An expert eye on small- and mid-cap stocks

Portfolio manager explains how curation is key to success in 'world's best hunting ground for growth businesses'

An expert eye on small- and mid-cap stocks

When Mackenzie Investments announced the launch of its new U.S. Mid Cap Opportunities Fund earlier this month, it was hardly surprising that the management team included Phil Taller.

A senior vice president at the firm who’s also received a prestigious industry award, Taller has kept his eye on the U.S. small- and mid-cap space for about 25 years. Together with vice president and portfolio manager Sonny Aggarwal and associate portfolio manager John Lumbers, Taller has built a solid track record running Mackenzie’s US Mid Cap Growth strategy.

“Historically, small- and mid-cap equities in the U.S. tend to perform better than large caps coming out of recession,” Taller said. “It’s an open question when things will get better as of now, but historically when that happens, there’s a tendency for equities to do better the smaller you go.”

Going beyond the average
Right now, many investors might feel cagey about making allocations below the large-cap corner of the U.S. equities market. In the worst periods of U.S. stock-market volatility and downturns, there’s been a tendency for returns to get worse on average as one goes deeper into mid-caps or small-caps.

But Taller and his team don’t deal in averages. As self-described company-focused investors, they put a lot of time into determining which companies within their investment universe have solid business models that may drive above-average revenue growth, profit margins, and cash flow. They also consider industry trends that can bear out over the long term and provide a lift to particular equities.

“Our fund is not the index,” he said. “We look at what the world does not like, and look for what might be ok about it or even good.”

While the general long-term behaviour of U.S. small- and mid-cap stocks won’t exactly inspire confidence in most investors, Taller maintains that being selective can lead to a better portfolio profile. He pointed to the historical track record of their small- and mid-cap growth strategy, noting that its long-term volatility profile has been lower than its benchmark’s and closer to a large-cap strategy.

A high-conviction strategy
“Our new opportunities fund holds a portfolio of just 25 names,” he said. “We’re pretty much doing the same thing we did with our previous strategy, which also started with a short list and has expanded to include just over 40 unique holdings as its AUM grew. I’m confident that our new fund will develop in the same way.”

The recent volatility in the U.S. stock market might have jarred and scarred passive investors, but Taller sees the bright side – namely, that periods of turbulence open up potential opportunities for certain sectors or stocks to come into favour.

“Generally speaking, our tendency has been to overweight technology in the funds we manage. That’s certainly where we are today, along with a healthy allocation to health care and industrials,” he said. “Over the long term, we’ve also tended to have little to no weight in utilities, telecom services, materials, and energy.”

He also suggested that the events of March were a valuable test for investors – specifically, to determine whether they can stomach extreme volatility in performance. While he admitted to having a personal bias, he said that the new mid-cap opportunities strategy could represent a solid core of investment for anyone with an interest in high-quality equity exposure and a healthy tolerance for risk.

“To anyone who went through the coronavirus selloff without much of a sweat, I’d point to the U.S. small and mid-cap space as one of the world’s best hunting grounds for growth businesses,” he said. “Historically, it has been a great place for investors to put some of their money long-term.”


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