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Text transcript

Speaker 1:

This podcast is for informational purposes only. Information relating to investment approaches or individual investments should not be construed as advice or endorsement. Listeners should seek professional advice for their situation.

Matthew Schnurr:

Welcome to the MacKenzie Investments podcast. My name is Matthew Schnurr and I’m delighted to be here with Will Aldridge. Will leads our Canadian equity mandate. Will, welcome to the podcast.

William Aldridge:

Thanks a lot, Matt. Glad to be here.

Matthew Schnurr:

I’m glad you’re here as well, particularly timely. The more and more that I read about Canada in the press, it seems like Canada is a bullish place for many forecasters. Before we get into your views on Canada specifically, I’d love to start the conversation with how you approach investing in general.

William Aldridge:

Yeah, and you certainly can’t talk about how we and my team approach investing without talking about Canada. We’re a hundred percent focused on Canada. As you know, Matt, Canada is a somewhat unique environment to try to find investments in the global landscape. There’s a couple of markets that are similar to Canada, but really it’s a pretty unique place.

William Aldridge:

I spent all my career in Canada looking at Canadian names, meeting with Canadian management teams and the same can be said for my team. We’re bringing a lot of experience into that. Trying to find ideas in Canada and approaching it with that sort of Canadian lens. Just thinking about the resource heavy exposure in the TSX. Obviously financial is a big weight as well.

William Aldridge:

What that means really as a result is you need to think about things a little bit differently. We take commodities and sort of forecasting into consideration, but Canada’s a pretty unique place. We can talk about the opportunity in Canada, how it looks today. People tend to think about valuation and put that lens on things, Canada will always look statistically a little bit cheaper than a place like the US. We can get into that a little bit.

William Aldridge:

It’s an interesting dynamic in Canada. Certainly we need to think about what it means to try to come up with ideas and it’s a pretty small landscape as well. We build a diversified portfolio and we just try to think about where the best opportunities lie in each sector, but some of those sectors can be pretty skinny as you know.

Matthew Schnurr:

Of course. Yeah, Canada, very narrow market dominated by resources and financials as you’ve pointed out. Often investors describe themselves somewhere on the continuum from value to growth. Those words can be a little bit ambiguous for sure and potentially in need of refinement, particularly with a market like Canada. Where would you put yourself on that continuum and how do you think about it when approaching the Canadian markets?

William Aldridge:

Yeah, my training really was with a value sort of bias towards it. When I came into the business onto the buy side, I started working with a deep value investor, Bob Tatersall, who you will have worked with in the past as well, Matt.

Matthew Schnurr:

Sure, yes.

William Aldridge:

Bob very much deep value, very focused on price to book. Even just in my innate sense, in my soul and my spirit, I’ve always felt an attraction to that and attraction to valuation generally. That’s how I trained myself as well. Before starting working with Bob. All my reading was really based around valuation things like Buffet and Peter Lynch on the growth side, but still very much valuation focused. It’s easy sometimes for us to bucket investors on the value of the growth spectrum, but really for us, I think what we think more about is valuation in general and trying to find statistically attractive opportunities relative to what the market is telling us this the share should be worth.

William Aldridge:

We’re certainly not afraid to own what you call growth year type names. They may trade at higher multiples, but really for us it’s more about valuation than value or growth. Because we have such a focus on valuation, what that tends to lead to is our portfolio does tend to look a little bit cheaper than the benchmark. We’re just so focused on it. That’s where we want put the capital. We want to put the capital to where we see the best returns to intrinsic value and we’re not chasing momentum. We’re not chasing names that are showing higher growth, continually higher growth and accelerating growth. Those aren’t typically the names that we’re attracted to.

William Aldridge:

It certainly can make it a bit challenging in markets like this where you’re seeing this migration towards quality and the valuation dynamics around those types of names tend to be a little bit higher. On the spectrum, absolutely tilted towards value and I think that’s probably the safest and easiest way to think about how we manage the portfolios is kind of a value tilt to our perspective, what we bring to the table.

Matthew Schnurr:

That’s great. Maybe we can get move now into the present time in Canada. As I had mentioned at the start, many forecasters are relatively bullish on Canada after being fairly bearish on the nation for the past decade or so. Do you share their optimism and I guess to tie in your most recent comment about more quality bent, I think that many people don’t think of Canada as a particularly high quality market. What are you doing right now to counter that or to incorporate that in your portfolio?

William Aldridge:

Yeah, I think why Canada’s working today is certainly more of a resource exposure than anything else. Obviously energy being a pretty high weight. Not as high as it once was. I mean, we were north of a third exposure to energy in the TSX at its high. Now we’re half that, but we’re coming off the bottom as well. We got as low as 10% and as high as a third and now we’re sort of 16, 17% in energy. Yeah, that’s the big reason why Canada’s working today. Obviously the unfortunate war in Ukraine there is having a big impact on commodities generally.

