James Telfser of Aventine Investment Counsel.The Globe and Mail
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James Telfser isn’t letting market swings and the threat of a recession keep him from snapping up stocks he thinks will do well down the road.
“We’re worried about the market in the short term, but we’re finding that there’s no shortage of opportunities to deploy capital for the long term,” says Mr. Telfser, managing partner and portfolio manager at Aventine Investment Counsel in Toronto, whose firm oversees about $220-million in assets.
For Mr. Telfser and Aventine, that means investing in a mix of stocks, bonds and alternative assets.
“We’re trying to build unique portfolios that can generate higher risk-adjusted returns,” he adds.
The firm’s balanced composite – the average performance of its accounts that include a mix of equities, fixed income and alternatives depending on the client – has returned about 3.8 per cent so far this year. It has seen an annualized return of 4.3 per cent over the past three years and an annualized return of 6.3 per cent since its inception in June, 2009. The performance is based on total returns, net of fees as of Aug. 31.
The Globe and Mail spoke with Mr. Telfser recently about what he’s been buying and selling and a technology stock he wishes he never sold.
Describe your investment style.
We use a ‘core and explore’ approach. Core includes high-quality compound growth stocks that we might hold for a decade or more if we think those companies will continue to reinvest capital at attractive rates of return; exchange-traded funds for more passive market exposure, and maybe some unique cash or fixed-income ideas. With ‘explore,’ we tend to focus a lot on alternatives. We’re noticing that more investors are interested in private equity and so, we’re looking into other areas such as farmland, merger arbitrage, or other alternatives that clients can’t always access on their own.
What’s your take on the market environment?
It’s hard not to be cautious. Interest rates have risen so fast, and we don’t think the damage has been fully felt in the economy. So, we’re not exactly feeling optimistic about the short term. That said, many companies we follow have been pricing in a recession for years and we tend to focus on much longer-term time horizons. So, we’re optimistic about that through that lens.
It will be harder for interest rates to move lower in the short term, but in the longer term, as inflation continues to drop, we expect to see interest rate cuts. We’ve never really stopped finding good opportunities; it depends on where you look. For example, many defensive stocks have been hammered this year including telcos and utilities, and we’ve been trying to take advantage of that through products like structured notes.
Do you think we’re heading into a recession?
It’s a hard question to answer – the short-term environment is quite murky. We’ve been surprised that the economy has been as resilient as it has been. There will likely be some economic contraction in the short term. How deep and severe it will be is unclear.
What have you been buying or adding recently?
We bought Danaher Corp. DHR-N a couple of months ago. The Washington, D.C.-based medical technology company has a bioprocessing division that was a huge winner during the pandemic. It also has an environmental and applied solutions business that will trade independently when spun out later this month. The company’s bioprocessing business is bottoming out, and we feel it’s a good time to get it. It just put out a bid to acquire Abcam PLC ABCM-Q, a leading global supplier of protein consumables. Abcam is considered the Amazon.com Inc. of proteins for companies making formulations.
We have also recently added to our position in Canadian specialty food manufacturing and distribution company Premium Brands Holdings Corp. PBH-T. We think it’s a good buy now. Inflation costs have hurt the company over the years, and it took a while for it to expand its margins. Premium Brands has been chipping away at its balance sheet and we think it will be able to show free cash flow growth in the next few quarters. It may also be able to use some of that cash eventually to start making acquisitions again. It has been quiet on that front since it acquired Clearwater Seafoods LP with a coalition of Mi’kmaq First Nations in late 2020.
What have you been selling or trimming?
We recently trimmed our shares in Starbucks Corp. SBUX-Q. We continue to hold the stock but have cut it back substantially. A big reason is the economy in China, which hasn’t been as robust as many thought it would be coming out of pandemic lockdowns. Spending might also slow in North America in the near term.
We’ve also been selling hotel stocks, specifically Hyatt Hotels Corp. H-N and Marriott International Inc. MAR-Q. We’re short both names now in our active U.S. strategy. Hotel prices are a little nuts, and we think the current pricing isn’t sustainable. We’ve seen prices drop 15 to 20 per cent in recent months. We expect occupancy rates to normalize as everybody gets the travel bug out of their system and prices drop more.
Name a stock you wish you bought or didn’t sell.
Open Text Corp. OTEX-T is a stock we sold in November, 2022. The company acquired Micro Focus International PLC in August, 2022 at an aggressive premium. After that, the stock dropped steadily by 50 per cent from its highs in 2021. With the acquisition and our view of the market then, we felt it was a good idea to get out of the stock. It’s now trading above where we exited it at around $38. We went against one of our core tenets at the firm – when you find a good management team and a good company, it’s best to hold those names for a long time. We’re looking at buying it again.
What advice do you have for new investors?
It’s very important to diversify your portfolio. You can knock it out of the park by investing in one area, but it can also backfire, so it’s best to have a balance. Also, avoid the fads. Investing is about finding companies run by great chief executive officers and letting them do all the work for you.
This interview has been edited and condensed.
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