A year ago, fund manager Bryden Teich’s portfolios were almost fully invested, holding around 1% in cash. Today it is 15% cash, the highest level in a decade.
The cash stack is part of a broader diversification strategy that Mr. Teich and his colleagues at Avenue Investment Management say is necessary to protect investors from a confluence of market challenges, including surging oil. inflation and rising interest rates, fueled further by the economic fallout from the war. in Ukraine.
Central banks were forced to accelerate their rate hikes, jeopardizing the economic recovery.
“We recognized this at the start of the year and felt it was time to be as defensive as possible, as the way forward has now become very uncertain,” says Mr. Teich, whose Toronto-based company manages approximately $400 million in assets. . Its average stock portfolio was up 3% year over year as of May 31, based on total returns.
Teich and his colleagues intend to hold the high end of cash for quite some time longer, not expecting markets to rebound as quickly as they have after recent downturns.
“I think investors have been so conditioned to buy the dip and expect the market to come back,” he says. “But I think we’re heading into a very different market environment than we’ve seen in recent years, with rapid monetary and fiscal tightening, which requires a strategy that can adjust.”
Along with a higher cash position, Avenue has also allocated 2-3% of its portfolio to option contracts that hedge against a market downturn. The rest of the portfolio includes a handful of Canadian and US stocks, many of which have international operations.
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The Globe and Mail recently spoke to Mr. Teich about what he buys and sells and why he warns investors that the market is not their friend:
Describe your investment style
We believe the best way to long-term investment success is to focus on owning consistently profitable businesses and buying them with a good margin of safety. These types of businesses generate high returns on invested capital and we manage the entire portfolio in a diversified manner. Our goal is to have an investment strategy that allows us to successfully manage our investment portfolio through all kinds of different market cycles and regimes.
What have you bought or added in recent months?
Andlauer Healthcare Group AND-T is a stock that we started buying in early 2021. The company ships time-sensitive and temperature-controlled healthcare items to different medical facilities and pharmacies. The company has an excellent management team who have done an exemplary job in running the business during the pandemic. The company has also demonstrated its ability to make strategic acquisitions and is strengthening its presence in the United States. It has also demonstrated its ability to consistently generate high profits through different economic cycles.
Another name we added earlier this year is CACI International CACI-N, which provides IT and technology infrastructure services to the US Department of Defense. He has a long track record of generating good returns on invested capital, and we believe that investments in national defense and technology will continue to be an area of growing interest for governments.
What have you sold or cut in recent months?
One stock we cut early in the year is AutoZone AZO-N, an auto parts retailer. We owned it for a few years. Demand for auto parts has been strong and AutoZone has an excellent long-term track record of generating high returns on capital. However, with the share price soaring in 2021, we decided to reduce our position by about half.
What is the best investment call you have made?
Our best call has been to turn very positive on Canadian energy in late 2020 and early 2021. We have been focused on buying the highest quality producers in Canada, particularly Canadian Natural Resources CNQ- T and Arc Resources ARX-T. We have since reduced our initial position in CNQ and ARX, but these are still two of our biggest holdings. We think the energy price movement needs to go further, so our plan is to let our stocks sink.
What general advice do you give to investors?
People need to be reminded that investing isn’t supposed to be easy, despite what many investors may have been through until recently. It can often be a heartbreaking and overwhelming experience. The stock market is not your friend, which means investors need to have a plan and tools to overcome the challenges thrown at them. It takes a lot of patience and emotional control to stick with your long-term investment strategy.
Additionally, some investors spend too much energy worrying about the upside of their investments rather than focusing on avoiding the downside. If you have an individual investment idea that isn’t working, the best thing to do is sell it and move on. Investors often stick to losing positions because they hope it will turn around. It rarely works well. The most important thing for a successful investment strategy is to avoid big losses. This is why we manage our portfolios with hedging and are very disciplined in our risk management.
This interview has been edited and condensed.
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