William Aldridge:

Even prior to that though, I mean, we were seeing this shift towards value and then Canada was outperforming because of that bias as well. That more value tilted, again, financials was really driving things towards the beginning of the year.

William Aldridge:

It all really comes back to what we were talking about at the outset. Really the mix. What we’re talking about in Canada is the mix. Obviously technology being extremely weak here year to date as well. Not much exposure to technology and certainly much less. Today with Shopify coming off as hard as it has.

William Aldridge:

I think it does come down to the mix and I sort of stray and pull back from talking collectively about a market and just saying, oh, Canada’s the better place to be than the US. You’re always going to find in any sort of opportunity you’re looking at, there’s little pockets. You need to think about pockets of opportunity as opposed to a collective hole and say Canada’s better than the US or value’s better than growth. It’s really not how we think about investing. We’re always trying to uncover intrinsic value wherever it presents itself and then taking consideration of the dynamics and the overall market as well.

William Aldridge:

When markets are really expensive, that will lead us to behave in a certain way. When markets are really cheap, it’ll lead us to behave in a certain way. We’re always trying to hone our process and evolve and think about what the best opportunities are at any point in time and not necessarily sticking to any particular discipline and saying, I’ll only buy stocks that look like this or I’ll only buy these sectors and I’ll never buy these sectors. It’s not the way we think about things. We’re always trying to find those little opportunities to generate off of our clients.

PAID CONTENT 

Portfolios constructed before the pandemic were based on very different assumptions than what we’re seeing today.

Investors currently face an environment not seen in several decades, defined by high inflation and rising interest rates designed to combat it. For many Canadians, their investment goals, risk profiles and time horizons may have also changed.

This economic recalibration had an immediate effect on equity markets, especially among the high-growth businesses that had led indices’ increases over the past decade.

Confronted by this new reality, many investors have embarked on a process of portfolio reconstruction.

Benefiting from value tilt

Over the past two decades, Canadian investors increasingly sought portfolio diversification by investing outside of Canada. This made considerable sense, as an over-reliance on Canadian stocks tends to result in a portfolio heavily overweighted in financials, energy and materials.

Domestic equities in general have underperformed higher growth markets over the past several years, as low interest rates have promoted high-growth investing, particularly in technology and health care, which are under-represented in Canada.

As investors shift from a growth bias to a value bias, Canadian equities may benefit, according to William Aldridge, portfolio manager of the Mackenzie Canadian Equity Fund.

“Canada has a great deal to offer investors,” he says. “It’s time to look at Canada again.”

Canadian equities tend to trade at lower valuations than those seen in the US, Aldridge points out. Recently, he has noticed a migration away from high-growth companies, with capital moving into more high-quality businesses.

After global markets retreated this past spring, investors may want to consider a larger weighting in Canada, due to its attractive position in inflationary environments.

Defense against inflation

Over the past few years, it’s been easy to overlook the potential benefits that Canadian equities can bring to investment portfolios. Chief among these are a measure of protection from inflationary pressures and the fact that many of the largest companies have a more defensive tilt.

“The Canadian market is unique, with high exposure to resources, such as energy, industrial minerals and precious metals, as well as a very high exposure to financials,” says Aldridge. “Put together, it can tend to be a more cyclical market, so investors need to consider the macro view when investing in Canada.”

In the current inflationary environment, Canada offers opportunities for outperformance over other countries. The domestic market is overweighted to commodities, so it will benefit from recent price increases in energy and materials.

Many investors globally had all but given up on the traditional energy sector, believing fossil fuels would become obsolete relatively soon.

“The energy sector has felt like a bear market since 2014. In 2008-09, it made up nearly a third of the S&P/TSX Composite Index, but it got as low as 10% during market lows in 2020,” Aldridge says. “This year energy rebounded to 20% of the index,” says Aldridge. “Suddenly energy felt like a pretty good place to be.”

He acknowledges that high energy prices can lead to lower demand and will likely accelerate the adoption of electric vehicles, and that he doesn’t expect new large-scale oil sands developments in the future.

With a constructive outlook on earnings growth within the Canadian equity market, Aldridge believes some of those rising profits will be used by companies to reinvest in their businesses, make acquisitions, repurchase shares and raise their dividends.

The potential for higher dividend payouts through the economic reopening provides both a return enhancement over the long term and helps mitigate downside risk during inevitable risk-off periods.

