Toy Manufacturer helps stock fund that is top Glow in market

A toy manufacturer, a 100-year-old railway and a business that literally prints cash are among the eclectic mix of shares forcing Canada’s top-performing equity fund in an age of slow, “sloppy” growth.

“We are focused on the feeling that slow growth and deflation will continue and we have been investing accordingly,” David Arpin, senior vice-president and portfolio manager of the Mackenzie Canadian Growth Fund, said in a telephone interview.

The $1.1-billion fund, managed by Toronto-based Mackenzie Investments Corp., returned 10 percent in the first half of this year, which makes it the best acting of 61 Canadian-focused equity funds with over $1-billion in assets under management.

Its plan is to find stocks that can generate 10-per-cent to increase in cash flow. The fund is split about 50-50 into Canadian and U.S. equities, with the U.S. holdings providing diversification from Canada’s commodity-heavy stock exchange.

“We’re a growth investor but we are not hyper-growth,” said Dina DeGeer, senior vice-president and staff lead of the Mackenzie Canadian Growth Team. “We do not like deeply cyclical businesses, we do not like commodity companies, we do not like capital-intensive businesses.”

Mackenzie looks for stocks with a leadership position in their industry. “We love duopolies since they have pricing power and if you’ve established a massive strong business moat you do not have new competition coming in,” Ms. DeGeer stated.

Among the fund’s top holdings is Canadian National Railway Co.. The Canadian railroad industry is a quintessential duopoly, dominated by CN and Canadian Pacific Railway Ltd., and CN provides Mackenzie vulnerability to natural sources while reducing the cyclicality that is typical of commodities, Ms. DeGeer stated.

Another high investment is toy manufacturer Spin Master Corp., making up only less than 5 percent of the fund’s holdings. Ms. DeGeer explained the Toronto-based firm as “a true gem.” The business counts PAW and Hatchimals Patrol, two of the toys moving, in its stable.

“While the industry longterm develops 4 percent organically, they’ve increased at least 2 1/2 to 3 times that,” she said, citing the revolutionary culture that won Toronto-based Spin Master three Toy of the Year awards in February. “I think they’re just in a class of their own.”

Other leading Canadian holdings in April 30 included Royal Bank of Canada, Telus Corp., CAE Inc., Metro Inc. and CCL Industries Inc., a packaging and labels manufacturer that entered the money-printing company when it acquired Innovia Group for $1.13-billion in December. Innovia makes the polymer banknotes used in other countries, Britain, Mexico and Canada.

“It’s a really stable firm with 4 to 5 percent organic growth year in and year out, constantly getting operating efficiencies and very large free cash flow,” Ms. DeGeer stated. “They’ve made a great deal of acquisitions in their history and they’ve been excellent allocators of capital.”

The Mackenzie Canadian Growth Fund’s strategy of focusing on stable companies that generate consistent free cash flow expansion works in most market environments except once the market “gets really excited and concentrated in one area,” like the technology bubble of the late 1990s, Mr. Arpin said.

That is not the case this season. The grade Samp;P/TSX composite index is down 1.3 percent year to date, lagging the majority of the developed world.

“In markets like we have seen for the past five years, that have been sloppy, slow, slow, that is probably our very best environment,” Mr. Arpin said.

Also on the Planet and Mail

Carrick Talks Money: Is Canada returning to an ‘inflation country’? (The Globe and Mail)

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