Manager Views

Equity Investing: Looking ahead to a resurgent US

Portfolio Manager Phil Taller believes today's bargain prices could disappear as the US bounces back

How do you build portfolios that can withstand market volatility and prolonged slumps?  For Phil Taller, Manager, Universal American Growth Class, the answer boils down to two words: resilient companies. That’s why Taller travels extensively in the United States in search of companies that not only dominate their sectors, but offer products and services that people need in good times and bad. And if a company can do all that with a clean balance sheet, it may be able to bounce back in uncertain markets quicker than its rivals. “The share price may go down in a selloff,” says Taller, “but the company itself should hold up pretty well when the product you are selling is value-added for a customer. It tends to give you a very sustainable business.”  (Click here to learn more about the fund’s performance)

Growing by avoiding risk

As a growth fund following a risk-averse strategy, part of its success can be attributed to the conservative estimates that Taller plugs into his financial models, including company growth rates and product margins. He also factored in a recession in 2008 and it allowed the fund’s investors to escape the worst of the market slump. “Financial services, consumer stocks and companies with really ugly balance sheets were hammered in 2008,” says Taller. “We didn’t own any of them in the fund.”

Taller included slower-growth assumptions in his models earlier this year when he became concerned about the strength of the economic recovery in the US.  As a result, he eliminated three positions before the full brunt of the recent market sell-off hit, bringing cash in the fund up to about 15%. A number of companies on Taller’s watch list also corrected to the point where they now appear attractively priced and he is considering deploying the cash he has raised.

Mackenzie Universal American Growth Class is currently owns 25-to-30 stocks, and at the end of July the largest industry weighting was in information technology at 29.4% followed by industrials at 17.4% and healthcare at 15.3%. Taller notes that technology investments in the fund have increased while holdings in US health care, a $2.4 trillion sector, have fallen because both governments and employers are trying to bring down their health costs. This cost pressure has made it  difficult to invest with a high degree of certainty.

On the other side of the equation, technology has grown in importance, as companies strive to cut costs in the downturn. “I think companies are looking for a way to be more productive and there are a lot of new technologies for companies to look at,” says Taller. “It’s a powerful theme, and I’ve been able to buy companies with technology that should help their customers stay productive.”

For example, he recently bought MicroStrategy, a software firm operating in the business-intelligence sector.  Companies are collecting multi-gigabytes of data from their customers and MicroStrategy’s technology allows them to sift through this information to refine or develop new business strategies. “More and more corporations are turning to the question of whether they can glean some useful meaning from the mountains of data they collect,” explains Taller. “And MicroStrategy is known for working with very large databases, so they’ve been growing nicely.”

The company is particularly well positioned in the social media sector, where Facebook’s 750 million subscribers have left behind a data trail. This data mine could be a gold mine if its insights could be turned into new business opportunities. “As you can imagine,” adds Taller, “all sorts of organizations and businesses will want to understand what’s going on in that data and MicroStrategy can help them do that.”

Dominance through innovation

Another element of Taller’s strategy is seeking out companies that are transforming the sector in which they operate through their innovations. For example, computer chips were originally designed for a specific use, but as the number of products grew that required them, so did the market for a chip that could be programmed for multiple uses.  After years of research, Altera Corp. brought a programmable chip to market. As demand grew, Altera became one of the strongest performers in the fund, at one point doubling in value. Today, it is growing almost twice as fast as the overall semi-conductor industry.

Taller is also finding opportunities in more traditional enterprises such as Carlisle Companies, an industrial conglomerate that manufactures construction materials, produces wiring and electronic systems for the airline industry and anti-friction break equipment for heavy machinery. Demand for the company’s products is growing, and Taller says Carlisle Chairman and CEO David A. Roberts (who he knows from a previous investment) is determined to streamline the business by concentrating on sectors that are performing well and selling more products internationally. Says Taller: “I just think there is a lot of opportunity here to create a classical US industrial success story.”

As the US economy emerges from the slowdown, it will put further upward pressure on energy prices. And Taller decided to play the natural gas sector through Chart Industries, which makes equipment used in the production of natural gas and the storage and processing of liquid natural gas. As natural gas consumption rises, Chart should be well placed to benefit, and not just from growth in the US. Countries like China will also likely need more natural gas and Chart has the technology to liquefy it so that it can be shipped abroad. “I think Chart is an interesting opportunity,” notes Taller. “The world has large natural gas reserves and I think we’re going to exploit them.”

Looking beyond the current downturn

After watching the debate over the US debt ceiling and the subsequent downgrading of the country’s debt, which in part triggered the August selloff, investors may have lost even more faith in the US – a market that Taller says was already under-owned by both Americans and foreigners. But he believes there are a number of reasons to believe the US economy will bounce back, including the redeployment of corporate profits, which have risen dramatically over the last two years. And that reinvestment should bode well for investors. “What drives stock markets are not headlines about consumer confidence, housing prices or unemployment levels,” says Taller. “Ultimately, stock markets are driven by corporate earnings."

There is also an intangible about the US that Taller often experiences first hand on his trips south of the border.  He describes it as a “spirit of entrepreneurialism” that has not been destroyed by the economic downturn. “Americans are very optimistic people who go for it,” says Taller. “That’s part of what makes it such a great breeding ground for great companies. That’s where Apple, Facebook, Twitter and LinkedIn come from.” And he believes it’s where investors should consider going.