“I have no doubt that over the next decade we’ll see world-leading companies built in Canada,” Aldridge says. “We have what the world needs in terms of resources and we operate in a stable jurisdiction, which gives comfort to those looking to Canada for supply.”

Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

This article may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of August 22, 2022. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.

PAID CONTENT

At the start of the year, our inflation views reflected the existing supply chain disruptions and strong consumer demand. We expected to see inflation peak in the first quarter and move lower throughout the rest of this year, resetting to a new range above 2%.

Like most investors, we did not foresee the invasion of Ukraine by Russia, which has constricted the global supply of many raw materials, including grains, energy and minerals.

Meanwhile the Omicron COVID wave and resulting temporary lockdowns in manufacturing centres such as China also have the potential to further crimp the supply of some finished goods.

Inflation that began as a complex logistics issue has become an outright supply problem.

The result was inflation hitting highs not seen since the 1980s, which has subsided slightly, but remains with us into the middle of the year. North American and European central banks have acted aggressively to tamp down inflation, with higher policy rates.

We are watching economies recalibrate in real time.

Inflation response

Many central banks are now focused squarely on reducing inflation. Among these are the Fed and the Bank of Canada, which can only achieve this by tightening monetary policies to reduce aggregate demand.

Although we expect inflation rates to gradually fall this year, the pace of decline is going to be an important variable in how much and how fast central banks tighten.

Combined with global supply issues that are keeping inflation uncomfortably high, a policy-led slowing of economic growth has raised the possibility of a stagflation scenario in the quarters ahead.

Longer-term market-based measures of inflation expectations have moved higher this year but are not yet considered to be unanchored from the Fed’s 2% inflation target. We expect inflation will come down but linger in a range above target by the end of the year.

There’s no quick fix for many commodities. Supply disruptions can be expected to persist for as long as the war in Ukraine continues. Continued sanctions against Russia will restrict its energy exports, while a disruption in Ukrainian agriculture will have a dramatic impact on global grain supplies. Both imply elevated pricing at recent levels of demand.

Passing costs on to consumers is no sure thing. Last year’s high consumer demand was partly fuelled by low interest rates and large-scale pandemic fiscal spending. But this free spending is already in decline. Interest rates on consumer credit have climbed this year in anticipation of continued rate hikes. Wage gains, while robust, have failed to keep pace with inflation.

A silver lining

From energy to agriculture, commodities have served as an effective hedge in the wake of soaring inflation expectations. The commodity complex has been fueled by strong demand as the global economy emerged from the pandemic.

This occurred at the same time as tight supply conditions from a decade of under-investment for future production, pandemic lockdowns and a redirection of capital in favour of higher dividends and share buybacks.

In our view, inflation’s impact on investments has been double-edged. On the one side, it has hit growth-oriented markets hard, particularly in the technology sector. But rising commodity prices should provide a relative boost to the economies where they are produced. These include Canada and much of the emerging markets, which have lagged in recent years.

It’s certainly a difficult time to navigate markets when there are competing forces that can have an impact on different asset classes. We were bullish on Canada at the end of 2021, and remain so today, as the cyclical nature of the domestic market should be supportive.

This environment presents short-term tactical opportunities, but the best approach is, as always, diversification across asset classes and a long-term time horizon to ride out any short-term turbulence.

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Disclaimer:

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

This article may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of June 3, 2022. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.

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Text transcript

Speaker 1:

Equity market has certainly been a tough place to be fixed income as well, but we’ll talk to equities, and we’ve seen a fair amount of decline year to date. Do you think that we are at the point of maximum pain in the sell-off? Hard to call bottoms, of course, but what are some signs and signals that you’re looking for?

Lesley Marks:

So, there’s two ways I would answer that question. The first is just to get some perspective or give some perspective, I should say, and when you look at the sell-offs that have happened in history over the last almost 100 years, there’s been six periods or six years where we’ve seen a greater than 20% decline in equities. And remember, we almost hit that, not in Canada, but in the U.S., we sort of bounced at that 20% decline, but I just picked that number, because a lot of people look at 20 as a bear market or it’s just a milestone number that a lot of people focus on. In five of those six cases, the following year resulted in a greater than 20% increase in equities, and so the only time in history that we saw multiple years in a row of declines of greater than 20% was in the Great Depression, 1931-32 period.

Lesley Marks:

And so unless you think that we’re heading into that type of environment, and I don’t think that we have the conditions that would set us up for a great depression here, as I said, I think of this as more a post-COVID dislocation that’s impacting markets and we need to get back to regular times here. I don’t think that we’re heading into a multi-year decline in equity, so let me start there. Now, the second thing I would say about that is, I’m not just giving trivia here, there’s a reason why markets do bounce typically after large drawdown years, and it’s what I like to refer to as the good old-fashioned business cycle.

