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’re talking about small- to mid-cap equities with Phil Taller, senior vice president, portfolio manager, and head of the Growth Team at Mackenzie Investments. We talked about names and sectors he likes, and we started by asking what 2023 has been like so far for small- to mid-cap companies.

Phil Taller (PT): The U.S. small- and mid-cap equities generally have not done much. They’re pretty flattish so far for the year. There is some enthusiasm about a soft landing, perhaps. But, still, I think there’s uncertainty and when there’s uncertainty, investors tend to gravitate toward large-cap companies that they may feel are more reassuring somehow.

Tailwinds for smaller companies

PT: There are a number of tailwinds that could arise for small companies. Aging demographics, infrastructure spending and certainly mergers and acquisitions can pick up. There are times when larger companies who are pushed to find growth in their own businesses will often look for smaller companies to acquire. It’s very much like lightning striking in any given portfolio. So, predicting that is impossible. But it can have an impact. Aging demographics and healthcare is a very interesting industry. All sorts of things that are driven by growth in the healthcare system come from small- and mid-cap companies. A great historical example is a company like [California-based] Dexcom, which makes continuous glucose monitors for diabetics. When we first bought it, it was a new-ish kind of technology just getting acceptance. And they’ve become more profitable, generating high margins, lots of free cash flow. That’s what can happen in a space like healthcare technology. Infrastructure spending, we do see that as a tailwind that could arise for small companies. You are seeing a lot of work being done in engineering and construction, diversifying of supply chains, reshoring to the U.S. and also different shoring. All that generates infrastructure spending, in which mid-caps can play a role.

How AI might play out in the mid-cap space

PT: We do think there’s a lot of value that could come from generative AI today, especially if you have proprietary data that you have collected over the years that is not easy to get. If you think of that data as gold, and if we think of some of the mega-tech players as owning the big mining equipment to surface the value of that gold, even though we may not own the mining equipment, we own the gold. And, in helping people manage their data, bring it together, out of different systems, and get it ready for analysis, we own a company called Alteryx, a fairly small-ish but a software company that does a lot of what they call extract, transform and load. So, it’s very much a tool that can be used to democratize the analysis of data, and we think it has a lot of high-value-added in business processes. We own a [New York-based] company called EXL Services, a business process outsourcer that, pivoted to adding a lot of data analytics capability. And they can add analysis to those business processes to add insight, to help grow revenue, to find efficiencies, to help companies better understand their own data and how to use it. We talked about healthcare, and we talked about Dexcom. In a very similar vein, we own [California-based] iRhythm, which is possibly in the same kind of stage that Dexcom was in. iRhythm is a maker of various heart monitors, mainly used today to capture data in order to diagnose atrial fibrillation. And we think they have a better solution than the historical approach, because this collects more data, in more real time. Coincidentally, there’s a device coming to fruition called pulsed field ablation, which is a better way to treat atrial fibrillation, probably faster and safer. And if there’s a safer, faster way to treat the disease, doctors might be more interested in diagnosing it. And the way to diagnose it would be with a device from iRhythm.

And finally, what’s the bottom line on investing in small- and mid-cap equities?

PT: This is a great hunting ground for growth companies in some of the earlier stages of their life cycles. You can find great innovations, high value-added companies that ultimately have the potential to become much larger. So, in my view, long term, it’s been a great space to look for investment opportunities.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Phil Taller of Mackenzie Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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Funds:
Canada Life Global Small-Mid Cap Growth Fund - mutual fund
Fonds:
Fonds de croissance petites et moyennes capitalisations mondiales Canada Vie - fonds commun de placement