Welcome to Soundbites – weekly insights on market trends, and investment strategies, brought to you by Investment Executive, and powered by Canada Life.

For today’s soundbites, we discuss Canadian equities with Patricia Nesbitt, a portfolio manager and senior vice-president with Mackenzie Investments. We started by asking what sectors she favours right now.

Patricia Nesbitt (PN): Well, looking at the market, I don’t have to tell you it’s been a difficult and unusual market cycle. We’ve positioned the portfolio to take advantage of sectors benefiting from [a] recovering economy and very strong consumer spending. Particularly, I would highlight the consumer discretionary sector, with household saving rates very significantly elevated. We expect continued strong discretionary spending from North American consumers. So that’s one area that we’ve been overweight for quite some time.

Industrial is another area that we’ve focused on, economic recovery obviously being a tailwind for the sector, favouring rails, trucking, engineering, consulting firms, construction equipment and waste companies.

And then technology. We’ve owned an array of businesses offering superior growth in a number of different verticals in that space, be it IT consulting, information management, supply chain management, e-commerce systems — really businesses with compelling secular growth opportunities.

And we’ve even warmed up to the financial services space here recently with the outlook for credit provisioning, reversals looking quite favourable, strong capital markets performance, very healthy capital levels within all of the banks. And now, with interest rates looking to at least no longer be a headwind for the sector, that’s led us to increase our exposure to the space. So those would be some of the key sectors that we would be focusing on in the fund at the moment.

What companies she likes.

PN: One that I would mention is Boyd Group Services, an operator of collision repair centres across North America. They are a leading consolidator of this industry which remains highly fragmented. This stock will be a clear beneficiary of the reopening of North America in the year ahead.

Another name I would highlight would be TFI International in the industrial space. TFI is a North American transportation and logistics company. It offers a great exposure to a recovering industrial economy and, through their recent acquisitions like UPS Freight, should continue to post a tremendous top- and bottom-line growth.

And, thirdly, I would highlight Waste Connections — a name we’ve owned for quite some time. [It’s a] best in class North American waste collection company. Not sexy, but important business. Strong management team with very strong organic and acquisition-backed growth strategy. Strong free cash flow, supporting ongoing M&A and dividend growth.

I would also add companies like Equinix — a name that we own in the data centre space and it’s one of the world’s largest data centre operators. Again, huge secular tailwinds in that segment; growing resilient earnings; they’ve got a global footprint [that] allows them to compete and win new business; compelling revenue and earnings growth.

There’s also CGI group, [a] world class IT service provider, tremendous track record, leveraged to a recovering global economy and demand for consulting IT services, with a valuation that’s very reasonable.

Similarly, OpenText, operating in the enterprise information management software segment. [It has] strong free cash flow, improving organic growth, excellent M&A track record, valuation that’s reasonable, and an accelerating growth profile. So again, [it] just checks all the boxes that we look for in the kind of businesses that we want to have in the portfolio.

How market capitalization impacted performance in recent months.

PN: There’s no doubt that off the lows of last year, we’ve seen very significant outperformance by small-cap stocks relative to larger-cap companies, be it looking at the TSX small-cap index or the Russell 2000 in the U.S. and really to the extent that the small-cap universe is more heavily skewed to resource cyclical sectors, particularly in Canada, the recovery in energy and mining and gold stocks will be seen more dramatically in those smaller-capitalized segments of the market. But again, these companies, you know, have to check all the same boxes as the large-cap opportunities in the portfolio.

And, finally, her thoughts on the expected rotation from growth to value.

PN: Well, it’s funny. I look back, I’ve managed through more market cycles and style rotations than I care to admit! But we’ve been adhering to the established investment process, the buy-and-sell disciplines. We know from our collective professional experience that, over time, the market recognizes the kind of companies that generate superior returns on capital for their shareholders, regardless of some of these near-term cycles and rotation between themes, per se. And so, stick to your disciplines and over time those get rewarded and that certainly has been the case these last many years.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life.

Our thanks again to Patricia Nesbitt, senior vice-president and portfolio manager with Mackenzie Investments.

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