Speaker 1:

Sure.

Lesley Marks:

Which is exactly what I think we are experiencing right now, which is, things get overheated, inflation runs hot because the job market is tight, there’s too much demand and not enough supply, and I know a lot has been spoken on your podcast about that, so I won’t go into details about the supply and demand issues today because I don’t think we have time for that, but when the central banks remove liquidity, the intention is to impact demand, obviously they can’t impact supply, to bring demand and supply more into balance.

Lesley Marks:

So, I think that that’s what eventually happens, and then you start to see prices start to come back and inflation gets under control, and then we start the next business cycle and the market obviously discounts into the future, so equities would start to rally once they start to believe that we’ve hit the bottom and now we’re going to hit economic growth because the central banks have stopped tightening. So I think that’s a good segue into what I’d be focused on, coming away from the statistics and the way it’s worked over the last 100 years, there’s three things to focus on to say, “Are we there yet?”

Lesley Marks:

The first is liquidity, which I touched on. I think once the market perceives that central bankers, The Federal Reserve, the Bank of Canada, are done hiking, then I think we have one important setup for equities to bottom, and I think that a lot of the increases of interest rates have been priced into the market, and we’re probably getting close to thinking that we’re at the point that the central bankers will have gone far enough, that inflation is perceived as under control. The second is earnings, and earnings is really probably the next shoe to drop, if there was one for equities, which is the revision downwards of earnings, that is really only just starting, and it’s very difficult to know how far we’re going to need to go when it comes to earnings. Now in Canada, it’s been interesting because overall TSX earnings, that’s been the one market where earnings have been revised upwards because of energy.

Lesley Marks:

So it’s actually been a good tailwind for Canadian equities, and it’s a big part of why Canadian stocks have outperformed global equities. The third one is sentiment, which is another factor that I don’t think we’re there quite yet, which is that maximum pessimism where you just get the sense that everyone has thrown in the towel on equities, that feeling that equities are never going up again, that maximum level of fear, and while we’ve had people be very negative on the market, I don’t think we’ve hit that maximum fear gauge. So as you know, none of us have the crystal ball, it’s hard to predict the point in time when all of this comes together, but those are the three things that I’m really focused on to converge to say, I think we’ve hit the bottom here.

Speaker 1:

Right. And based on your explanation there, you think that on the liquidity side, we’re fairly close, but with both earnings and sentiment, we might have a little bit to go.

Lesley Marks:

Exactly. And what I want to clarify on the liquidity side is, I’m not saying we’re at the end of the Fed hiking cycle.

Speaker 1:

Right.

Lesley Marks:

What I’m saying is, what is priced into the market is almost what we think will probably be the maximum tightening that we expect to experience.

Speaker 1:

Perfect. Maybe we’ll turn to Europe now, we were talking a little bit about Canada, perhaps we can come back to the U.S., but in Europe, it feels as though it’s probably a little bit more negative, a tougher environment. I’d say that the war in Ukraine has gone on longer than most people had initially expected, and there’s lots of collateral damage or potential collateral damage to the European economy as a result. Do you think Europe is able to avoid a recession under these circumstances?

Lesley Marks:

Well, I’m glad you asked about Europe because it’s topical today, on this day for two reasons. The first is, we just saw the German inflation print, which hit 8.7% year over year, and the expected number was 8.1, so I think it’s a sign of things to come in Europe and really highlights the extent of headwinds that this region is going to experience, and there’s really a confluence of events here. The first is obviously Russia’s invasion of Ukraine and the collateral damage that that is causing in the region, in two important areas: one being energy and the second being agricultural commodities, which impact the price of food. So I think to the extent that we are seeing the impact on inflation of those two issues, it’s going to be very difficult for Europe to avoid a recession.

Lesley Marks:

Another factor that’s really impacting Europe is that Europe, particular Germany, is very impacted by the lockdowns in China, which is an important market for Germany, and so I think that, in that context, it’s everything coming together at once to be a strong headwind for Europe, which was already a lower growth market. So I think that Europe is a region that is going to continue to need fiscal support, as the region goes through what, as you said, has been a longer conflict than any of us expected. And consensus earnings growth for the region for Europe is only 3% this year, and it’s been revised down significantly year to date. We could see earnings growth turn negative for Europe. It’s also one of the slowest growth markets by expectations at 2.8%. Again, I think 2.8 is going to be a really hard number to hit for the year, and so I think Europe is going to continue to face significant headwinds and we’ll need a very different fiscal and monetary support package than we’re seeing in North America.

PAID CONTENT

With pandemic lockdowns now well in the rearview mirror, investors are confronted with an unfamiliar investment landscape.

