While European stock markets have struggled to keep up with the US market in recent years, in part due to the dominance of powerful tech giants that wield major influence over US indices, investing has become even more difficult in Europe. . with the start of the Russian invasion of Ukraine.
As of April 30, Mackenzie Ivy European F, sponsored by Mackenzie Investments of Toronto, had a negative year-to-date return of -12.9%. While the decline was disappointing, it was a slightly smaller loss than the Morningstar European Equity category and the comparable benchmark.
Looking longer term, the fund, the Morningstar Bronze Medalist, posted an average annual gain of 3.0% for the five years ending April 30, a second-quartile performance that puts it ahead of the average return of the category and one percentage point behind the index.
Toronto-based Matt Moody, vice president and portfolio manager on the Mackenzie Ivy team, which oversees the fund with senior vice president Paul Musson and assistant vice president Jason Miller, says portfolio managers are looking high-quality companies capable of delivering returns over the next five to 10 years, regardless of what changes may be in store for the economy and other general factors.
Business resilience is key
“Rather than trying to make macro calls on things like war or the pandemic, we look for companies that can grow resiliently no matter what is thrown at them,” Moody says. “We have a long-term time horizon, and sometimes stock market volatility can create price opportunities.”
While the team does not try to predict the real direction of the economy, political events or interest rates, it does not ignore unusual macro factors that challenge businesses, including what becomes a protracted conflict in Ukraine and rising inflation. .
“We’re not forecasters, but we look at how well companies can meet the challenges they face,” Moody says.
Inflection of oil and gas
Energy costs are rising rapidly, along with other cost pressures, and consumer spending and economic growth will likely suffer.
The Bundesbank recently said that the German economy could contract by up to 2% this year if the war in Ukraine continues and there is a ban on Russian oil and gas on which Germany depends, as well as weaker external demand for German manufactured goods. Germany is the number one engine of growth in Europe, and a German slowdown would have knock-on effects.
Shock knock sticker
With inflation becoming more entrenched globally, some businesses are finding that the costs of inputs such as labor and materials are rising, as well as the cost of transporting goods from place to place. other.
“Costs have increased significantly in a short time, and we are looking at which businesses could be affected if inflation persists,” Moody says. “We look at pricing power and brand strength, trying to figure out which companies can stay profitable.”
The approach of the Mackenzie Ivy team in Europe has always been to invest in a combination of “domestic champions” who dominate their local market and also have the potential to expand overseas, as well as global giants well established beyond their borders. However, there is more focus these days on companies that operate globally and make a large part of their profits outside of Europe.
European Launchpad
“We want to reduce geographic concentration and market risk,” says Moody.
The fund does not include any companies headquartered in Eastern Europe, although some holdings are expanding their business in this part of the world.
“We have exposure to emerging markets through corporate operations, but prefer companies domiciled in Western Europe due to lower political risk and higher accounting and corporate governance standards,” Moody said. “There aren’t many world leaders coming out of Eastern Europe.”
A favorite holding is Admiral Group PLC (ADM), a UK-based financial services company specializing in car insurance which has been held in the fund for 14 years.
“The company is economically resilient and has experienced impressive growth in a highly competitive industry,” says Moody. “People will always need car insurance, and the company is a strong, low-key contributor to the fund. We’re confident it can maintain its greatness over the next five to 10 years, and that’s our goal. – instead of trying to predict top-down factors such as the consequences of Brexit.
A strong balance sheet is important to help companies absorb shocks, says Moody’s, along with a strong corporate culture, a less tangible but hugely influential key to resilience.
The value of corporate culture
Company culture encompasses a variety of factors, including positive employee and community relations, operational efficiency, and an entrepreneurial atmosphere. This leads to the attraction and training of valuable employees, greater staff engagement and longer retention.
“Company culture is an undervalued asset,” says Moody. “It’s hard for competitors to copy, and it’s a great long-term benefit for a company that supports other benefits.”
Mackenzie Ivy European maintains a concentrated portfolio of 25-30 stocks. The fund can invest in companies of any size, but are generally mid to large capitalization companies. They must be attractive and liquid.
The team’s approach is low turnover, but more active in times of equity market volatility. Leaders are disciplined to pay a reasonable price, and if they find a company attractive but expensive, they either wait patiently for the price to drop or simply don’t buy.
A company that has been added to the portfolio in the last six months is Vestas Wind Systems (VWDRY), a Danish sustainable energy company specializing in the production, installation and maintenance of wind turbines worldwide. The company has high margins, superior execution and scale advantages over its peers.
Another major holding is De Longhi SpA (DLG), a leading Italian brand in the manufacture of high-end coffee machines and other small household appliances.
“We love the niche and the business will benefit as people move towards better coffee and brew it at home,” says Moody. “These trends have been accelerated by the Covid pandemic.”