Why now’s the time for value investing

Over the past decade, value investors’ fondness for cheap and dependable stocks has often placed them behind more growth-oriented investors. In early 2022, however, interest rates soared as central banks moved aggressively to counter inflation. These rates increased rapidly over a short period of time and have begun dampening consumer spending. Investors are no longer able to count on unusually low interest rates going forward. This signals an environment for which a value-oriented approach might be better suited.

Understanding the value space

When it comes to value investing, there are different approaches and categories to consider. The Mackenzie Cundill Team looks at value in three main buckets:

1. Deep value: Stocks that are deeply out of favour, often due to specific issues like management changes, lawsuits, or earnings misses. They are typically very cheap but require certain events or changes to unlock their value.
2. Cyclical value: Stocks in cyclical sectors that become cheap during downturns. We focus on leaders in these sectors, as they tend to benefit from the economic recovery and have strong operating leverage.
3. Quality value: Stocks that trade at low valuations but have consistent cash flows, strong balance sheets and non-cyclical performance. They are more resilient during economic downturns and offer steadier growth potential.

Navigating the market cycle

Understanding where we are in the market cycle is crucial for our investment decisions. As bottom-up value investors, we pay attention to both macroeconomic data and company-specific factors. While we don't forecast the market's direction, we analyze trends and indicators to make informed decisions.

During the early stages of an economic cycle, both deep value and cyclical stocks tend to be deeply out of favour and present attractive opportunities. As the cycle progresses, cyclical stocks rally, driven by the economic recovery. In the late stages of the cycle, we shift our focus to quality value stocks, which are more resilient and less affected by economic downturns.

Recent performance and opportunities

Looking at our recent performance, the Mackenzie Cundill Value Fund has been ranked in the top decile in the three-year period, despite the market not being intuitively value-oriented. As value investors, we try to identify businesses that are cheap based upon our estimation of intrinsic value. Heading into 2024, the cost of capital is very relevant and so are valuations.

At this stage of the cycle, we emphasize quality value stocks, which are undervalued securities that have resilient cash flows and balance sheets. We believe a quality bias is important as we monitor if (and when) the global economy will go into a more meaningful pullback.

Some of the attractive opportunities we have found include:

• SNC Lavalin: This Canadian company has faced scandals and a significant drop in stock price. However, a clean-up in operations and recent strong quarters are promising. With its leadership in engineering services and its infrastructure spending, there is significant upside potential.
• TJX: This retailer, known for offering bargains, performed well during the pandemic. As consumers look for affordable options, TJX has the potential to benefit from the economic slowdown and attract bargain hunters.
• Daimler Truck: This German company, a spinoff from Mercedes-Benz, is the global leader in large trucks. With a healthy balance sheet, strong cash position and a focus on electric-driven trucks, it shows significant growth potential.

The Cundill Team’s investment decisions are driven by bottom-up analysis and a gradual shift in portfolio positioning based on market conditions and company-specific factors.

Value investing requires a deep understanding of the market cycle and the flexibility to choose from the three categories within the value universe. The team’s approach to positioning portfolios through the economic cycle incorporates fundamental analysis with a focus on downside protection.

While we believe this is an all-weather approach to investing, the current environment provides an opportunity for investors who want to add greater value exposure to their portfolios.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The content of this document (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.

Performance for the Mackenzie Cundill Value Fund Series F for the period ended October 30, 2023, is as follows: 8.8% (1 year), 9.9% (3 years), 1.7% (5 years), 2.5% (10 years). Source: Mackenzie Investments.

Quartile rankings are from Morningstar Research Inc., an independent research firm, based on the Morningstar Global Equity category, and reflect the performance of the Mackenzie Cundill Value Series F for the 1-year, 3-year, 5-year, and 10-year periods as of October 30, 2023. The quartiles divide the data into four equal regions. Expressed in terms of rank (1, 2, 3 or 4), the quartile rankings compare how a fund has performed relative to other funds in a particular category and are subject to change monthly. Ranking for the Mackenzie Cundill Value Series F for each period are as follows: one year – second quartile; three years – first quartile; five years – fourth quartile; ten years – fourth quartile. The number of Global Equity funds for the Mackenzie Cundill Value Series F for each period are as follows: one year – 1918; three years – 2086 funds; five years – 1414 funds; ten years – 649 funds.

Percentile rankings are from Morningstar Research Inc., an independent research firm, based on the Morningstar Global Equity category, and reflect the performance of the Mackenzie Cundill Value Series F for the 1-year, 3-year, 5-year, and 10-year periods as of October 30, 2023. The percentile rankings compare how a fund has performed relative to other funds in a particular category and are subject to change monthly. Ranking for the Mackenzie Cundill Value Series F for each period are as follows: one year – thirtieth percentile; three years – eighth percentile; five years – ninety-eighth percentile; ten years – ninety-eighth percentile.     The number of Global Equity funds for the Mackenzie Cundill Value Series F for each period are as follows: one year – 1918; three years – 2086 funds; five years – 1414 funds; ten years – 649 funds.

Disclaimer: This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of October 30, 2023. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.

The content of this article (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.