President explains how tuning out macro narratives helped his equity strategies win in 2023
Dixon Mitchell Investment Counsel beat the markets last year. The Vancouver-based investment firm’s US equity fund beat the S&P 500 by 8.5 per cent, their Canadian Equity Fund beat the S&P/TSX TR index by 7.6 per cent, and their Small Cap fund beat the S&P/TSX Small Cap index by 16.5 per cent. According to Don Stuart, President & executive chair at Dixon Mitchell, that outperformance stems from a bottom-up focus, and the advantages of scale.
Stuart explained what he means by ‘bottom up.’ Rather than focusing on macro narratives and speculation about central bank interest rate decisions — a level of noise that is hard to tune out these days — his firm aims to look at the dynamics at work in specific businesses. They buy equities to hold for the medium-term at least, which enables them to look past short-term macro volatility.
“Our philosophy is that we’re buyers of businesses. If we look at buying a business, we’re really looking at it over a 3-, 5-, or 7-year period. So we try to figure out if a business is well positioned, if they’re run by a strong management team, if they have a competitive advantage. Those are the factors that are going to play out over a business cycle and beyond the news of the day,” Stuart says. “We’re a bottom-up manager, and the more we get distracted by headlines, the more likely we are to take our eyes off that ball.”
That is not to say the Dixon Mitchell team puts on blinders. Macro stories like interest rates can play a significant role over the time horizons Stuart and his team work at, but they try to give those stories less weight in their decisions. Stuart notes that often these large macro stories are rapidly digested by markets, or even priced in before they occur. Trying to chase those narratives as an investor rarely works well.
Stuart notes that 2023 began with negative market forecasts from the biggest Wall St. shops. Goldman, Morgan Stanley, JP Morgan, with their massive teams of highly credentialled analysts, all predicted that the S&P 500 would post a negative return last year. It ended the year up 26 per cent including dividends. Going into 2024 the spread on predictions, he says, are between negative 12 per cent and plus 15 per cent returns.
“There’s no other profession where you’d have a group of experts give such a range of opinions. Can you imagine a building where one engineer says you need 50 gauge steel and the other says you need 100 gauge steel? In our business it’s common,” Stuart says. “If the brightest people in the business devote most of their time to come up with these forecasts that don’t mean anything, then that would be wasted energy for us as a little shop in Vancouver.”
Stuart notes that Dixon Mitchell’s “little shop” status actually gives its equity strategies an advantage. More capitalized investment funds and asset managers require greater degrees of underlying liquidity in the stocks they buy. Dixon Mitchell is small enough that it can invest in small and medium-cap companies — especially in Canada — that it sees as potential growth drivers despite their lack of market cap. Stuart cites the example of Dollarama, which was valued at $2.4 billion when Dixon Mitchell first invested. Bank asset managers need stocks with greater capitalization in most of their funds, but Dixon Mitchell was there as Dollarama grew to over $28 billion in market cap.
In their US portfolios, a mid-cap approach also helped Dixon Mitchell outperform. Their US equity fund only owned four of the so-called “magnificent seven” and it didn’t own the top three performers from that class of mega-caps: Tesla, Nvidia, and Meta. They still managed to outperform the S&P 500 with allocations to smaller companies exposed to US house construction that benefitted from tight supply in the US market.
As advisors look for ways to help their clients beat the market this year, Stuart believes that asset managers with a bit more agility and a focus on the businesses they own can help deliver those results.
“It’s common in the industry to just buy indexes because managers don’t beat the index after management fees. On average, across the group, that’s true. But the business is dominated by the big managers,” Stuart says. “Two things are going to allow a manager to get away from that pack. One is size, and the ability to get into parts of the market that giant managers can’t get into with any meaningful allocation. The other is an investment process. Over 20 years our teams have built this very disciplined process that gets us away from distraction.”