Like many investors, Robert Taylor wasn't surprised at the recent market correction and believes it was necessary to maintain its long-term health. Still, he doesn't recommend investors rush back in. "You don't fall from a 10-storey building and then get up and you're fine the next day; it definitely takes some time."
Mr. Taylor, senior vice-president and portfolio manager at Calgary-based Canoe Financial, which has $4.5-billion in assets under management, expects more volatility ahead. "We are still looking for positive rates of return in the market, but it's not going to be as smooth of a ride," says Mr. Taylor, whose 100-per-cent equities Canoe Equity Class Series fund returned 9.6 per cent for the 12 months ended Jan. 31. His Canoe Canadian Asset Allocation Class fund, which is about 23-per-cent bonds and 77-per-cent equities right now, returned 7.9 per cent over the same period.
The Globe and Mail recently spoke to Mr. Taylor about his take on the recent market swings, what he's been buying and selling and the one stock he wished he didn't give up on, especially now that it has sprinted higher.
What concerns are you hearing from investors today?
People are worried about the next bear market. Psychologically, I think we're anchored into thinking the same thing is going to happen in this cycle as in the last cycle – where we had the tech bubble that burst and the financial crisis. Our belief is that we're in a secular bull market, where the drawdowns tend to be shorter in duration and not as deep as they are in secular bear markets. Another concern investors have is the valuation of stocks – that levels are extended compared to history.
What's your view?
Our view is that the next stage of the bull market is going to be more driven by earnings growth. So you can still make very good rates of return, but the easy money has been made. It's partly why we think we're moving into more of a stock pickers' environment. It will be a lot choppier … and more important to pick the right stocks, because you're not going to have that same multiple expansion and valuation upside that you've had in the last eight or nine years.
What's your take on the recent market volatility?
We think that we're transitioning right now to the latter part of the business cycle, where the economy is doing better, rates are moving higher, inflation starts to move higher and you're just naturally going to see volatility picking up. I think one of the things that had happened over the last 12 to 18 months is the market became very complacent … In the last few weeks, we came back to a more normal environment with volatility picking up. The catalyst was the first signs of inflation we've seen in quite some time. Our view is that it was more of a liquidity-driven event, as opposed to fundamental. There were a lot of funds positioned in a particular way that created a panic sell in the market. Our view is that, fundamentally, nothing has really changed. The economy continues to be in good shape, corporations are generating good earnings growth and what you really saw was the market was very overbought and the sentiment was extremely optimistic and that needed to be reset. That tends to be healthy in a bull market.
What have you been buying lately?
As you move into the latter part of this cycle, you want to be in sectors that are going to be exposed to a better economic backdrop, such as energy, financials, industrials, materials and technology. A couple of names on the energy side we've bought are Parex Resources and Tourmaline Oil Corp. Parex has very strong production growth and trades at a very reasonable valuation. It has an extremely strong balance sheet with cash to spend, which is unique for an energy company. Tourmaline is a company that is extremely cheap right now and trading below its IPO price from 2010. It has a strong management team, great asset base and good balance sheet. We think that the value of the company is underappreciated in the market right now.
What are you selling?
The areas we see as more challenging going forward are the defensive areas of the market, such as consumer staples, the telcos, the utilities and the REIT space because they do better in a falling-rate environment as opposed to a rising-rate environment. One stock that is no longer in the portfolio is Coca-Cola. BCE is another. At some point, we'll revisit these companies, but we think it's a little bit too early today.
What's the one stock you wish you bought or kept?
One that we wished we kept was Nike. We sold it in the second half of 2017. The stock was going through a transition, moving its business from wholesale to a direct-to-customer channel. We thought it would take longer than it did. The company surprised the market to the upside. We sold it around US$55 and it's now trading around US$69.
This interview has been edited and condensed.