Investing 101

Great American companies are ready to grow again

Why invest in the US? That’s a question many Canadian investors asked themselves when the financial crisis roiled Wall Street and markets tumbled. But US markets have rebounded, in part because America is home to many great companies – names like Apple, Google and Colgate-Palmolive. They share a number of traits: strong management and the ability to constantly innovate and grow their revenues. Mackenzie Universal U.S. Growth Leaders Class – available in currency hedged or unhedged versions – holds a core group of these dominant multinationals. And Phil Sanders, Portfolio Co-Manager and Senior Vice-President of Waddell & Reed, one of the oldest financial services firms in the US, believes the fund is positioned to perform well as the economy recovers. Below, Sanders discusses his investment strategy.

As a growth manager, what do you look for in a company?

Companies can grow at attractive rates for a period of time. But to sustain above-average growth there has to be something unique about a company’s business model. So we look for companies with competitive advantages, including big barriers to entry that limit competition and support higher levels of growth and profitability.

How has growth investing fared coming out of the downturn?

In 2008 investors were scared and sold companies with high debt levels and moved into safer names. When the financial system didn’t collapse, lower-quality names bounced back and higher-quality companies lagged. But any future advance will probably include higher-quality companies. That’s where we are focused.

Why are you over-weighted in technology?

In general the tech sector has pretty strong balance sheets – not much debt, lots of cash and attractive valuations. Companies we own have healthy exposure to faster growing international markets, which should benefit their top lines as the global economy recovers.

The fund holds Apple, which has been a great company recently.

Apple dominates the digital music industry; continues to gain in the PC sector and in smart phones with the iPhone. They’re in the early stages of a long-term uptick in the smart phone category with lots of cash, no debt, a great brand and a strong history of innovation.

How are you approaching the healthcare sector?

Given the regulatory crosscurrents in healthcare, our focus has been very company-specific. One name we own is Gilead Sciences in the biotech space. It is highly profitable and dominates the treatment for HIV. We like companies that have limited exposure to potential generic competition or price controls and Gilead fits this profile.

Why do you like JPMorgan Chase in the financial sector?

JPMorgan Chase has emerged from the financial crisis even stronger. Much of its competition has been weakened or eliminated. It is well positioned to gain market share across many of its business lines and will likely be one of the first banks to increase its dividend given its tremendous financial strength.

What’s your take on the energy sector?

As global growth resumes, energy demand will follow – especially in many emerging markets. As energy prices tighten companies will spend more developing existing fields and searching for new sources. Oil service firms like Schlumberger, which has a strong global presence, should benefit.

Colgate is another top multinational you own.

Colgate is the global leader in oral care (toothpaste and brushes) and has a strong market presence in many fast growing international markets where oral care is a rising trend. All told, the company generates over 80% of its revenues from international markets. Oral care is also a sector where Colgate’s strong brand equity really matters and private label usage is not a major factor, thereby supporting high levels of profitability.

Waddell & Reed has been very successful. What’s your secret?

Our managers and analysts really work hard at trying to understand companies in an objective way, with a healthy degree of skepticism. There is also a high degree of collaboration among our entire investment staff which plays to the benefit of our clients and the organization in general. Furthermore, having our own internal research staff has also paid off because we don’t have to rely on Wall Street recommendations.