Paul Musson will soon be developing the frown lines that come with being chief worrier for the Ivy group of funds, which are sponsored by Toronto-based Mackenzie Financial Corp.

After working at the side of veteran fund manager and mentor Jerry Javasky for the past nine years, Musson has taken over responsibility for the seven Ivy funds as Javasky retires. As senior vice president of Mackenzie, Musson leads a team deeply steeped in the philosophy behind Javasky’s steady, conservative investment style of constantly looking for what might go wrong.

“I’m conservative and I’m a worrywart, and with that base I’ve picked up different things and formed my investment philosophy,” says Musson, 47. “Our goal is to tread carefully at all times and make as few mistakes as possible.”

Learning the Ivy investment style from Javasky was at least a three-year process for Musson — even though he had previously worked as a senior investment analyst for AIC Ltd. of Burlington, Ont., prior to joining the Ivy team in 2000.

Javasky’s teaching method was to ask Musson to study a company for its investment merits in order to make a case as to whether or not it should be held by an Ivy fund. Meanwhile, Javasky would analyze the same company. Then the two analysts would compare their findings.

“We’d get together and compare our thoughts about the company,” Musson says. “Then, we’d do the same thing for another company. And every time I’d get closer to what Jerry was looking for in the business. The process forces you to think — and that’s how you learn.”

Musson is the one now responsible for mentoring new team members; he has already started with Matt Moody, the newest member of the team, who joined three years ago. The team also includes portfolio managers David Arpin, Stephanie Griffiths and Abe Gottesman.

The team’s focus is to carry on the investment philosophy that has earned the Ivy funds reputations as low-volatility performers with a history of preserving capital in tough times. Musson is looking to add one or two more people to the team, but is in no hurry to do so.

“It’s important to find people with the right aptitude, investment personality and personality,” he says. “We are as careful in hiring as we are in investing. We don’t want to hire someone who’s not going to work out.”

There has been remarkable stability within the Ivy management ranks, says fund industry analyst Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc. Hallett foresees no change in management style with Musson in charge. “Jerry Javasky planned for continuity and succession,” he says, “and there are no major concerns. There will be the same approach as before. So, for those who liked Javasky’s style, there’s no reason to worry.”

Ivy fund portfolios tend to be tightly focused, with no more than 25 holdings. At the heart of the Ivy style, Musson says, is paying close attention to both sides of the risk/return equation and never forgetting to consider what might go wrong and what might change.

“We don’t wait for a rough economic environment to worry about risk, or a strong economic environment to worry about return,” he adds. “We worry about both at all times. If you wait until it’s a poor economy to worry about capital preservation, it’s too late.”

For a company to qualify as a holding in an Ivy fund, it must first have a strong balance sheet with minimal or no debt. In the largest fund in the group — the $2-billion Ivy Foreign Fund — approximately one-third of the companies held have no debt; in the $200-million Ivy European Fund, about half of the companies are debt-free.

The team also looks for companies that generate high levels of free cash flow and have the ability to fund growth internally. Such companies are able to access financing should they need to make an acquisition, but the ability to grow at a superior level under the power of their own profits is key.

The Ivy team also avoids deeply cyclical companies that tend to have erratic earnings streams, including many resources companies. Imperial Oil Ltd. is an exception and remains one of the Ivy stable’s longest-standing holdings.

@page_break@“We have more comfort with non-cyclical companies that won’t suffer as much as the average company in a economic downturn,” Musson says. “That tends to keep us away from many resources companies, although we don’t totally avoid them. If we can find a resources company with a sustainable competitive advantage, we reserve the right to make exceptions.”

The target company must also have a sustainable competitive advantage, such as a strong brand name or business franchise, or a unique corporate culture. The Ivy team also seeks a management team that is cautious, careful and is not leveraging the balance sheet or taking big bets in business.

“We want managers who are investing their company’s money the same way we invest our money,” Musson says. “You put one toe on the ice, test it and, if it’s sound, move forward.”

Once the Ivy team finds companies that meet its criteria, it takes a hard look at their stock prices. The tendency is to be conservative when it comes to valuation but, Musson admits, valuation is part art and part science. “If you overpay for a great business,” he says, “it will be a lousy investment.”

The team meets weekly to discuss holdings and challenge each other in what Musson calls “a culture of intellectual honesty.”

Once a good business has been found, the team keeps a constant watch to see if the original investment thesis has been changed by an event such as a new competitor or a regulatory change.

“You can’t afford to fall in love with a business. And that can be easy to do when you spend so much time analyzing a promising holding,” Musson points out. “You may have led the charge on a name. But others are not as emotionally involved, and a difference of opinion can be a splash of cold water on your face. You have to be willing to say ‘No’ to an investment. That’s why we spend all that time examining something. If the answer is always ‘Yes’ at the end, why bother to do all the work?

“One of the things I always respected about Jerry,” he adds, “is his willingness to reconsider and never rest on his laurels. It’s dangerous to be wedded to previous assumptions if things change.”

During the past few years, the Ivy team has paid increasing attention to broad macroeconomic trends in addition to company fundamentals — not to take advantage of the trend, but to look for ways in which a broad trend may affect portfolio holdings.

“We don’t invest according to macro concepts, which are difficult to predict and impossible to time. But we look for risks they may create,” Musson says. “For example, if food prices are going up or the housing market is overheating, how can that hurt?”

Ivy funds have a reputation for being low-volatility performers and have held up well relative to many competitors and market indices during the market turmoil of the past year.

The $1.8-billion Mackenzie Ivy Canadian Fund, for example, fell by 19.8% in the year ended Feb. 28, far less than the 38.2% drop in the S&P/TSX total return index. However, for the 10-year period, the fund showed an average annual gain of 1.9%, less than the index’s gain of 4.6%.

“There is still a lot of risk out there. Having said that, we are long-term believers,” Musson says. “If things get nastier in the global economy, our companies will be affected. But if you’re looking out five to 10 years, a company with a great balance sheet, trusted management team and a sustainable competitive advantage is going to do well.

“These companies are good at what they do,” he adds, “and you wouldn’t want to compete against any of our companies.” IE