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Millennial strategist steers a changing investment industry

Kara Lilly’s curiosity about macroeconomic, technological and political themes led to her becoming Mawer Investment Management’s first strategist.

Jeff McIntosh/The Globe and Mail

She may write a blog titled The Art of Boring, in which she extols her employer's trademark, "Be Boring, Make Money." But Kara Lilly is not bored. She's keenly interested in the forces that shape the global investing environment – so much so that her boss created a new position for her. Ms. Lilly is the investment strategist at Mawer Investment Management Ltd., a Calgary-based money manager with more than $40-billion in assets.

At 31, she is part of a new generation – the millennials – helping to steer the swiftly changing investment industry. Ms. Lilly, who joined Mawer as an equity analyst in 2009, holds the esteemed chartered financial analyst (CFA) designation. Her curiosity about macroeconomic, technological and political themes led to her becoming the firm's first strategist.

As such, Ms. Lilly helps manage risk and identify broad trends. She serves on the asset allocation committee that oversees the firm's popular Mawer Balanced Fund and the Mawer Global Balanced Fund, both managed by Greg Peterson. The committee determines the proportion of stocks, bonds and cash in the funds.

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The Mawer Balanced Fund Series A won the 2016 Lipper award for the best five- and 10-year performance in its category (U.S. fund research firm Lipper Inc. is a unit of Thomson Reuters).

"My role is to take the macro and make it micro," Ms. Lilly said in a telephone interview from Calgary. Her research helps the firm's fund managers better understand some of the big-picture risks a company might face "so we can make the best risk-adjusted decisions." Macroeconomics comprises economy-wide factors such as inflation, price levels, growth rates, national income, gross domestic product and changes in unemployment.

"In order to understand the opportunities, you have to have some awareness of your surroundings," or how larger, macro themes might affect a company's fundamentals, she says.

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She recounts a visit to Spain in 2010, when the sovereign debt crisis was just taking off.

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"We held a Spanish bank (Banco Bilbao Vizcaya Argentaria) in our international portfolio," she says. After she presented her risk analysis, the investment team wisely "sold out of our position."

In the months leading up to the U.S. election last November, the Mawer team was light on bonds. "The positioning turned out in our favour" after the election, she notes.

Ms. Lilly also has taken on the role of Mawer's chief marketer. Given last year's difficult financial environment, conveying the firm's strategy to investors is important.

"The mood has shifted meaningfully since the U.S. election," Ms. Lilly says. "Growth and inflationary expectations have increased, business executives seem more confident and the mood in the market is generally positive," she adds. "This should give investors reason to pause."

Stock markets have enjoyed years of positive returns, "and yet many risks exist, including the potential dislocating effects of [trade] protectionism, growing populism in Europe, China's banking system and potential missteps with rising interest rates."

Mawer president Michael Mezei said in a report to shareholders that his firm's strategy – buying good businesses run by strong managers at reasonable prices – can put it at odds with a volatile stock market, leading to periods "when the companies we emphasize ("boring," wealth-creating) underperform the broad market." Many of the Mawer funds, which are known for their strong, long-term returns, underperformed their benchmarks last year, although the Canadian equity funds did better.

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The reasons vary. The Mawer funds tend to be light on energy and mining stocks, two categories that rebounded in 2016. Longer term, commodity producers "tend not to be wealth-creating," Ms. Lilly says. TSX-listed miners actually destroyed wealth, or economic profit, over the period from 2005 to 2016, she said in a recent blog. The mining sector makes up 8 per cent of the main Toronto stock index market capitalization.

"A lot of the time you win by not losing," she says.

Looking ahead, the Mawer team sees three important shifts. First, inflation expectations are rising, although less so in Canada. The result is that short-term Canadian and U.S. interest rates might well diverge, making Canadian fixed-income securities more attractive. Second, stock markets appear to be favouring sectors that stand to benefit from inflation at the expense of less cyclical ones.

The third development, good for actively managed funds, is that the tight correlation between stock and bond markets that began with central bank intervention post-2008 appears to be ending. This would create better conditions for stock pickers such as Mawer.

Last quarter, the Mawer team added to the balanced fund's Canadian bond holdings, which had fallen close to their 30-per-cent floor. They also added to their Canadian equity holdings.

"We believe that bonds play an important part in a balanced portfolio because they do not have the same volatility as equities in a down market," Ms. Lilly says. "Over time, bonds are still going to have positive returns as long as interest rates don't move up aggressively in the short term."

Ms. Lilly believes the Mawer strategy will pay off in the future as it has in the past. "We're keeping a steady ship, looking at creating resilient portfolios that can excel in a number of conditions," she said.

"At Mawer, we tend to agree with the Stoics: Step outside the crowd when integrity demands it," she wrote recently. The Stoics were an ancient Greek philosophical school, but the term has come to mean a person who can endure pain or hardship without complaining – an apt description of Kara Lilly.

For adventure, and to test her limits, Ms. Lilly turns to extreme sports. In 2015 she took up mountain biking, starting with a 24-hour endurance race in Canmore, Alta. A few days before the race, she broke her elbow. But she competed anyway, finishing fifth. That stoicism will serve the Mawer strategist well in what could turn out to be extremely volatile and difficult financial markets.

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