Many investors have come to the realization that the portfolio that worked prior to the pandemic may not work today. The past decade was dominated by high-growth investing, seemingly ignoring risk. But as the world’s central banks grapple with inflation, interest rate increases shifted investor preferences.

As the markets adapt to this new reality, now is the time for portfolio reconstruction.

A different world

The fiscal and monetary stimulus enacted at the height of the pandemic has left the world awash in cash. This includes a massive increase in consumer savings, as spending patterns changed during lockdowns. That pent-up demand has now been unleashed, driving inflation to highs not seen in decades.

“This is typically an environment where many dividend-paying stocks perform well,” says Darren McKiernan, Head of the Mackenzie Global Equity and Income Team and the lead manager of the Mackenzie Global Dividend Fund. Katherine Owen and Ome Saidi are also named portfolio managers on the fund.

As managers of a core portfolio, his team is style agnostic in terms of the growth-value spectrum. The overarching goal is to find high-quality businesses with the free cash flow to support a healthy dividend.

McKiernan points out that over the past decade of growth dominance, dividends have accounted for just 15% of realized investor returns, far short of the 40% average that was established over the preceding 120 years.

The dividend solution

A pivot toward durable businesses that pay sustainable dividends may provide a degree of stability to a portfolio overloaded with higher-risk growth.

“We believe dividends will be an important source of total returns going forward,” says McKiernan. “All we need is for the world to look more like the last 120 years than the last 10 — and signs seem to indicate that’s going to be the case. At the very least, the long-term averages are on our side.”

Even as the global economy slows, still-high inflation and the rising interest rates designed to tame it should benefit portfolios that are weighted toward pro-cyclical sectors, such as financials, travel and leisure, as well as energy and materials.

However, active management remains key, as skillful stock selection has the potential to add considerable value.

“Not all dividend-paying companies are created equal when it comes to a rising-rate environment,” says McKiernan. “There’s a big swath of the investment universe that might be disproportionately negatively affected by rising interest rates.”

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Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

This article may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of May 3, 2022. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.

Last updated on September 6, 2022

(Runtime: 7 min, 31 sec)

Text transcript

Matt:

I know that you still hold some of the large-cap tech names as well. Certainly their story has almost been the opposite of what we’ve just talked about, where they did very well during COVID and recently been quite challenged. What’s your view on that space, and why do you continue to hold some of those names?

Speaker 2:

Yeah. Well, first of all, I mean, we’re not in a lot of the parts of tech that have been decimated that are 30 times revenue. You call yourself a SaaS software company and you’ve got bid up to really crazy multiples. The pure COVID darlings like the Pelotons, the Netflixes, the DocuSigns of the world, we never really got too serious looking at those companies because we asked ourselves, okay, that’s great. Certainly during COVID…I mean, look, seeing Zoom go to what it did to whatever it was, I think at some market cap, at some point, I don’t know, it was certainly over a $100 billion. It might have been $200 billion. I honestly can’t recall. Because it obviously seemed like an obvious trade, but that was just the point, Matt, it was a trade.

As painful as it is sometimes, and you get FOMO watching this stuff go up every day, we just knew that the question we had to ask ourselves. Well, okay, well, what then? Assuming that the world normalizes and we’re all back at our offices, we’re travelling, we’re going out. What then? I certainly think behaviours have changed. We’re not recording this live. We’re doing it over a technology platform, right, and that’s not going to change. And I just got a request from the sales department about perhaps going out and seeing some clients in the summer and fall. I’m like, okay, well, maybe instead of going out for a week, I go out for a couple days, and instead of being on the road for a week, it’s two days and the rest are webinars, or we do it online. Those things haven’t changed, but the price you were paying for these companies was just unreasonable.

Now, I don’t think paying 15 times next year’s earnings for Google is unreasonable, which is what it is today. Or I think the same multiple for Facebook. Although, again, it’s moved around a little bit. I look at it this way, and we own Apple. I’ve owned Apple for over a decade now. Do we have these massive positions in these companies? No. That’s where I think you’re right. I mean, I think that there’s certainly some froth in parts of those markets. Maybe it’s at this point as you’re looking at the stocks. Maybe we’re near towards the bottom than we were, say, six months ago.

I don’t know. But I’ll tell you this. I feel very comfortable with the positions we have in those names. Again, they’re relatively small. They’re certainly relatively small compared to our benchmark, but I also feel like it wouldn’t be prudent as a long-term investor to bet against these companies. So I’m more than happy. I don’t lose one minute of sleep at night having a 1 percent position in Amazon. These are very unique companies. I think their moats have increased over COVID. Amazon spent more money in CapEx the last two years than they had the previous 20.

