Fund Spotlight: MD Growth Investments

August 1, 2017

Telling the MD story of innovation and market leadership through one fund

Canada and the Canadian Medical Association (CMA) are each celebrating their 150th anniversary this year. Mutual funds don’t have the same span of history, but one fund is old enough to personify MD Financial Management’s story of innovation, market leadership and growth. MD Growth Investments (generally referred to as the MD Growth Fund) was launched in 1969 as part of the birth of MD Financial Management (MD).

From the beginning, we have always believed that our clients deserve to have the smartest people making decisions on their behalf every day. Our search for top talent has been relentless. Hiring Sir John Templeton as the MD Growth Fund’s first manager personified that focus on talent. Templeton, who died in 2008 at the age of 95, was in the vanguard of global investing when most people limited themselves to investing in their home markets.

His extreme take on value investing was summed up by his adage: “Invest at points of maximum pessimism.” There are countless examples of his investment prowess. One of the most notable was Templeton’s decision to be among the first to invest in postwar Japan before its economy went into overdrive. He didn’t let success blind him and, in the mid-1980s, he was among the first to sell out of Japan as it entered a prolonged slump.

MD Growth was so successful that in the early 1970s, clients would use the names “MD Management” and “MD Growth Fund” interchangeably. Modelled on one of the oldest global equity funds in the world—the Templeton Growth Fund, Inc.—the MD Growth Fund as well as MD itself would evolve in ways that few MD clients could have anticipated almost 50 years ago. In 2006, the fund peaked at $4 billion in assets when MD had only 20 other funds and pools. Today, with MD’s offerings considerably expanded to 25 funds and 13 pools, the fund has about $1.6 billion in assets.

More global diversification than the benchmark

Currently the fund is overweight in Europe, Japan and emerging markets and underweight in the United States, compared with the benchmark MSCI World Growth Index. Following several years of outperformance, U.S. equities have grown to account for nearly 60% of the benchmark. Accordingly, MD Growth is more diversified globally than the benchmark. We also believe that the relative value in the United States is not as good as in other markets, so in addition to improving overall regional diversification, this regional positioning is expected to add to returns.

From a sector perspective, the fund is modestly overweight in information technology and industrials, with underweights coming from sectors such as consumer staples and utilities, where the latter are more expensive and offer less growth—making their fundamental value less attractive.

A value-based philosophy at the core of MD Growth’s success

The fund invests in equity securities from around the world using an intrinsic value-based approach that seeks to invest in companies with attractive valuations relative to the future cash flows the companies are expected to provide. This approach has evolved over the years from the more contrarian value strategy pursued by Sir John Templeton. Today, the fund seeks the joint margin of safety of buying a company that is priced attractively relative to its future cash flows and is also expected to grow over time.

MD Growth an early innovator in Canada’s investment industry

The investment world has changed a lot since 1969. MD and the MD Growth Fund have changed along with it and have influenced the evolution of investing in Canada. MD Growth was among the first Canadian mutual funds to have a dynamic currency management strategy. We use this strategy to make decisions about which companies to invest in, independently of local currency implications. For example, we may really like a Japanese company but not be keen on holding the yen. The dynamic currency strategy allows us to own Japanese companies without holding a large yen position, and it also ensures that every currency exposure is converted into a purposeful active management decision intended to add additional value for the fund’s unitholders. This feature was added to all of MD’s foreign mandates in 2011.

A cash equitization mandate was added to all of our equity funds in 2011 to reduce the drag on returns from holding cash. Every day, we have clients buying and selling our funds. When we get cash to invest, we put it to work quickly by buying an investment, like a futures contract, that replicates market performance. Then, we look at what specific stocks to redeploy the money into. Currency management and cash equitization are separate and distinct.

MD Growth was also an early adopter of what would evolve into impact investing. Under the CMA’s guidance, MD has excluded tobacco from our funds and pools—starting with MD Growth. The decision for the fund to avoid tobacco products, from its inception, showed leadership on an important social issue that was not yet in the mainstream. This idea of impact investing has seen the rise of green and socially conscious funds around the world.

Today, every proprietary MD investment product is free of direct exposure to tobacco securities. We don’t buy individual securities issued by companies involved in the manufacturing of tobacco or tobacco-related products. We also actively screen out all tobacco producers, eliminating names such as Philip Morris, Altria or British American Tobacco. Even our MDPIM Index Pools are tobacco-free.

Popularizing the multi-manager approach

Another of the signature features that MD Growth adopted early on was the multi-manager approach, which we call MD PrecisionTM. The idea of combining portfolio managers with different specialties in one mutual fund has since caught on and been adopted by other investment firms.

CMA membership gives clients access to some of the most specialized and sought-after financial professionals in the world. Many of our investment managers work exclusively for institutions and are not ordinarily available to individual investors.

But no matter how successful an individual manager is, MD adheres to a disciplined approach to constantly evaluate manager performance and ensure that the right combination of managers are working together. This method recognizes that an individual manager’s investment approach often comes with unintended consequences, or is not sufficient to meet all of a client’s needs. When this has the potential to affect performance, we change management teams to achieve desired results.  

Three asset managers working in tandem to deliver value

Templeton’s indelible mark on the MD Growth Fund exists to this day and the current managers carry on his commitment to long-term, value-oriented investing. Each manager has a unique and complementary investment strategy with a view to achieving long-term capital growth and managing risk. The equity managers are AGF Investments and Walter Scott & Partners Limited. CIBC Asset Management runs the fund’s currency mandate.

AGF’s global core equity strategy employs an approach to global investing that has a conservative growth philosophy. The strategy combines a top-down country allocation framework to identify undervalued markets with bottom-up fundamental analysis that emphasizes corporate profit growth and attractive valuations. The advisor maintains disciplined controls at the country, sector and company levels with a focus on the portfolio offering strong diversification benefits.

Walter Scott’s focus is on companies it judges to be capable of sustained returns and superior earnings growth. Its buy‑and‑hold investment approach, allowing the selected stocks’ growth to translate into share price performance, typically results in low portfolio turnover. Walter Scott assesses each company’s business to understand the company and judge whether it can sustain its return structure into the future.

CIBC Asset Management seeks to maintain equity market exposure and to minimize the impact of cash on the fund’s performance. The advisors employ proprietary quantitative models focusing on key valuation, cyclical and momentum factors, and qualitative analysis to manage currency risk.

Impressive performance to match a proud history

A $10,000 investment at MD Growth’s inception (December 1, 1969) would be worth over $1.2 million as at June 30, 2017. That’s an average annual return of 10.7%.

The fund has also performed well in the face of adversity. During the late 1990s, the fund’s commitment to value investing faced headwinds during the euphoria of the dot-com bubble. During this period, many tech stocks were bid up to stratospheric valuations not supported by the underlying earnings and cash flows of the businesses. In time, this bubble ended badly, and MD Growth was well rewarded for avoiding the craze. The mid-2000s provided another challenge as the Canadian dollar rose against most developed-market currencies, and it became harder for global investors to generate decent returns, in Canadian dollar terms.

An established investment solution suited to 21st century challenges

MD Growth is suitable as a core foreign equity component of an investment portfolio for clients who are willing to accept a medium to high level of investment risk. The fund is not suitable as a short-term investment. With a portfolio consisting primarily of equity positions in global markets, the MD Growth Fund’s primary objective is to achieve long-term capital growth.

This is a diverse fund, with investments spread over many different markets to reduce risk. An MD Advisor can help clients determine whether MD Growth should be part of the mix of investment solutions in their portfolio, based on personal needs and objectives.

Values-based investing with MD’s Fossil Fuel Free FundsTM 

MD Growth’s mandate to avoid tobacco holdings, since 1969, finds its contemporary equivalent in the MD Fossil Fuel Free Equity Fund™ and MD Fossil Fuel Free Bond Fund™. These funds invest across stock and bond holdings while excluding companies involved in extracting, processing or transporting fossil fuels.

Most fossil-fuel-free funds available in Canada eliminate only companies involved in extraction. Developed in response to feedback from CMA members, MD Fossil Fuel Free Funds™ go a step further by also avoiding companies involved in processing or transporting these fuels.

The MD Fossil Fuel Free Equity Fund™ also includes a “positive impact sleeve” that seeks investments in companies that provide solutions to the problems caused by the use of fossil fuels. This could include companies that develop or fund positive environmental solutions like renewable energy and energy efficiency.

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