they expect will support a stronger oil price, than over the previous decade. Currently, technology is the largest sector weighting at 20.8%, followed by 17.6% financial services, 16.8% health care and 12.8% consumer defensive. From a geographic viewpoint, the U.S. is the largest weighting at 63.1% followed by Germany at 6.5%, Japan at 4.3%, France at 4%, Netherlands at 3.9%, and smaller holdings in the U.K. and Australia. There are no Canadian holdings because Mackenzie offers the $2.3 billion 4-star bronze-medalist Mackenzie Canadian Dividend F (also available in Series D), to complement the global product, which has a running yield of 2.3% before fees.
In building a portfolio, Owen and her team scans thousands of companies but settles on a fraction of them. “We are trying to buy the best businesses in the world, which we like to call the dream team. It is made up of about 350-400 stocks, which meet our criteria. If you are fishing in a better pond, then your results should be better.”
A Focus on Three Growth Factors
In terms of criteria, the team looks for attributes such as a long track record of growth of sales, earnings, and cash flows. “Companies with very long track records are those that are leaders in their industry and continue to be so. They have been through good times and bad times. But because of their strength and their balance sheets, they are able to reinvest in automation equipment, for instance, or in innovation and launch new products and services, or even buy out weaker competitors. Ideally, they are able to expand their moat over time, and over every cycle,” says Owen, noting that risk management plays an important part, too, and that the fund is well diversified according to country, industry sector and investment style.
By way of illustration, Owen points to Union Pacific Corp. (UNP), one of the largest railroad operators in the U.S., which Owen says offers the best network in that country. Key to the investment thesis was the recent appointment of Jim Vena as chief executive officer. “He has a very long record of success in the railroad industry and was very highly regarded at CN [Canadian National] and worked at UNP from 2019 to 2020. He’s been brought back to improve operations and optimize the network’s productivity,” says Owen, adding that the stock entered the portfolio in late 2020.
Owen argues that UNP has some of the best assets in the industry, and hired a well-seasoned operator, and “we don’t think that is priced into the stock.” Over the short term, she admits, a deceleration in economic growth is bound to impact the company. “But over the long term, if Vena can turn around the operating metrics, the company will benefit from re-shoring [a trend in which manufacturing is returning to North America after a period of operating in Asia] or more traffic from Mexico. Because of its network, Union Pacific will be a beneficiary of the re-shoring trend.”
Currently, the firm boasts an operating margin of about 37%. Shares are trading at US$211, or 18 times forward earnings, and the stock generates a 2.5% dividend yield. Owen declines to call a share price in the near future.
Another top holding is Novo Nordisk A/B (Novo-B), a Denmark-based pharmaceutical firm that is a leading provider of insulin and has been in the portfolio since 2016. “Back then it was a value stock, but now it’s a growth stock.” At the purchase the stock had been de-rated because of concerns about competition. “We always knew that Novo Nordisk was the leader in launching new products so we thought that the stock was under-valued,” says Owen, adding her team was aware that the firm was working on a new product that could work for obesity. “We thought that offered us some optionality, in terms of growth. Fast forward to today, the obesity drug has grown to levels greatly exceeding our expectations, and even that of company management.” The drug, which now has super-star status, is marketed as Ozempic or Wegovy.
Year-to-date, the share price has risen from 484 DKK ($95) to 709 DKK ($139), for a share price multiple of about 48 times trailing earnings. Owen concedes that expectations for the stock are high, and the team has been trimming the weighting.
Invested in Companies that Compete in Tough Climates
Looking ahead, Owen notes that with geo-political risk increasing and interest rates and inflation much higher than a decade ago, it’s important to monitor the impact of those factors on companies. “That’s why in this environment, the focus on owning high-quality companies is even more important than ever. If we are heading into a recession, you want to own companies that can navigate in weaker economic environments,” maintains Owen. “They will not only weather challenging times but become stronger. When you look at almost all the companies that we own, each one has become stronger and actually increased their economic moat. That is what we look for.”