We own a company, Texas Instruments. This is an analogue semiconductor company, and we own a number of….We own Analog Devices, which is another analogue semiconductor company. These are businesses that are playing an increasingly critical role in the…call it the new economy, the digitization of everything, industrial products of not just your home networking and your PCs. It’s the number of semiconductors that go into automobiles or MRI machines. I mean, this is not going away and we’re happy to own companies like Texas Instruments or Analog Devices that have, if not dominant, very strong positions in what is a really important industry going forward.

Then Texas Instruments sold off because they announced that they were basically going to double their CapEx over the next several years. Why are they doing that? Okay, they’re doing that because there’s a massive amount of demand, because they’re ultimately trying to serve their customers better. You know what? It’s going to dampen near-term returns. The stock’s not going to do maybe as well as it would’ve otherwise, but they’re doing the right thing for the business and we’re okay with having—again, last time I checked—a 95 basis point position. We’re okay with that.

I mean, if you really want to get granular, we are underweight tech. I think we’re at 17 or 18 percent. I think the benchmark’s at 22. We don’t lose a lot. Again, we’re not sitting up at night going, Oh my God, we’re 5 percent underweight. We have a 5 percent weight in semiconductors across not just Taiwan Semiconductor. I mentioned Texas and Analog. We own a Broadcom, which has got dominant franchises. They sell chip sets into data centres. They also have, they call it an infrastructure software business, which is almost…it’s just that…it’s an annuity business. It’s about a quarter of their earnings. We’re more than okay owning those businesses. We own, I mentioned Amadeus. That’s considered a technology company, believe it or not. It’s more like a service company to the airline and hospitality industry, even though it’s in tech.

We own Visa. That’s considered a tech company, but at the end of the day, it’s, again, the long-term trends towards the transition from cheques and cash to online and to e-commerce. Again, there’s still the rails, the default rails, them and MasterCard, that enable all this stuff. So we’re happy to own Visa as opposed to Affirm or PayPal, or go down the list of companies that have gotten destroyed because we felt Visa, at 30 times earnings, was reasonable. But I couldn’t justify paying 200 times earnings for companies that had earnings.

So a long way of saying we own a number of these big tech companies. We think they’re reasonably valued here. We think the positions we have are prudent, and there’s going to come a time where, it’s probably going to make sense for us to add to them. I’m not saying it’s necessarily today, but if everyone thinks…15 times next year’s earnings for Google is not unreasonable—now maybe the earnings are a little bit high—it’s probably a fair assumption. But whether Apple generates 75 billion dollars in free cash flow next year or 70, these are still extremely well-placed, profitable, call it dominant businesses in their end markets. I think they’re getting more dominant. Now, again, rates going up, valuation-wise. How that’s going to play out the next six months, nine months, 12 months, who knows? But, their business certainly isn’t getting weaker.

So it’s just a valuation call. I can completely appreciate people thinking, Okay, Apple’s 23 times earnings may be a little bit much for a business that might be growing high single digits over the next several years. Maybe it goes to 20. Maybe it goes to 15 in a massive market sell-off. Okay, we can live with that. We’re happy with our positioning here, because, again, it’s what is this thing going to be worth in three years’ time, five years’ time, and beyond? That’s how we think about it.

PAID CONTENT

Canadians are increasingly interested in investments that will not only meet their financial goals but also support their desire to create a more liveable planet. These concerns typically fall into the environmental, social and governance (ESG) framework.

Early ESG strategies tended to focus on investing in companies that are already considered “clean” while avoiding investments in companies that were deemed “dirty” – indeed entire sectors may have been shut out.

This approach can reduce capital flows to companies that are striving to improve their ESG scores, as well as sectors that are vital to the transition to a lower-carbon economy.

If we are to achieve such goals, we must rebalance our approach to sustainability to be more inclusive.

The path to a greener future is bound to be messy, involving a massive overhaul of our critical infrastructure. Large-scale projects to produce and distribute more clean energy, for example, are financed almost exclusively with debt, not equity, making fixed income investments the key to sustainability.

Funding the future

The Mackenzie Fixed Income Team is playing an active role in ensuring our investment decisions are funding a better future.

We strongly believe that strategic fixed income investment in issuers with positive momentum and sustainable use of proceeds will support and enhance the transition to improved social standards and a decarbonized economy.

We’re focused on identifying bond issuance that will finance positive change, at both the macro and the corporate levels, because we recognized that good ESG practices are critical factors that can affect the financial performance of bond issuers.

This is why all our fixed income strategies include an upfront ESG risk assessment, that aims to eliminate exposure to controversial issuers and unethical activities.

