ESG Leads the Way for Medalist Canadian Growth

Mackenzie’s Shah Kahn has been weaving sustainability into his stock picks - and selling at double-digit premiums.

Diana Cawfield 25 November, 2021 | 5:58AM
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Schneider Electric charging station

ESG investing is embedded in the Mackenzie Canadian Growth mandate with its 5-globe sustainability rating. And a responsible route to capital appreciation paired with three key strategies has delivered a 5-star performance.

“ESG investing is part of our DNA,” says Shah Khan, vice-president and portfolio manager on the Mackenzie Bluewater team at Mackenzie Financial Corp. in Toronto. “As long-term shareholders, it’s always been at the core of our investment philosophy and process.”

Diversity, Business Risk and the Best of the Rest

The four-member team, including Khan, seeks businesses that can sustainably grow free cash flow over time at above-market rates. To do this, the team takes three key approaches:

 

The first broad investment strategy looks nothing like an index or benchmark. “Over time, we have added value by investing differently in niche market businesses right across the spectrum of market cap,” says Khan. The style is more “conservative growth” through a market cycle and not at an extremely fast rate.

The second approach is holding a concentrated portfolio of 30 to 35 names. The focus is on business risk, so the diversified companies are not tied to the same market drivers or industries. “So you’ll never see us holding five banks,” says Khan.   

Thirdly, Khan says what differs is the use of foreign content. The fund invests 50% in Canada, offering investment opportunities of up to 49% in foreign content. The focus is on higher quality, faster growth and more stable businesses in areas where Canada is lacking, such as the healthcare area.    

The overall goal of the investment thesis is to enhance growth, add stability and diversify away some of the cyclicality in Canada.

DCFs for Decades

The approach follows a fundamentally-driven, modelling process that assesses the quality and value of a business 10 years out. Kahn says the net result is good downside protection and better diversification which should result in positive, risk-adjusted returns for unitholders.  

A valuation discipline uses discounted cash flow models to forecast a business over a decade. The managers buy at a discount and start selling when a company reaches double-digit premiums above fair value. “It really takes the emotions out of the process,” says Khan.

EV Car Parts, Green Grids, Enabling IT and Implants  

Although stock-by-stock driven, the team does incorporate a top-down overlay to look for trends and opportunities and to assess risk. In general, the managers avoid deep, cyclical businesses, pure commodities and highly capital-intensive businesses because of their unpredictable nature through a cycle.

For example, Khan says the team has been talking for several years about the impact of electric vehicles and how that’s going to impact oil demand. So they are cautious about the sector have zero exposure in the oil space.

In Canada, the fund holds automotive supplier Magna International Inc. (MG). “The company has a strong technology portfolio,” says Khan, “that gives them good leverage to some of these megatrends like electric vehicles and even autonomous vehicles.” Specializing in a niche market like electric vehicles also enhances margins and accelerates growth. Near-term there are obvious disruptions from the chip shortage but when you build out a 10-year modelling thesis, it won’t have a material impact on the fair value. “The good news is that consumer demand generally continues to be strong. We tend to be a bit more patient, as long as we can understand the issues and feel confident that they’re not structural in nature.”

On the foreign side, France-based Schneider Electric (SU), a leading global supplier to industrial, data-centred, energy customers, is favoured. “The management,” says Khan, “started transitioning the company 10 years ago and they’ve moved the company in the right direction.” According to Khan, in the move towards a future with greener energy, you need a huge amount of electrical gear if you’re going into a world with more renewables. “That just benefits the company directly,” says Khan, “and that’s a hallmark of leaders, to spot trends early and position the company.” 

For opportunities in technology, the fund owns Ireland-based Accenture (ACN), a leading global IT-services firm offering diversified services across multiple industries and sectors. According to Khan, compared to what happened in the late 90s (when the revenue of many tech and digital companies collapsed), this time around the sector is much broader. “It’s about the application of digital in all types of different areas,” says Khan, “areas like 5G technology, Cloud computing, AI, and it’s just only getting started. That’s where Accenture comes in. It’s the world’s number one consulting firm and they’re the ones helping companies to actually implement all these multiple digital technologies.” The company is also favoured as a platform-style investment where you don’t have to bet on one technology. In addition to indirectly supporting innovations that support ESG goals, the company has a "Negligible" ESG Risk Rating, according to Sustainalytics.   

In the healthcare area, Stryker Corp. (SYK), a U.S.-based company, is among the top 10 holdings. Stryker designs, manufactures and markets an array of medical equipment, supplies and implantable devices. The company remains one of the largest competitors in reconstructive orthopedic implants. It is favoured as a leader in the industry and for its diversified platform of offerings. “The businesses that we’re looking for tend to have more stable revenue with higher margins and higher barriers to entry,” and Stryker is an example of this.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Accenture PLC Class A367.44 USD2.03Rating
Magna International Inc100.35 CAD4.02Rating
Schneider Electric SE161.14 EUR-1.00Rating
Stryker Corp245.99 USD2.88Rating

About Author

Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.

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