Portfolio manager of Mackenzie International Dividend Fund reflects on lessons of past 18 months when 'tide went out' on companies
For many investors and analysts, the pandemic has been like truth serum. Firstly, the curtain was pulled back on how many companies operate, allowing a transparent look into their structure and profitability. Secondly, it allowed us all to contrast and compare how different countries and economies handled the crisis.
For a global investor, this has been fascinating. Ome Saidi, VP, portfolio manager, Mackenzie Global Equity & Income Team, co-manages the Mackenzie International Dividend Fund and believes many lessons have been learnt these past 18 months.
At its core, the fund aims to buy great companies after a rigorous testing process. It analyses things like return on capital, growth revenues, management, competitiveness and sustainability. From a “Dream Team” list, the portfolio is curated. The dividends have been fantastic, Saidi told WP, with many compounding significantly over time.
After the health crisis took hold, and economies were shutdown, the tide went out and investors could see which companies really worked. You were able to see changes to cost structures, culture and the overall soundness of their organization compared to their peers.
Saidi explained: “You learned more about the company, and more about their consumers and their clients. Some of the costs that were taken away will come back, others will never come back. You saw operating leverage built into some of these businesses, and you saw companies willing to take steps that they wanted to, but had been too timid to do previously.”
This is true of two of the fund’s biggest holdings. South African company Safran makes engines for narrow-body planes and, pre-pandemic, were in the middle of a huge ramp up in production at a loss with the aim of building net present value (NPV). Forced to cut costs as airlines struggled to survive, Saidi and the Mackenze team were able to dig deep into its cost structure. Now, Safran has ramped up production once again and incremental profit is set to be even higher.
Another holding, SAP, an application software firm, had spent years balancing its push to the cloud with shareholders' need for value and profitability, disappointing people in both camps. The work-from-home necessity gave management the freedom to go 100% in the cloud, while its clients are now also more confident to go that route.
Saidi explained: “As shareholders, we have been asking them to pursue [the cloud] and create value in that time period, even as they were compromising. But now they've been unleashed. They get to invest and pursue what is best for the long-term value of the company.”
The other element to the pandemic has been exposing biased investment views. Saidi believes there is a lens through which people see the world that greatly discounts what's not in North America, with many people underestimating these companies.
Take ASML and TSMC, two companies leading the way when it comes to semi-conductors and the Moore’s Law progress we’re seeing around AI and cloud computing. They are Dutch and Taiwanese, respectively.
“Sometimes, we discount what other people do well," Saidi said. "What this fund does is try to get access to that. And when the world gives us something like 2020, there are so many things and so many new opportunities. We’re constantly learning and it was a year of even more learning because of the transparency. When the tide went out, you got to see so much more of what was there.”
The fund provides exposure to companies that deliver strong value over time for clients, giving these industry leaders – “global champions” - time to compound your capital. Saidi stressed that they represent a totally different opportunity set to what you can get in the U.S. He added: “Historically, the performance of the top holdings outperform the smaller holdings. Meaning when I recognize an attractive situation, more often than not it's played out favourably for us.
“We get to own great franchises, sometimes at prices that are crazy. But I think the most interesting thing here is that you can put the money to work and leave it there for a long time. You don't have to worry about it because [fund holdings] LVMH, a luxury goods company, and Novo Nordisk, a Danish company helping solve problems around diabetes, are going to be around a long time.”
