Manager Views

Generating wealth the Saxon way

Investing in balanced funds is becoming a popular option for many Canadians. And with a 24-year track record of managing small-cap, multi-cap, balanced and fixed income portfolios, Mackenzie Saxon has earned a reputation as one of Canada’s top value-investing shops. In the following article Suzann Pennington, Senior Vice-President discusses Mackenzie Saxon Balanced Fund, the #1 Canadian equity balanced fund over 20 years.¹

What is Saxon’s investment approach?

We’re bottom-up value investors. Ben Graham, the father of value investing and mentor to Warren Buffett, wrote about 90 years ago that investors can build a “margin of safety” into their portfolios by buying stocks at a discount to fair market value. From a stock perspective, following that strategy tends to protect us against downside risk. But another really important part of what we do at Saxon involves how we construct our portfolios. You can pick great stocks, but be a lousy fund manager if you don’t know how to construct a portfolio effectively.

Let’s talk about portfolio construction and Mackenzie Saxon Balanced Fund.

There are several factors that separate us from other value managers. First, we draw from an all-cap universe by including small- and mid-caps as well as large-cap stocks. This gives you a larger universe of stocks to choose from and that leads to better diversification. It also allows you to take advantage of the mispricing that most commonly occurs in small- and mid-cap stocks. Secondly, we differ from other funds in the variety of valuation tools we use. Using a number of tools to value stocks, allows us to consider a broader variety of companies in a wider range of industries and that produces better diversification. And third, we don’t overweight any single position to the extent that it exposes the portfolio to a significant degree of risk of underperforming if something goes wrong.

How important is asset mix in the fund?

The truth is that one single factor dominates returns on balanced funds, and that is asset mix. Despite the recent extraordinary market conditions, equities do outperform other assets over the long term. And maximizing equities and minimizing cash with a 70% equities to 30% fixed income asset mix, has provided Mackenzie Saxon Balanced Fund investors with higher long-term rates of return without significantly adding to risk.

If it’s that straightforward, why have so many balanced funds faltered?

Most managers recognize the importance of asset mix, but they think they can time the market. Even if you get all the economic factors right, if you’re off by several months or miscalculate the economic impact on returns, you will whipsaw the fund’s performance. It’s just too hard to get it right on a consistent basis. By trying to time the market, most people end up reducing returns and increasing volatility. We saw a lot of that last year.

But doesn’t maintaining a 70/30 split between equities and fixed income increase volatility?

It doesn’t have to. For example, if you look at Mackenzie Saxon Balanced Fund which has had a 70/30 split for many years, the volatility is only slightly higher than a 50/50 mix.

What do you attribute that to?

In Mackenzie Saxon Balanced Fund, both equities and fixed income are actively managed. This is where, as asset managers, we earn our keep by managing volatility. We do this by following a value style when picking stocks, diversifying the portfolio and doing rigorous credit analysis. These are the three key strategies that we use to manage risk in the portfolio.

¹ Source: Morningstar PALTrak at May 31, 2010