Macro issues 'tend to be more noise', says Dixon Mitchell's Don Stuart

Being inundated with top-down concerns can force your focus from long-term horizons — don't let it

Macro issues 'tend to be more noise', says Dixon Mitchell's Don Stuart
Don Stuart, EVP of Vancouver’s Dixon Mitchell Investment Counsel

Though there’s no doubt top-down, macro concerns are moving markets around, the real question is: does that short-term volatility actually carry a large weight for someone thinking about a 10-year time horizon?

Being inundated with news on inflation, interest rates, and geopolitics can take your eye off a portfolio which is designed for five to 10 years, especially if heavily equity-oriented. But the truth is many of those macro things come and go, says Don Stuart, EVP of Vancouver’s Dixon Mitchell Investment Counsel.

“They seem like they’re changing the direction of the world, but when you look at strong cash-flow producing companies over that time frame, the macro issues tend to be more noise,” Stuart says. “People took their eye off the ball 12-18 months ago when interest rates were next to zero and money was flying around, and they probably stretched the risk profile of their portfolio into some of the names that turned out to be highly speculative and are now being hit pretty hard. Trying to predict them is next to impossible, so don’t let them distract you: focus on quality in the portfolio, cash flow generation, things you can buy at a reasonable price.”

This sentiment is the thrust of Dixon Mitchell’s recently released Q4 2022 research insights, Searching for Goldilocks , and as a money manager Stuart sees this as a more favourable environment for the firm’s approach. In 2021, everyone wanted to own Peloton, Zoom, and crypto currencies, all of which were going up by dramatic amounts, and though some of them are good businesses — Zoom, for example, is now cemented in the day-to-day lives of many people — they were never worth the value that the market put in during that speculative heyday.

Those are difficult markets for firms like Dixon Mitchell, because clients want to be involved in the frenzy and as fundamental managers there’s no way to own stocks like that because of valuation. In this market however, where some of those things have dropped up to 80 per cent, “there’s the opportunity to use the macro volatility to add to names we really like that are being hit worse than they should be.”

“The key for us is understanding that the company has an ability and a likelihood to generate and grow cashflow in the foreseeable future and that — most importantly — management can deploy that capital to create more value for us whether it’s grow dividends, buy back shares, pursue M&A, or organic growth,” Stuart says, adding that the firm is agnostic between those four uses of capital as long as management has a strong plan they can execute.

People need to remember the economy and the market often don't line up, and a great example is the homebuilder D.R. Horton, a company in Dixon Mitchell’s US equity portfolio. Homebuilding and the housing market in the US are on tenterhooks amidst rising mortgage rates and people sitting on their hands, but since mid-October that stock is up 40 per cent, illustrating that at the end of the day, you could be exactly right on a macro call but it’s not reflected in stock prices.

“Anything we can think about in terms of what’s going to guide the market, has long since been digested by the markets. Trying to play that game and get ahead of it, you can be lucky but it’s next to impossible to get it right. So we keep coming back to the time horizon — it’s not six months, when the next decision about interest rates will come in, it’s six years or more, so is it really a good use of my time and energy to focus on that which is just going to distract me from that six- and 10-year work I should be doing in the portfolio?”

There’s also the fact that the consensus agreement going into a recession in North America is by a factor of two greater than it’s ever been in the past, but Stuart points out that when China — the second largest economy in the world — appears to be going from shut down to possibly being open, even if it’s at 50 per cent or 80 per cent of what it would normally be, that changes the narrative. Dixon Mitchell doesn’t spend time analyzing these macro issues, but the certainty with which people claim a recession is imminent “isn’t something we’d be willing to hang our hat on as much as some people are,” Stuart notes.

Although there’s a prevailing low mood amongst investors at the moment, Dixon Mitchell notes that long-term clients that have weathered the 2007-08 Great Financial Crisis as well as the COVID drop recognize that the worst thing they could have done was to bail out of their portfolio when conditions and sentiment were at their worst. After a few years, the only people that were damaged were the ones who acted on their emotion and liquidated assets when panic was at its highest, Stuart says.

“Our clients know their portfolio doesn’t look as good as it did a year ago, but by the same token they also realize changing direction in the short term rarely works out because you have to get two decisions right: if you liquidate assets now, you also have to decide when to get back into the market. Like I said, the economy and the mood of the market are often not connected with where stock prices are going. In building that long-term portfolio this is a more rational time to look at names, analyze, and not be overwhelmed by the speculative access that may still be out there. Some of that air has been drained from the speculative bubble, and for the long-term investor, that's a good thing."