Geoffrey Heward of Heward Investment Management.The Globe and Mail
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Portfolio manager Geoffrey Heward believes central banks aren’t done hiking interest rates this year and is positioning his portfolio to withstand the economic fallout he sees ahead.
“I think it’s dangerous to declare the all-clear,” says Mr. Heward, partner and senior portfolio manager at Heward Investment Management Inc. in Montreal. His call comes after the Bank of Canada raised its benchmark interest rate by a quarter point to 4.75 per cent on Wednesday.
Mr. Heward believes the central bank could raise rates yet again this year and the U.S. Federal Reserve Board could also hike its benchmark rate once or twice more in 2023 to try to curb stubbornly high inflation.
“The hardest yards are ahead of us. Getting to 2-per-cent targeted inflation will not be easy,” Mr. Heward says, warning of more economic pain in the months ahead.
“Historically, markets never bottomed before a recession has started,” Mr. Heward says. “The historic inversion of the yield curve and reduced liquidity in the financial system with much tougher lending standards says investors and businesses should be careful.”
Mr. Heward, who manages the firm’s Heward Global Leaders Fund and global strategy, has shifted his portfolio mix as a result. He upped his cash position, invested mostly in Treasury bills, to 20 per cent – double its normal levels. He has reduced his exposure to energy and consumer discretionary stocks that he thinks may be affected in an economic downturn. He also owns stocks in more defensive sectors such as health care as well as precious metals.
His fund was up 2.9 per cent year-to-date as of May 31. It was down 1.6 per cent in 2022 and has seen an average annualized return of 8.1 per cent over the past three years. The performance is before fees and expenses and doesn’t include stock dividend payments.
Heward Investment Management, founded in 1981, manages more than $700-million in assets. Amphora Financial Group, a provider of life insurance, trust, legal and company management services with approximately $400-million under administration, acquired a majority interest in Heward earlier this year.
The Globe and Mail spoke with Mr. Heward recently about what he’s been buying and selling and a couple of stocks he wished he still owned.
Describe your investing style.
Our style can be characterized as growth at a reasonable price or GARP. In other words, we like growth but don’t want to overpay for it. We look for companies with predictable earnings, cash-flow growth and a stable income stream. We own a concentrated portfolio of 35 to 45 stocks and have a longer-term investment horizon. No sector will ever be more than 25 per cent of the portfolio, and no single stock weighting will be more than 5 per cent. We run a conservative investment strategy. We’re looking to grow capital and preserve it. We like companies that pay a dividend and, ideally, are increasing it.
What have you been buying or adding in recent months?
We recently bought Kering SA PPRUF, the French luxury goods manufacturer behind brands like Gucci, Bottega Veneta and Yves Saint Laurent. It’s a stock we previously owned and bought back in March. It’s seeing renewed growth in China and Europe. The valuation is discounted relative to its history and compared to its peers. It also has a new creative director for Gucci. We think it could do very well in the future.
We have exposure to Japan and own Sony Group Corp. SONY-N. Its earnings are driven by games, imaging, music and entertainment. It’s a global leader in these duopoly or oligopoly businesses, and it has been through a change over the past five years with management reviewing all its divisions and trying to improve its best practices and corporate governance.
In April, we bought Canada’s MDA Ltd. MDA-T, a developer of space technologies such as robotics and satellite systems. It’s best known for the Canadarm, which has been involved with various NASA space programs. It’s a leading public Canadian space company. It’s an amazing business idea. I think we could double our money with this one in the next few years.
What have you been selling or trimming in recent months?
In March, we trimmed some of our luxury retail holdings such as EssilorLuxottica SA ESLOF, L’Oréal SA LRLCY and LVMH Moet Hennessy Louis Vuitton SE LVMUY after the stocks hit our short-term targets. We still own these stocks, just in smaller positions.
We also trimmed our overall energy position to about 7 per cent from about 15 per cent a year ago based on concerns about a slowing global economy. We trimmed our holdings in Shell PLC SHEL-N, ExxonMobil Corp. XOM-N, Chevron Corp. CVX-N and Imperial Oil Ltd. IMO-T.
We also sold all our shares in Teck Resources Ltd. TECK-B-T when the Glencore PLC GLNCY bid came. We felt the stock was fully priced.
Name one stock you wish you bought or didn’t sell, and why?
Manchester United PLC MANU-N, one of the world’s top-recognized and most valuable sporting brands, is a stock we sold after COVID-19 hit. The controlling family had become controversial and the business was struggling. When we initially bought the stock several years ago, the valuation was about US$2-billion. Today, the family has the franchise up for sale for more than US$5-billion. So, that’s one I wished we had hung on to.
Another stock we sold last year was Apple Inc. APPL-Q. We felt it was priced to perfection given that various parts of the business saw slowing growth. I wish we hadn’t sold it, in hindsight. It’s a great company, but we just stuck to our investing principles.
What’s your advice for new investors?
Try to avoid various behavioural biases that can skew or hurt an investor. One we see a lot of today is “herd behaviour bias.” That’s when investors follow others without researching a sector or stock. Also, communicate with your adviser every quarter to understand what’s working, what’s not and how they invest. Know what you own and why you own it. Have a longer-term investment horizon and reasonable expectations as to how investments will perform in the world we live in today.
This interview has been edited and condensed.
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