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Investors continue to debate whether a recession will eventually hit and, if it does, whether the economic blow will be hard or soft. Money manager Bryden Teich believes we’re in for a two-stage economic decline – with part one already here.
“[This year] was the soft part of the landing and we expect a much harder landing into next year,” says Mr. Teich, partner and portfolio manager at Toronto-based Avenue Investment Management Inc., which oversees $400-million in assets.
Mr. Teich blames the rapid rise in interest rates, the full impact of which he believes won’t be felt until 2024.
His firm has become more defensive as a result, increasing its fixed-income holdings to about 18 per cent of its portfolios, specifically using short-term government bonds. Avenue also uses a tail hedging strategy to try to limit losses in bad markets within some of its portfolios.
“We’re as defensive as we can be with our view that we’re going to have a hard landing,” Mr. Teich says. “We’ve been pretty pessimistic for about a year or so, which in some ways has felt early, but we’re still up on the year as we try to protect our portfolios.”
The firm’s average equity portfolio has returned 5.5 per cent over the past 12 months and has an annualized return of 8 per cent over the past three years. The performance is based on total returns and is net of fees as of Sept. 30.
Mr. Teich says his investment team will become more positive on equities when the economy makes its anticipated descent.
“We don’t feel like we’re there yet, so we’re not in a rush to do anything right now,” he adds.
The Globe spoke with Mr. Teich recently about his investment style and what he’s been buying and selling.
Describe your investing style.
We describe ourselves as quality investors. We don’t break it down into value or growth investing. We’re just trying to find what we think are the best-quality companies in North America based on certain criteria. For instance, we look for companies that can earn consistently high returns on invested capital. We also pride ourselves on our independent thinking and creative research process, which we believe gives us an advantage.
What big-picture investment moves have you been making lately?
We’ve lightened up on interest-rate sensitive stocks, which include infrastructure. We’ve also been shying away from companies raising equity or taking on new debt because the cost of financing has increased. Companies we find attractive in this market are reinvesting profits in their business and buying back shares.
What have you been buying lately?
One company we bought in March is McKinney, Tex.-based Encore Wire Corp. WIRE-Q, which manufactures copper wire products that go into new construction of buildings such as hospitals and renewable energy projects. It has a market cap of US$2.8-billion and trades at five times 2023 earnings with no debt. It also has almost US$700-million in cash, or 25 per cent of its market cap. We’ve never seen a business with this strong of a balance sheet. It’s well-positioned to benefit from large fiscal spending in the U.S. on critical infrastructure projects. It has repurchased more than 10 per cent of its outstanding shares over the past year.
Another stock we bought at the end of last year and added to early this year is Murphys USA Inc. MUSA-N. It’s a El Dorado, Ark.-based gas station and convenience store business, mostly located in Walmart Inc. parking lots. It’s a simple business trading at about 10 times forward earnings. It’s been buying back a lot of its stock over the past few years while reinvesting in the business. It’s a safe, predictable business, and we have a lot of confidence in the long term.
What have you been selling?
Earlier this year, we sold our interest rate-sensitive infrastructure stocks such as Emera Inc. EMA-T and Brookfield Infrastructure Corp. BIPC-T. Our concern was that higher interest rates would cause major headwinds for these kinds of companies.
Name one stock you wished you bought or didn’t sell, and why?
My biggest regret was trimming AutoZone Inc. AZO-N, an aftermarket auto parts and accessories retailer, in January, 2022. We still own the stock, but the business is in even better shape than it was when we sold it back then. The stock is up about 20 per cent. I thought I was being smart by trimming the position, but the right thing to do was to keep owning the full position. Time is the friend of any wonderful business, and the proper holding period for a high-quality company is forever.
What advice do you have for new investors?
Some investors spend too much time trying to find the cheapest valuation stocks rather than what they believe are the best companies. It took me 10 years to learn this, but it’s one of the most important lessons for investors. Better companies should trade at higher valuations than lower-quality companies, and higher-quality companies are the best way to achieve good long-term returns.
This interview has been edited and condensed.
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