Our specific sustainable strategies go further, to include an impact analysis that assesses the use of proceeds from a bond to ensure adherence to the mandates’ core thematic objectives.

If a company in a traditionally “dirty” sector issues a green bond, we must determine whether the proceeds of the bond are truly improving the company’s sustainability. This kind of insight is not something that you can just pick up off the shelf. We do our own research to ensure that the issuer is not relying on a “seal of approval” from an agency with lax standards.

Our in-house models include not only Mackenzie’s proprietary ESG research, but also data from global institutions, including the World Bank and the United Nations’ Sustainable Development Goals. This level of scrutiny requires research far beyond the traditional fundamental analysis of the underlying business.

Of course, if the issuer is not creditworthy in the first place, we will not invest in that issuance.

Engagement over exclusion

We approach all sectors with an eye toward identifying the businesses that apply strong ESG practices compared to their industry peers.

Just as credit risk assessments vary between industries, our process of analyzing ESG positioning is uniquely targeted to suit the characteristics of individual issuers. Many companies are honestly working to improve their ESG records. Engagement with these businesses gives us a seat at the table to ensure they live up to that expectation.

Our analysis uncovers businesses that have demonstrated the ability and will to improve their low current ESG scores, as well as those that are more exposed to ESG risks due to the nature of their industry.

After adding a bond to a portfolio, we engage with the issuer on critical ESG concerns throughout the duration of the investment to ensure the stated improvements are made.

In the best-case scenario, continued engagement with issuers who presently score poorly has led to improving the company’s sustainability and the issuance of sustainable and green-labelled debt.

We are involved in over 100 ESG engagements annually, each of which is logged so we can monitor what action an issuer has taken on the concerns we have raised.

In recent years, we have prioritized climate change and diversity/inclusion as engagement themes. The team also actively encourages companies to issue green bonds if they have a clear green use for the proceeds. If they are still developing clear ESG targets, we encourage issuance of sustainability-linked bonds.

For example, a steel producer may require funding to transition from coal to new electricity-based production methods. Its legacy carbon footprint as a coal consumer may overshadow its aspiration to become a “green steel” producer. To achieve this transition, it may issue bonds that specifically fund that transition.

Such “use-of-proceeds” bonds are issued to finance dedicated environmental and/or social projects. The proceeds are specifically earmarked for this intended use. While the use of the proceeds is ring-fenced for the specific project, the bond is backed by the creditworthiness of the issuer as a whole.

Investment and engagement with the companies striving to improve enables a transformation that is not only better for business, but also for our world.

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Text transcript

Matthew Schnurr:

This podcast is for informational purposes only. Information relating to investment approaches or individual investments should not be construed as advice or endorsement. Listeners should seek professional advice for their situation. Welcome to the Mackenzie Investments Podcast. My name is Matthew Schnurr, and I’m delighted to be here with Konstantin Boehmer. Konstantin co-leads our fixed income team at Mackenzie that manages over $40 billion. Konstantin, welcome back to the podcast.

Konstantin Boehmer…:

Hey, Matthew. Thanks for having me again.

Matthew Schnurr:

Wanted to start today’s discussion by talking about sustainable bonds. I know that you have a deep experience with sustainable bonds, starting, of course, at being that you’re a German native and the advancement that Europe has in sustainable investments. Also, you’re the manager of the Mackenzie Global Sustainable Bond Fund. Maybe we can start with some basics. What is a sustainable bond, and how are they used?

Konstantin Boeh…:

Sure. So, sustainable bonds are now actually a quite large part of the fixed income universe. And I would say, traditionally, they’re now classified as anything that is labelled as sustainable debt. So, there is a label that those bonds are getting from third-party companies, and they are labelling debt under a banner of either green or sustainable or social, so the different kinds of bonds, which all fall under the umbrella of sustainable bonds. But the core principle is that they are labelled by a third party. And those bonds are not any different in terms of the riskiness that one has to look at them. They carry the same risk, the same credit risk as non-labelled debt. So, one company could issue a bond, which is labelled green or labelled sustainable debt, but that same company could also issue a bond, which is not labelled and is just for general purposes.

So, the credit risk of those two instruments would be exactly the same. The only difference is that the proceeds of that bond are earmarked for special areas of their business, which are either in the E, the S, or the G category, and are therefore promoting doing good in that sense.

Matthew Schnurr:

That’s great. And just so…the E, S, and G is environmental, social, governance. Maybe we can get into more tangible examples of this. I know that green bonds is something that I hear a lot about, clearly a focus there on the environmental. And when I reflect on what the world has signed up to, as far as climate change goes, certainly it’s going to require a huge amount of investment to rebuild a lot of the infrastructure. What role does green bonds play in that sort of transition?

