Manager Views

Is it time to invest in the US again?

Since the 2008-09 recession, Canadians have been nervous about investing in the US. Wall Street played a substantial role in engineering the financial crisis, and the American economy has only recently showed signs of sustainable growth. But investor resistance is a bit surprising when you consider that American companies are cash rich and have emerged from the recession leaner and more competitive. “People, including Americans themselves, have been under-invested in US equities, and that has shown up in relatively poor valuations for what are really great companies,” says Phil Taller, lead manager, Mackenzie Universal American Growth Class. “At some point the world will look at the positives in American companies and it’s going to change.”

Taller spends a lot of time travelling in the US, studying companies and meeting with management. This methodical research has paid off for investors. In fact, Mackenzie Universal American Growth Class is the only fund in the small/mid cap category carrying a five-star Morningstar rating. At the end of 2010, it also posted the best risk-adjusted returns over three and five years, and was the top-performing fund in its category during that five-year period.

The portfolio managers look for companies that can innovate, have growing revenues and are not being over-valued by the market. Adobe Systems, one of the world’s leading software developers, was recently added to the fund when its valuation tumbled after Apple refused to allow the company’s Flash technology to be used on the iPad platform. Adobe’s shares dropped, but Taller believed that the company would adapt and the shares would rebound. “Having been beaten up last year, Adobe’s valuation became really attractive,” explains Taller. “Its stock price has had a bit of a comeback, but we think it has more growth ahead.”

Adobe will adapt by offering the ability to generate content in both an HTML5 and Flash format. While Flash is still not allowed on the iPad, Taller believes the company will hold its market lead, and is in fact using its expertise to expand into corporate workflow processes and to help companies optimize their websites. In the end, Taller believes Adobe’s core business will not be hurt by Apple’s decision. “What we’ve seen after watching for a while is that Adobe really is the gold standard in content creation tools for creative professionals,” says Taller. “If the question is about output format, Adobe can adapt to that.”

In 2008, in what turned out to be insightful timing, Taller avoided the US financial sector, and as a result he did not own companies caught up in the financial crisis. In late 2010, after reviewing a number of firms in the sector, he added Signature Bank to the portfolio.

Taller says it dovetails with the fund’s investment strategy in two ways. First, the company, operating primarily in the greater New York City area, is innovative. It does not have a retail branch network; instead, teams of specialists work directly with small and mid-sized companies, with loans in the sub-$25 million range. Secondly, the company is showing accelerating loan and deposit growth, with the shares recently breaking out to new highs. “We struggled to find a bank with a unique growth thesis to it,” says Taller. “And we think we found one in Signature Bank.”

Two long-time holdings in the fund, Altera and Edwards Lifesciences are indicative of Taller’s belief that the ability of a company to innovate should be a key part of any investment strategy. For example, Altera’s computer chips can be programmed by the end user to perform any number of tasks. The market has started to recognize this, and in 2010 its revenues surged by 60% and the stock has almost doubled. “I think 2010 will go down as the year we saw Altera’s chips start taking a lot of market share,” explains Taller. “And it’s still pretty reasonable in terms of price.”

It’s a similar story with Edwards Lifesciences, which has developed a less-invasive device for heart valve replacements. They are close to gaining regulatory approval, and the stock has almost doubled. Explains Taller: “The trial results showed that its valve will save lives, and you can see it in the stock price.”  Taller is continuing to look for new names in the US, but is sector agnostic. “I’m open to anything,” says Taller. “If I can find an idea that is a little less discovered or popular, I’ll go there.”