A risk moderation play in uncertain times: Part 1, the Dream Team

How a strategy built on the best businesses and reasonable returns can carry your clients through the stormy present

A risk moderation play in uncertain times: Part 1, the Dream Team

In a year of stomach-turning uncertainty, advisors have had to deal with countless clients exhausted from the roller coaster ride that is 2020 and begging to just get off. After a summer that began to feel almost normal, a second wave has struck across much of the developed world and we’re on the edge of a U.S. election like no other, with some analysts predicting a month of potential chaos between election day and the final result.

The macro shocks driving uncertainty for investors are compounded by the collapse of fixed income’s utility as a safe haven. With rates cut to the bone and yields falling below the rate of inflation, income seeking clients need an alternative source of income without exposure to undue risk. The answer may lie in dividend-paying equities, but without both a time-tested strategy and deep fundamental analysis of company positioning, adding those equities could just mean adding risk. That’s where the Mackenzie Investments Global Equity & Income Team come in.

“Our goal is to generate superior risk-adjusted returns, above-average returns with below-average volatility,” says Darren McKiernan, Senior Vice President of Mackenzie Investments and Head of the Global Equity & Income Team. “In investing, no matter how much work you do, you can still be wrong because the world is a fluid and dynamic place. It’s not the winners that are going to determine performance, it’s managing your mistakes.”

McKiernan cites the example of Mackenzie’s Global Dividend Fund, driven by a long-term, core style investment approach rather than trying to time the markets. McKiernan quotes Seth Klarman saying he runs a dividend fund by ‘worrying top down but investing bottom up.’ The approach he takes is to build a dream team of the best businesses in the world. That dream team is currently sitting at around 400 companies pulled from the best investable businesses across all geographies and sectors.

Making it onto McKiernan’s dream team doesn’t mean a stock is staying there forever. The Mackenzie team is keenly aware of the flux the investable world is in, especially now. McKiernan himself says that disintermediation across a range of industries is forcing his team to ask a question about their whole list: ‘what’s this business going to look like in ten years?’ His team is in a state of constant re-evaluation and reassessment to ensure their fund has as little risk exposure as possible.

“We’re not a growth fund, or a value fund, that’s not what we’re looking for,” McKiernan says, “We’re looking for businesses that we think can grow sustainably in the mid single digits, which is really actually hard to do over the course of time.”

McKiernan stresses that the nature of compounding means a company growing sustainably at that consistent rate, that can generate enough cash to reinvest in the business and keep growing, can actually generate a lot more money than an investor might think.

Balance is key to maintaining that fund. It’s core mandate means it stays exposed to at least six sectors, and proper discretionary management means that the fund isn’t suddenly going to become a one-way bet on Japanese industrials overnight. Big macro bets, too, aren’t what McKiernan uses to deliver with this fund. Rather, that dream team of high-quality businesses allows the fund to deliver what unitholders expect from it over time.

In the face of today’s uncertainty, McKiernan says he and his team at Mackenzie are doing what they always have, constructing what they believe is the best risk-adjusted portfolio of investment opportunities for their investors.

“We look at our dream team list, we ask what companies are being directly affected, what companies are being indirectly affected?,” McKiernan says. “We’re being active, picking up businesses that are being indirectly affected, maybe coming off 20% of where their price had been but will come out on the other side stronger, and doing this without adding any undue stock specific risks in the portfolio.”

Driving this track record of success and consistent performance, is the human element. To learn more about how Darren McKiernan became the PM he is today, stay tuned for part two of our series.