Konstantin Boeh…:

Yeah. So, I think they play a tremendous role because this, as you correctly said, there is a lot of money required to achieve that transition. And usually, when big amounts of money are required, fixed income is the area that will foot the bill, and that is providing most of that financing. And I think we’re currently faced with the trilemma also on the energy transition. And it’s not only the energy transition, but energy is currently at the forefront because we’re looking at security, affordability, and, of course, sustainability in the way that we are providing energy to the citizens and to the industries around the world. And a lot of those aspects are a challenge right now.

And what we see is that there’s quite a lot of investment actually going on. So, incoming data suggests that there’s a surge in investments in the energy transition space. China has done impressive proposals in terms of what they’re planning and starting to engage in. I think it’s 150 nuclear power plants; investments in wind energy quadrupled last year. So, there’s meaningful stuff happening. And it looks like this year, so 2022, we’ll see transition investments. And that is an energy place is probably 70% or so of that, will breach probably $1 trillion for the first time, and that number has doubled over the past four years. So, the total transition investments were around $500 billion, just four years ago. But in order to complete the decarbonization plans by 2050, we probably have to double that amount at least twice in this decade.

So, there’s a lot more that is needed, but at least we’ve seen an acceleration in the past couple of years, with this year being probably the one where we are breaching the $1 trillion. That is a really good sign that the momentum is picking up. And most of that will be financed by fixed income. So, last year, we had $1.6 trillion, $1.64 trillion in sustainable debt issuance, and roughly half of that was for the global transition investments. So, if you think about it, so last year, we were probably close to $800 billion in transition investments and the other $800 billion would be for other purposes. But that is, I think, a very important figure, because we need to bring that number up, and investing in funds that are actively engaged in that space is probably a meaningful step to help with that transition.

Matthew Schnurr:

That’s great, Konstantin. So, sounds like it’s a vehicle that helps this great energy transition, which is required for us to meet our climate goals. Second piece of that, that you mentioned, the universe is growing fairly substantially. So, there’s room for active managers to be selective on the different bonds. One question that I have is, the characteristics of a sustainable bond product—be it an index, be it a fund—how similar is that to a general broad universe bond product?

Konstantin Boeh…:

Yeah, good question. So, I think they’re getting much closer over time. If you would’ve asked me that same question five years ago, when we launched our first mandate, there was not so much available to us that we can pick and choose from. So, it really was a clear focus on energy companies or lots of solar wind in general, renewable energy companies, which were issuing bonds. So, if we wanted to, and we did it, we put together portfolios at that time, but there was a distinct difference in terms of sector allocation and in terms of the broad exposures that the market offers. So, that has changed over time. And we’re getting much closer to something which looks more comparable to a global benchmark or something that people, as global fixed income investors, are more used to.

And part of that is that it started off with companies and countries dragging their feet a little bit, but with a recent issue also of Government of Canada and many other governments around the globe, it becomes more of a global fixed income feel that you can actually make the same duration trades that we do for our regular funds. We can shift between different asset classes. So, there’s a lot more potential now in that space. But I think for us, as managers, we want to do good—and especially in those funds—but we also have to look after, of course, our investors.

Matthew Schnurr:

Sure.

Konstantin Boeh…:

So, we supplement a lot of the label debt that I’m mostly talking about here, so, dedicated labelled investments, which have that ticker of being a green bond or a social bond. But we supplement those bonds with some best-in-class securities, where we just scan the corporate world or the sovereign world and look for really good companies in the ESG space and really good countries who are doing all the right things, but they don’t necessarily have issued those label debts. So, we supplement our fund by those good investments as well, and that adds then another layer of flexibility that we can use to make the asset allocation and macro-decisions that we would like to express in our funds.

Matthew Schnurr:

Konstantin, great summary of the sustainable bond universe. Thank you very much for that.

Konstantin Boeh…:

Yeah. Well, my pleasure. Thanks.

Matthew Schnurr:

The content of this podcast—including facts, views, opinions, and recommendations—is not to be used or construed as investment advice and is not an offer or an invitation to buy or sell any security. The content of this podcast should not be relied upon for any purposes, and Mackenzie Financial Corporation is not responsible for any reliance upon it. This podcast includes forward-looking information that reflects our current expectations or forecasts of future events. Forward-looking information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those expressed year-end. Our views are subject to change based on market conditions. Commissions, trailing commissions, management fees, and expenses may be associated with mutual fund investments. Please read the fund facts and prospectus before investing. The indicated rates of returns are an historical annual compound of total returns, including changes to unit values and reinvestment of all dividends or distributions, and does not take into accounts, sales, redemptions, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns.