Download Mackenzie Cundill Value Fund – Series C

Mackenzie Cundill
Mackenzie
Q1 -2016 COMMENTARY
Value Fund – Series C
Performance Summary
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During Q1 2016, the Fund returned -7.0% vs. the MSCI World Total Return Index (net CAD) which returned -6.5%.
Contributors to Performance
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The largest contributor during the period was POSCO, the largest holding in the fund. It is a great example of how patience can
pay off. This stock has been greatly undervalued, but due to slower demand and a glut of low quality cheap products, the price of
the stock had been pushed down last year. The fact is POSCO’s core steel profits have been stable over the last 3 years. This year
so far we have seen steel prices recovered faster than iron ore prices, which the team believes should help POSCO’s margins.
Industry capacity is shrinking and is expected to continue to shrink. The stock was up 25% (CAD) during the first three months
of the year and the stock is still only trading at half of book value. We believe cost cuts, restructuring of poor performing
operating units, and continued focus on premium products sales will be drivers going forward. We continue to see upside on this
position.
From a regional perspective, a higher allocation to Canada and South Korea were contributors to returns.
Detractors from Performance
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The beginning of the year was challenging for financials; it was the worst-performing sector in the MSCI World Index. Our
holdings in Citigroup, AIG and Bank of America were the top detractors during the quarter. Uncertainty in global markets
caused the Federal Reserve to delay and decrease the number of rate hikes planned for 2016, which affects the profitability of
financial institutions. The markets were also concerned about the energy-related losses for the banks, although the loan exposure
to energy companies is a small segment of the banks’ balance sheet. We believe that the markets overreacted and the banks have
sufficient capital to cushion any defaults.
No allocation utilities and consumer staples also detracted from returns.
Portfolio Activity
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We purchased the Chinese search engine Baidu. This price fell significantly in conjunction with the slowdown in China and has a
significant discount to NAV. Baidu is a Chinese search engine, akin to Google. It has a growing search business with growing
margins and it has a variety of secondary internet-related companies ranging from video, travel, food delivery, and car services. We
analyzed the company using a sum of the parts analysis. Breaking up the company, we paid a reasonable price for the search
business and the cost of the secondary businesses, which have upside potential, were not priced in.
The new portfolio managers took over the fund on March 24, 2016. They are evaluating the existing portfolio holdings based on
their investment framework and are seeking new opportunities to enhance the portfolio.
Outlook
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We believe on-going volatility in the global equity markets will present opportunities for value managers like ourselves. We look
for out of favour stocks due to temporary concerns regarding their fundamentals. Our analysis calculates the intrinsic value of the
businesses we consider owning. Then our purchase price incorporates a margin of safety reflecting the quality of the underlying
business. Our investment thesis identifies the drivers of value creation in the stock.
We are focused in our stock selection and the portfolio has a diversity of value opportunities.
Equity market performance thus far in 2016 can best be characterized as uneven, with Canadian Equities outperforming their
developed market peers (in CAD). Going forward, energy prices will inevitably determine the near term direction of our domestic
equities, however Canada has exited its energy-led recession on the shoulders of a healthy manufacturing sector (bolstered by a
weak CAD). Canadian equity valuations in general remain attractive in the context of comparable fixed income investments, and
we currently see value in Energy, Media, and Food Retail.
We believe foreign exchange headwinds will in all likelihood continue to curb U.S. multinational earnings growth this year, and
operating margins are peaking as labour force capacity tightens. However the U.S. domestic economy remains strong, monetary
tightening is now expected to occur at a slower pace in this year, and lower oil prices should potentially be beneficial to the U.S.
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consumer which would further support economic and earnings stability. Interest rates also remain historically low on an absolute
basis, which as in Canada, make comparable fixed-return asset classes look unappealing to equities. We would classify the overall
margin of safety in U.S. Equities as moderate, however we are currently finding value in Financials, Industrials, and Energy.
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Internationally, the political risks and mixed economic data out of EU and the U.K. is expected to create investment
opportunities. We are seeing better value in more segments of the market, including financials, health care, and industrials. China’s
shift to more of a consumer-driven economy and away from capital intensive growth may present opportunities. However, the
outlook for its commodities demand is cloudy. We are watchful about risks in commodities ex-energy even though some stocks
in this sector are looking depressed.
In Japan, the success of Abenomics is far from guaranteed despite having its stock market pushed up by a weaker Yen over the
last few years. We will pursue select bottom-up driven opportunities in the Japanese market.
Energy prices look unsustainably low in the short term as new capital investments in the sector contract and global demand
continues to grow. In addition, current prices are putting tremendous pressures on the budget of many OPEC and non-OPEC
nations. However, costs in the swing producing regions (U.S. shale) have come down and capacity can come back with
improvement in pricing. There are values in the space but we are closely monitoring the risks associated with energy investing in
the current environment. In the near term, politics from OPEC could potentially drive significant volatility.
PORTFOLIO MANAGEMENT TEAM:
Jonathan Norwood, Senior Vice President, Investment Management, Mackenzie Investments†
Richard Wong, Senior Vice President, Investment Management, Mackenzie Investments
†
Effective March 24, 2016 Jonathan Norwood and Richard Wong were named lead managers of the Fund
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments.
Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns
as of March 31, 2016 including changes in unit value and reinvestment of all distributions and does not take into account sales,
redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns.
Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in the
investment products that seek to track an index.
This document includes forward-looking information that is based on forecasts of future events as of March 31, 2016.
Mackenzie Financial Corporation will not necessarily update the information to reflect changes after that date. Forward-looking
statements are not guarantees of future performance and risks and uncertainties often cause actual results to differ materially
from forward-looking information or expectations. Some of these risks are changes to or volatility in the economy, politics,
securities markets, interest rates, currency exchange rates, business competition, capital markets, technology, laws, or when
catastrophic events occur. Do not place undue reliance on forward-looking information. In addition, any statement about
companies is not an endorsement or recommendation to buy or sell any security.
The content of this commentary (including facts, views, opinions, recommendations, descriptions of or references to, products
or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an
endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy
and completeness, we assume no responsibility for any reliance upon it.
Fund and Benchmark Performance as at: March 31, 2016
1 year
3 years
5 years
10 years
Mackenzie Cundill Value Fund Series C
-12.3%
3.7%
2.6%
1.4%
MSCI World Total Return Index (net CAD)
-1.0%
15.9%
12.9%
5.4%
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