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Building resilience through volatility · The Invested

• 0:10
  Rajan Bansi (00:04)
• 0:13
  You're about to hear my conversation with Catherine Owen, portfolio manager with McKenzie's Global Equity and Income Boutique. Today, we'll spend some time talking about McKenzie's flagship global dividend mandate with Catherine and get her perspective on what the conflict in the Middle East and surging input costs means for the portfolio, whether or not investors should be in full on defensive mode and the implications of the K-shaped economy for opportunities in the United States.
• 0:16
  Rajan Bansi (00:58)
• 0:19
  Welcome to The Invested, a podcast from McKenzie Investments. My name is Rajan Bansi, head of portfolio construction. Today, I'm joined by Catherine Owen, portfolio manager with McKenzie's Global Equity and Income Boutique. Catherine, thank you for joining the podcast today.
• 0:22
  Katherine Owen (01:13)
• 0:25
  Thank you. Great to be back.
• 0:28
  Rajan Bansi (01:16)
• 0:31
  Excellent. Now, Catherine, we're going to spend our time today talking about McKenzie's flagship global dividend mandate. And I'm going to start with geopolitics. We are now about eight weeks into the US-Iran conflict and there's a lot going on at this stage. I was reading this morning negotiations not only to end the conflict, but also open the straight of her moves and address Iran's nuclear ambitions. Now, not going to ask you to do a deep dive of the geopolitics, but instead, what is this eight week period meant to you as a portfolio manager?
• 0:34
  Katherine Owen (01:49)
• 0:37
  You know, it's so easy to get whipsawed in this market and I would even broaden it out to before the war even began. Like if you just think about the year to date, right? In 2026, it's really been a bit of a roller coaster. The overall market hasn't been wildly volatile, but leadership has really constantly been shifting beneath the surface. So if I can just bring it back to the beginning of the year,
• 0:40
  it seems like forever. But when we were at the beginning of the year, we're kind of talking about markets broadening out. It wasn't just a mag seven market anymore. We had more participation across sectors, across geographies, a pretty, pretty healthy shift, right? From, from the concentration that we saw the last few years. And then in March, the conflict in the Middle East triggered another rotation. We saw energy stocks spike.
• 0:46
  And investors really shifted more defensively as geopolitical risk came back into focus. And now we're here in early April and the market is already starting to look through this uncertainty and risk and have rebounded quite strongly and we see momentum back towards AI. So when we're thinking about, you know, the Middle East as with, I would say any event, like we're really trying not to stay too much in the moment.
• 0:52
  What we really want to do is stay forward looking. Because the war clearly isn't over today. As you mentioned, there's still a lot of headlines signaling one thing or another day in, day out. But investors are already kind of looking towards the of the war and thinking that things may be less bad. So when we're thinking about the conflict in the Middle East, we're really not
• 0:58
  trying to call exactly when it will resolve, but really try to focus more on what the lasting effects may be, particularly the second order impacts. So for example, if inflation proves to be stickier, then rates may not come down as fast as expected. And we think about what impact that may have on the businesses that we own and how markets may price in different businesses as well.
• 1:04
  Rajan Bansi (04:05)
• 1:07
  Fascinating place to start our conversation. And Catherine, I'm really glad that you went back to the start of 2026 because as you run through those phases, it really does seem we've already had three years truncated into the first four months of the year. You mentioned something about input costs. There are some investors who feel we're in the midst of an input cost shock, especially in Asia and Europe, where there's so much gas imported from the Middle East.
• 1:10
  For you as a portfolio manager, how do you unwrap this? How do you think about margins given that as an investor you are looking around the world for the best opportunities?
• 1:16
  Katherine Owen (04:43)
• 1:19
  When you think about our approach, one of the most important aspects of the business that we own is that they have strong pricing power. That's good when input costs are benign, but really great when input costs are on the rise. So as I talked about earlier, we do believe that energy costs are likely to remain higher for longer. And really thinking
• 1:22
  through how that impacts inflation, particularly cost inflation, because it is going to make it more expensive for companies to produce goods. And you mentioned margin resilience. That is really a trait of companies that we own. We want margins that can thrive in good times and in tougher times. So when you think about consumer staples, which is a big part of our portfolio, a key question is who can pass on these higher costs
• 1:28
  without losing demand. So when we think about Coca-Cola, we do believe that Coca-Cola has a product diversity, the brand strength that does support pricing power and can raise prices but not sacrifice volume. So in other words, they have inelastic demand. So if they raise prices, it's really not going to impact consumers purchasing less of their goods. When we think about
• 1:34
  other parts of consumer staples that are in more commoditized categories, that may be harder to do. Consumers may be quicker to trade down to private label options. They may be want to trade down to lower priced alternatives. And that dynamic really underpins a more cautious stance on staples that are in the household goods category.
• 1:40
  say like a Procter and Gamble, for example. So when we think about pricing power in staples, I mean, this is an area that we're actually spending quite a bit of time on because when you think about what happened through COVID, a lot of these companies really pushed through significant price increases. We saw Coca-Cola, Pepsi, a lot of the other staples pass through double digit price increases. But then when we think about the consumer,
• 1:46
  Katherine Owen (07:02)
• 1:49
  They were also flush with cash. They weren't really spending a lot on other things, so they could afford to pay more for daily essentials. Today, prices are starting from a higher starting point. They're more elevated. And when you think about the state of the consumer, they're more stretched. Cost of living costs are rising. They're not as flushed with cash as they were a few years back. And you could argue that
• 1:52
  today, they're more pressured because it is more difficult for their wage costs to offset the rising cost of inflation. So we do continue to like staples, but really focused on allocating towards companies that do have that pricing power and that can raise prices to offset cost increases so that their margins don't come under pressure.
• 1:58
  Rajan Bansi (07:52)
• 2:01
  That's very good, appreciate that. We have in the past talked about focusing on companies that have strong pricing power, but I actually really like how you frame that post-COVID. During COVID, consumers were flush with cash. In 2026, maybe not so much the case, and these price increases do feel cumulative. Now, I want to stay on that theme because tip of the cap to you, if I go back to your participation on the
• 2:04
  podcast going back to at least 2024, you have been talking about this K-shaped economy in the United States, how those who own financial assets, those who are affluent are doing rather well. Many other consumers are not. And this is especially true in the United States. Again, as a
• 2:10
  global investor, is that still the case? Is that still what you're observing even now as we go through earnings season?
• 2:16
  Katherine Owen (08:46)
• 2:19
  It is. It's really unfortunate for the consumers that are the bottom part of that, K, because their lives are just not getting easier. And especially during this conflict in the Middle East, seen gas prices go up. I mean, you can argue that gas prices are not as big of a wallet share as it was, say, a few decades ago. But at end of the day, it's still costing them more,
• 2:22
  to go places, to go about their everyday lives. We're seeing food prices go up. And what I fear is that we may not have seen the end of this inflation, particularly in food, because there is a lag impact in terms of what's gone on in the Middle East. And for that to trickle through to the supply chain, to the end customer. So what I do fear is that, particularly with the lower end,
• 2:28
  consumer where they do not have as much exposure to the equity markets, as much exposure to the wealth effect, that they will be more challenged. I mean, that's very difficult, but it is making us think through the types of companies that we own and where we want to be exposed in the portfolio.
• 2:34
  Rajan Bansi (09:57)
• 2:37
  Very good. Now, follow up question that will combine the two or three questions I've asked you thus far in our conversation. If I were to take that K-shaped economic backdrop in the US, the geopolitical tensions in the Middle East that has led to a lot of volatility and it leads some investors to feel very nervous. One of the questions I field from investors is, well, why should I not go fully defensive right now?
• 2:40
  How about you as a portfolio manager? What keeps you from going fully defensive right now?
• 2:46
  Katherine Owen (10:30)
• 2:49
  Well, when you think about markets, you think about the economies worldwide, there's always something to worry about. And there's probably always something to be positive about. It's to what degree and to what extent the market has priced either the positive or the negative end. The easy answer on why not go fully defensive is if you had, you would have missed
• 2:52
  an over 10 % rally in the MSCI World Index since the Marshall O's. And the World Index, despite a lot of these risks and uncertainty, is still up 5 % new today. So I think that's a big reason why you shouldn't panic sell, particularly at the lows, and stay invested. Now, how you stay invested is key.
• 2:58
  And every investor has different risk profiles. If you can take more volatility, you probably do want to be in more of a growth driven fund, more technology driven fund that can benefit from all of these big growth opportunities everywhere. But the trade off is there's going to be a lot of volatility. Whereas how we construct the portfolio
• 3:04
  We want to construct a portfolio where you can still participate in the upside in equity markets, but do so in a lower risk and less volatile way so that when you're owning a fund like ours, you are benefiting from key trends like AI, but you still get the defensive characteristics of stocks like Coca-Cola. So what we really want to do is barbell the portfolio.
• 3:10
  so that it can benefit in a wide range of outcomes and create that resilience in the portfolio across different types of market environments.
• 3:16
  Rajan Bansi (12.22)
• 3:19
  That's great, Catherine. You you've certainly piqued my interest to ask the next question, which is going to seem rather obvious. I would love for you to go through a specific name that you like right now or think it is the appropriate time to talk about. You don't need to talk about Coca-Cola. You may, because my demand is inelastic and they have very strong pricing power with me. But, what's a name that you think would be relevant for our audience to hear about right now?
• 3:22
  Katherine Owen (12:46)
• 3:25
  I think I'm going to go to an AI-themed stock. So when you think about AI, mean, AI is back in favor. You're seeing a lot of excitement back again relating to AI. And most people think about AI and buying semiconductor stocks. So do we. We own semiconductor stocks that will benefit from AI.
• 3:28
  But just as important are the picks and shovels that are enabling the build out of AI. So when you're thinking about AI, AI needs an infrastructure to run on. So with increased use of AI, every time we use Chatchabee Tea or Gemini or use a Cloud Agent, we're using more more data. And those data's
• 3:34
  needs to run in data centers. So we're seeing this massive build out in data centers in order to basically meet all of this exponential AI demand worldwide. And these data centers are extremely power intensive. They need very advanced electrical systems, energy management, cooling to operate efficiently. And when we think about the company that can
• 3:40
  serve the needs of data centers, to serve the needs of the hyperscalers like the Microsoft, the Amazon, the Googles that own these data centers. This is why we own Schneider Electric. This is a company that provides electrical infrastructure and automation that the data centers rely on. And really what makes them special is this end-to-end platform.
• 3:46
  So they combine hardware and software to manage power in very complex environments like data centers. So it's mission critical. Companies cannot survive without them. It's deeply embedded in these data centers and there's very, very strong switching costs. So that is one key reason why we like Schneider. Another reason why we like Schneider, which is another big growth driver of their business,
• 3:52
  Katherine Owen (15:02)
• 3:55
  is this long-term theme towards energy efficiency, industrial automation, grid modernization. Because when you think about utilities, you think about the grids, the transmission lines that it runs on, they're old, right? They really, really can't support all of these higher energy needs. So there's a lot of money going into modernizing these grids in order to let them
• 3:58
  support higher data needs and Schneider will also benefit from that trend. So when we think about Schneider, this is a company that really embodies everything that we're looking for in companies that we own. It's a leader in its industry, it's mission critical, it has structural growth opportunities and it's a durable business that's hard to replace.
• 4:04
  Rajan Bansi (15:55)
• 4:07
  Very good. Now, Catherine, I'm to ask you one final question to close out our conversation. At the beginning, you reminded us we've really squeezed in maybe two or three years already into the first four months of the year. It can be difficult for an investor to maintain their focus, to stay with a strategy. What would you share with the audience as we go out into the rest of 2026 and beyond?
• 4:10
  If history has been any indicator, volatility is probably here to stay for the short and medium term. So how should investors really be thinking about their own portfolio construction and investment strategy?
• 4:16
  Katherine Owen (16:35)
• 4:19
  I think the most important thing is to stay invested and to have a diversified asset allocation because as the year so far in 2026 has shown, it's really difficult to predict where the markets will go. It's really difficult to predict what is going to happen to economies worldwide.
• 4:22
  And geopolitical risk could flare out at any moment. So I think the most important thing to do as an investor is to stay diversified so that you can participate or be protected in any type of market environment. So when we think about the portfolio global dividend, which is the flagship fund for a boutique, what we're really trying to do is design the portfolio to act
• 4:28
  as a ballast in the asset allocation. So we do want to own those high quality businesses that do have resilient cash flows that can perform across a wide range of outcomes. But more important to us is that it does protect capital when conditions get tougher. This is a fund that may lag in strong momentum markets like we've had so far in April. But what's important for us is to create that balance.
• 4:34
  so the fund can do well in more growth-oriented markets and also protect more on the downside when conditions get rockier. So when we're thinking about the portfolio, we really try to create that diversification within the portfolio itself too. So it'd be diversified across countries, diversified across sectors, diversified across styles, growth and value, cyclical and defensive.
• 4:40
  And really what we want to do is create a lower risk way, a less volatile way to gain exposure to equity markets. And what that means for investors is a much smoother experience through different types of market cycles.
• 4:46
  Rajan Bansi (18:42)
• 4:49
  That is a great place to end our conversation, Catherine, a great reminder for why the Global Dividend Fund is core to many portfolios. Well, not only core to many portfolios, but also why it is a flagship fund for McKenzie, especially when you look at that 10-year performance number. Thank you very much for joining the podcast, Catherine. I look forward to having you back sometime soon.
• 4:52
  Katherine Owen (19:05)
• 4:55
  Thank you, Rajan, always great to catch up.