Ken O’Kennedy of Dixon Mitchell Investment Counsel.The Globe and Mail
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Ken O’Kennedy isn’t making predictions about if or when interest rates will drop this year – or by how much.
Instead, the chief investment officer at Vancouver-based Dixon Mitchell Investment Counsel Inc. prefers to focus on analyzing and understanding businesses he can own long term, regardless of the interest-rate environment.
The fundamental buy-and-hold strategy has helped his team achieve double-digit returns in recent years.
The Dixon Mitchell Total Equity Portfolio, with $1.5-billion in assets under management (AUM), has returned 16 per cent over the past year. Its three-year annualized return is 15.7 per cent, while its five-year annualized return is 14.2 per cent. The returns, as of Jan. 31, are gross of fees, which vary by the client and range between 0.8 and 1 per cent.
The five top holdings in the portfolio are Visa Corp. V-N (6.2 per cent), Dollarama Inc. DOL-T (5.9 per cent), Google parent Alphabet Inc. GOOG-Q (5.6 per cent), Berkshire-Hathaway Inc. BRK-B-N (5.5 per cent) and Alimentation Couche-Tard Inc. ATD-T (5 per cent).
The Globe and Mail spoke recently with Mr. O’Kennedy, who oversees about $2.5-billion of his firm’s more-than-$5-billion in AUM, about what he’s been buying and selling, and his advice for new investors.
Describe your investing style.
We focus on qualitative components of a business based on our own framework. When evaluating a company, we look at five elements: its industry, competitive position, business model, management team and ESG [environmental, social, and governance] performance. We think of ourselves as owners of businesses and try to identify those that can compound at higher rates over time. We have low turnover and highly concentrated portfolios.
What’s your take on the current market environment?
There’s a lot of speculation in the markets, particularly in sectors such as technology and artificial intelligence (AI). While I believe AI represents a platform shift in technology, and there will be opportunities to invest in this theme, it feels like it has been overextended.
Despite some of the current excitement around AI, many tech stocks are supported by fundamentals. Yes, they’re expensive relative to the market, but they’re also growing faster and have much better competitive positions than other companies. The U.S. market looks expensive, but the expected growth and quality are much better than the rest of the world. In other places, the valuations are more reasonable, but they come with lower quality, growth and cyclicality.
What have you been buying?
We added Kinaxis Inc. KXS-T, the Canadian supply-chain management software company, to our Total Equity Portfolio in January and February. We first bought this in our small-cap fund in 2016.
Often, as these businesses execute and grow, they’ll find their way into our Canadian Equity or Total Equity mandates. We generally like software businesses, especially profitable ones. Its product is a huge upgrade for customers, replacing spreadsheets with an always-on view of the business. It’s a leader in this space and growing rapidly.
Kinaxis recently launched a quicker-to-implement version of its product, which has helped it open up to the small- and medium-sized business market. It’s a well-run business with high-margin, recurring revenue from its software-as-a-service product. It’s an interesting business that we think can grow significantly.
We’ve also been buying Ametek Inc. AME-N, a Depew, N.Y.-based company that manufactures electronic appliances and electromechanical devices. Its products are used in the manufacturing of various components in the aerospace, defence, medical and industrial markets. Ametek creates value through acquisitions. It has a strong management team that’s focused on deploying capital effectively.
What have you been selling?
Oracle Corp. ORCL-N, the software and cloud computing giant, is a company we sold recently. We’ve owned it for more than a decade. We did okay with it. It hasn’t been one of our better performers. While it’s a very good business, we think it’s a bit overvalued. The overall business isn’t growing that fast, and its core database business is under threat from many competitors.
We also sold Thomson Reuters Corp. TRI-T. The company has undergone an incredible transformation since the sale of its financial and risk business in 2018. However, we see limited upside from here.
Name a stock you wish you bought or didn’t sell.
Constellation Software Inc. CSU-T is a stock I wish I had bought. It’s our type of business, and I’ve followed it for a long time. We own it in our Canadian Equity Portfolio, but I regret not owning it in our Total Equity Portfolio. We review it continuously; however, at these levels, near-term returns could be challenging for the stock.
What advice do you have for new investors?
Keep your fees low and take advantage of all the registered programs such as the tax-free savings account, registered retirement savings [plan] and, if you’re looking to buy your first home, the new first-home savings account. Also, people who work with financial planners tend to have better outcomes over time, but again, watch the fees.
This interview has been edited and condensed.
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