Version:1.0 StartHTML:0000000236 EndHTML:0000007535 StartFragment:0000002754 EndFragment:0000007499 SourceURL:file://localhost/Volumes/CompositionFiles/%20%20Pagination%20Copy/Xtras/%20Columnists/Fundata/paterson%20volatility.doc
The Cundill Funds offered by Mackenzie Financial have long had a reputation as being contrarian, concentrated, deep-value funds, and Mackenzie Cundill Canadian Security Fund is no different. While it can lead to some impressive gains on a calendar-year basis, the Cundill approach can also ramp up volatility.
Lead manager for this Canadian-focused offering is Lawrence Chin, co-leader of the Mackenzie Cundill team, specializing in researching Canadian companies. He uses a bottom up, team-driven approach, conducting extensive fundamental analysis, looking for high-quality, well-managed companies that are trading at a significant discount to their estimate of its true value. Typically, this will result in selecting companies that have experienced some negative event that has caused them to fall out of favour with investors, resulting in a portfolio that looks dramatically different than the market indices.
As of Nov. 30, the fund was significantly overweight in financials (34.3 per cent), materials (14.9 per cent), and energy (10.4 per cent), and underweight telecommunications services (-0.1) and industrials (2.5 per cent). Cash was a relatively high 23 per cent. The top three holdings were Citigroup Inc. (NYSE: C), Granite Real Estate Investment Trust (TSX: GRT.UN), Celestica Inc. (TSX: CLS),
Volatility of returns
This positioning helped in 2012 (+20.1 per cent) and 2013 (+26.1 per cent), which resulted in outsized gains for the fund, but has been a drag on performance through 2014, as the fund gained 5.6 per cent for the year, significantly lagging the S&P/TSX Composite and much of its peer group.
Another drawback to the investment process used and the concentrated portfolio is that the fund can go through periods of extreme volatility. This was the case in 2008 and 2009 when it reached levels of volatility that were out of character with the longer-term norms for the fund. However, those who had the stomach to handle this volatility were rewarded with strong gains. Looking at recent numbers, it appears that the fund has started to settle down to volatility levels that are more in line with historic averages.
High cash cushion
Part of that decrease in volatility may be attributable to the fund’s high cash balance, which at 23 per cent hasn’t been this high since 2006-07. The manager believes that valuations are very high and has been having difficulty finding quality names trading at a deep discount to their estimate of their true worth.
Generally, I like this fund, the investment process, and the management team running it. However, I would be reluctant to recommend it as a core holding for all investors because of the potential for periods of significantly higher volatility. In my opinion, only those investors with an above-average risk tolerance and a long-term time horizon should consider it as a core holding.
Courtesy Fundata Canada Inc. © 2015. Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc. This article is not intended as personalized advice. Investments mentioned are not guaranteed and carry risk of loss.
