A volatile market means opportunity as firm looks to help Canadians invest with Mackenzie U.S. All Cap Growth Fund
Putnam Investments is looking to give Canadians the best return possible with Mackenzie US All Cap Growth Fund.
According to Richard Bodzy, portfolio manager at Putnam, the fund employs a “bottom-up fundamental process,” with three criteria focusing on growth.
The first criterion they look for is the expected duration of growth, Bodzy said.
“We won’t necessarily own the single fastest growing stock in the universe,” he said.
“But… structurally advantaged companies with pricing power, high EBITDA margins, lack of competition… these factors are what enable these companies to grow at above-market rates across the cycle with a narrow range of outcomes.”
The second criterion is the return profile of the business. Putnam seeks high and improving returns on invested capital, he explained.
“It often leads us to capital light businesses – so low capital intensity businesses, where management teams are able to deploy capital within the moat for a positive return in excess of the cost of capital,” says Bodzy.
The third and final criterion is a culture of ownership, according to Bodzy.
“We spend a lot of time focused on how much stock managers own, making sure they’re aligned with us,” he said. “And we also look into their compensation structure and how they’re incentivised.”
What Putnam is trying to do with Mackenzie US All Cap Growth Fund is marry those three criteria with a “top-down thematic lens.”
However, one narrative of the US equity market, which often holds Canadians back from investing, is how expensive it’s become.
“It’s often the case that there are pockets of the market that are expensive and overheated,” explained Greg McCullough, assistant portfolio manager at Putnam.
“But part of our process and our discipline around valuation is that we’ll avoid those valuation extremes.”
When looking at the portfolio relative to the index, it tends to trade at a higher multiple, he said.
“But, we think that multiple is largely reflective of the quality of the businesses we own,” he said. “We’d be concerned if we owned a portfolio of businesses that traded at a multiple well below the index, because that would contradict our beliefs about business quality.”
Looking forward, McCullough said they see “incredible opportunities” over the years ahead.
“We’ve tried to position the portfolio to benefit from some of the lasting shifts in the economy.”
Some of these shifts include increasingly direct sales channels, and the benefits of scaled capital light business models.
“You think about tech as being overvalued and expensive today, but if you just think about technology more broadly, and think about the application of technology to industries like healthcare, and industrials, and parts of the consumer landscape – these are huge industries that we think are ripe for a technological change,” he said.
Ultimately what they strive to do is to identify businesses which are going to be able to deliver technology solutions and innovations to those industries, which should drive stronger returns going forward.
Another ongoing debate is the large discrepancy between growth and value stocks.
“The valuation spread between growth and value has widened out as we’ve moved through this pandemic, but that doesn’t change the scale of the opportunity for many of these businesses,” he said.
In recent weeks we have started to see a shift as value stocks have outperformed growth in the month of November. This shift has caused considerable volatility.
Both Bodzy and McCullough believe the current environment has presented compelling opportunities.
“We have a view and a lot of conviction around intrinsic value for the companies that we own, and when we see big sell-offs like we saw in March and April, there’s an opportunity to initiate positions in companies we have our eye on,” he said.
To Bodzy, this year is an opportunity for active managers like Putnam to look beyond the next few months and identify companies where they believe the intrinsic value is higher over time, which is why they prioritize companies where there is visibility in cash flow years into the future.
McCullough noted the companies they own are designed to withstand volatility, whether it’s in the market, or the economy.
“If you look at the businesses that we hold… we think they’re incredibly well-positioned to weather economic volatility because they have strong balance sheets, because they’re structurally advantaged, and because they have the ability to price their product in the market,” he explained. He added they also have high margins and returns relative to the index.
Putnam likes volatility, and McCullough thinks volatile periods are a time when they, as an investment management firm, can shine.
Ultimately, McCullough believes Mackenzie US All Cap Growth Fund can be differentiated from other US growth funds.
“We think the thematic lens that we use is unique and different,” he explained. “But even more than that we think the way that we apply that theme to names in the portfolio is really unique.”
He said this gives them a portfolio of high-quality businesses that, in their view, are very attractive from a multi-year growth perspective.
“We spend a lot of time thinking about the range of outcomes for a business on the front end, and we want to own businesses that have a narrow range of financial and operational outcomes. Those are the types of businesses that we hold in the portfolio,” said McCullough.
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