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Illustration of Craig Basinger for The Mover. Aug. 27, 2022. Illustration by Joel KimmelThe Globe and Mail

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While many investors are predicting a soft landing, Craig Basinger still sees an increasing risk of a deeper global economic slowdown.

As a result, the chief market strategist and his team at Toronto-based Purpose Investments Inc. have been increasing their exposure to more defensive dividend-paying companies in telecommunications, utilities and pipelines and reducing their exposure to cyclical sectors such as banks, technology and industrials.

“For the past couple of decades, with bond yields falling, investors were moving en masse into the dividend space. That’s not the environment we’re in anymore,” says Mr. Basinger, whose team oversees about $1.8-billion of the firm’s $20-billion in assets.

“We think yields have probably peaked, and recession risk is rising,” he adds. “And while inflation is coming down, I think it will be a recurring theme in the markets in the next several years.”

The firm’s $350-million Purpose Core Equity Income Fund RDE-NE has returned 4.9 per cent over the past year. Its three-year annualized return is 10.7 per cent and its five-year annualized return is 9.6 per cent. The performance is based on total returns, net of fees, as of Jan. 31.

The Globe spoke with Mr. Basinger recently about what he’s been buying and selling and an industrial company he wishes he hadn’t sold.

Describe your investing style.

Our [Purpose] Core Equity Income Fund is an active, North American-focused strategy. Our sector weighting can change dramatically depending on what’s happening in the economy and with valuations. At the company level, we’re big fans of free cash flow. That’s a fundamental component.

What have you been buying?

We increased our position in pipeline company TC Energy Corp. TRP-T in the fourth quarter of last year. The company is expected to generate more free cash flow in the future. It has a dividend yield of about 7 per cent, which we think is a huge defensive buffer if the market falls.

A new buy in the fourth quarter was Merck & Co Inc. MRK-N. Our strategy is primarily Canadian, but we can own up to 35 per cent U.S. exposure. With our U.S. holdings, we tend to buy companies [in sectors] that are underexposed in Canada and health care is one of those areas. The company is getting more into the obesity market, which is as lucrative as AI [artificial intelligence] in the U.S.

Another new buy is Canadian oil and natural gas company Cenovus Energy Inc. CVE-T, which we picked up in the first quarter. We’re not overly enthusiastic about the outlook for oil, especially with our view of a possible recession, and there’s a lot of excess capacity out there. But Cenovus has substantially reduced its debt and is generating a lot of cash flow. We felt it was an attractive entry point for the stock.

What have you been selling?

We exited our position in Waste Management Inc. WM-N in mid-February after holding the stock for a few years. We love the company. It generates a lot of free cash flow, but we believe the valuations became crazy expensive for its type of company. I don’t think it has the corresponding growth trajectory. It’s a very stable business, but at some point, you have to look at a stock’s valuation and say, ‘That’s gone too far.’

We also recently trimmed our position in Manulife Financial Corp. MFC-T after it reported some stellar earnings, and the price popped. We still own it. We like the name, but we think it’s good to take some profits in this kind of environment.

Name a stock you wish you had bought or didn’t sell.

Trane Technologies PLC TT-N, a U.S. manufacturing company focused on HVAC [heating, ventilation, air conditioning] and refrigeration systems, is a stock we wish we still owned. We bought it in the summer of 2020 based on the premise that more commercial buildings would be putting money into better HVAC systems.

The company had stellar numbers and growth, so the thesis worked out. We sold the company about six months later, believing that office buildings were losing tenants and might be too cash-strapped to add these systems. What we missed was how much commercial construction was going on in the U.S. We bought it at US$100, sold it around US$150, and now it’s trading at around US$280.

What advice do you have for new investors?

Learn as much as you can about the markets, the history of what has happened and how it could repeat itself. An example is with AI today. Everyone’s excited about AI, including us, but we’re probably in a bubble.

Understanding how markets work and react can help ground investors and prevent them from making emotional mistakes. The only constant in the investment world is that things go too far – usually because of people’s emotions. Avoiding making some of those critical mistakes can go a long way to help you become a better investor.

This interview has been edited and condensed.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 24/05/24 4:00pm EDT.

SymbolName% changeLast
Purpose Core Equity Income Fund
TC Energy Corp
Merck & Company
Cenovus Energy Inc
Waste Management
Manulife Fin
Trane Technologies Plc

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