A staple diet for a conservative global manager

Mackenzie Ivy's Paul Musson favours consumer stocks.

Sonita Horvitch 1 August, 2012 | 6:00PM

 Paul Musson, head of the Ivy team at Mackenzie Financial Corp., says that leading global consumer-staples companies -- provided their valuations remain attractive -- will continue to feature prominently in Mackenzie Ivy's foreign and European portfolios.

"Right now our models tell us that these stocks are still reasonably priced, though not cheap," says Musson, senior vice-president, investments. Musson was last year's winner of the Morningstar Foreign Equity Fund Manager of the Year award at the annual Morningstar Canadian Investment Awards gala.

The Ivy team's investment philosophy is very much a buy-and-hold one. "We run concentrated portfolios of stocks and control risk through our qualitative assessment and our discipline in monitoring the stock's valuation," says Musson.

In 2002 and 2003, the Ivy team started to "slowly transition" to consumer- staples stocks in their global and European funds and gradually reduced holdings in economically sensitive companies, such as industrials and some financials.

"At the time," says Musson, "we were nervous about the sustainability of global economic growth, and the more defensive names were becoming more attractively valued relative to cyclical stocks."

Musson describes the team's target companies as those "with identifiable strong competitive advantages run by management that is proven and focused."

This qualitative evaluation involves "considerable digging." But it is necessary to assess "the company's capacity for future revenue and earnings growth." By contrast, Musson says, "the quantitative screening, though equally important, uses numbers that are historical."

At Mackenzie, Musson and his team are responsible for assets of $6 billion. They have a wide range of mandates including Mackenzie Ivy Foreign Equity   and Mackenzie Ivy European Class  . The latter fund won the Canadian Investment Award for Best European Equity Fund for the fourth consecutive year last year. Both are Morningstar 5-star funds. ( Mackenzie Ivy European   is a 3-star fund but has been managed by Musson and his colleagues only since November 2010. It performed in the top quartile over the 12 months ended June 30.)

 
Paul Musson

Musson's foreign-equity and European mandates invest in companies based in developed countries. At the end of June, Mackenzie Ivy Foreign Equity, with 29 names, had 55.8% of its portfolio in companies domiciled in the United States, 14.1% in the United Kingdom and 6.6% in Switzerland. Mackenzie Ivy European Equity Class, which has 19 names, had 25.2% in the UK and 19.7% in Switzerland.

Musson reports that the European fund has no holdings in companies based in the financially strapped PIIGS countries: Portugal, Ireland, Italy, Greece and Spain.

As for sectors, Mackenzie Ivy Foreign Equity held 33% in consumer-staples stocks at the end of June. At that date, consumer discretionary stocks represented 20.8% of the fund, health care 11.9% and financials 10.5%.

Consumer staples featured even more prominently in Mackenzie Ivy European Equity, at 41.1% at the end of June. In other sectors, the fund had 16% in consumer discretionary stocks, 11.9% in financials and 10.4% in health care. Both funds had little or no exposure to natural-resource stocks.

In keeping with the Mackenzie Ivy team's discipline to monitor stock valuation, it pared back a number of stocks in these funds late last year. Trims included two consumer-related stocks that continue to be held in a number of funds, including Mackenzie Ivy Foreign Equity. They are: McDonald's Corp. MCD and Costco Wholesale Corp. COST.

Musson says that since 2002, McDonald's has concentrated on boosting same-store sales rather than on adding new stores. "This has been a good strategy, as the new stores in some areas cannibalized sales of existing stores." The company has revamped its menu to include healthier options, he says. "It is also renovating its stores and improving its service."

At recent count, the global fast-food giant had more than 33,500 restaurants in 119 countries, with more than 80% of its restaurants owned by franchisees. "In all, McDonald's enjoys substantial economies of scale and considerable buying power," Musson says. The company is "a great free-cash-flow generator." The stock trades at 16 times consensus EPS estimates for 2012.

Costco is "a fast growing company and remains a good long-term hold," says Musson. It is the largest membership warehouse-club chain in the United States and has a growing international presence including in Canada, Mexico, Australia and Asia.

McDonald's Corp. Costco Wholesale Corp.
July 31 close $89.36 $96.18
52-week high/low $102.22-$82.01 $97.76-$70.22
Market cap $90.8 billion $41.6 billion
Total % return 1Y* 6.5% 24.2%
Total % return 3Y* 20.6% 25.9%
Total % return 5Y* 16.0% 10.8%
*As of July. 31, 2012. All figures $US
Source: Morningstar

Membership dues account for some 70% of Costco's profits, he says. "The company has a low-gross-margin, high-volume, low-cost business model," Musson says." It also remunerates its employees better than competing companies. "This helps to keep them motivated."

Costco has a strong balance sheet with a net cash position, he says. "The stock has done well and we trimmed it." It trades at 24 times consensus earnings-per-share estimates for 2012, "which is acceptable given the company's growth rate."

The world's leading yogurt producer, Danone SA, headquartered in France, is in the top 10 holdings in both Mackenzie Ivy Foreign Equity and Mackenzie Ivy European Class. "We have held this stock since 2000," says Musson. "Danone is a consolidator in the yogurt industry and is also a major purveyor of brand-name bottled water, including Evian, and of baby foods."

More than half the company's sales are in emerging markets, Musson says. "This consumer-staples company is both growing sales and global market share." The stock trades at 15 times consensus EPS estimates for 2012. "This is in keeping with its historic valuations."

UK-based Pearson PLC, which falls into the consumer-discretionary sector, is the largest holding in Mackenzie Ivy Foreign Equity, as well as in the top 10 holdings of Mackenzie Ivy European.

This international media and education company, says Musson, "has embraced technology to distribute its education material and is a dominant and growing player in the learning business globally." The stock trades at 14 times consensus EPS estimates for 2012.

Turning to financial services, Musson notes that neither of the two portfolios have any bank holdings. A UK auto-insurance company that has "a strong competitive advantage in the UK market" is mid-cap Admiral Group PLC, he says. This stock is in the top 10 holding in both funds.

Admiral, says Musson, is "a conservatively run car-insurance company that makes a profit in its underwriting business." In contrast to its peers, it does not rely on its investment portfolio for earnings, "a plus in a difficult bond and equity environment."

Admiral's stock pulled back late last year after the company announced larger-than-expected claims, Musson says. "We know the company well, we considered this to be a short-term setback and we used the opportunity to add to our holdings."

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Sonita Horvitch

Sonita Horvitch