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Robert Taylor of Canoe Financial.The Globe and Mail

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Money manager Robert Taylor is in the camp of investors who believe inflation will remain high for a while, which means interest rates are unlikely to start falling anytime soon.

For investors, it could mean higher-multiple growth stocks will remain compressed, and value stocks will shine.

“We think we’re going into a decade where value is going to outperform growth; where you want to be invested in high-quality and high free-cash flowing companies that can return cash to shareholders,” says Mr. Taylor, senior vice president and chief investment officer at Canoe Financial LP, who oversees about $5.4-billion in assets.

Picking good stocks has translated into solid gains for Mr. Taylor’s $1-billion flagship Canoe Equity Portfolio Class fund. The fund, which is North America focused, was up 7.4 per cent over the past year as of Jan. 31. That compares to a return of 1.6 per cent for the S&P/TSX Composite Index and a drop of 3.7 per cent for the S&P 500 (in Canadian dollars), over the same period.

The Canoe fund has seen a compound annualized return of 19.3 per cent over the past three years and a compound annualized return of 12.7 per cent over the past decade. The data are based on total returns, and Mr. Taylor’s performance is net of fees.

Some of the fund’s top holdings, as of Jan. 31, include Philip Morris International Inc. PM-N, Ross Stores Inc. ROST-Q, Wells Fargo & Co. WFC-N, Agnico Eagle Mines Ltd. AEM-T and Royal Bank of Canada RY-T.

The Globe recently spoke with Mr. Taylor about what he’s been buying and selling and a technology stock he wished he didn’t sell:

Describe your investing style:

We like quality companies when they’re out of favour. The stock may have underperformed for some reason, so it’s preferably trading at a discount to the historical average and to its peers. We also take a longer-term view, believing investors need to look over the valley to see the value on the other side. Most investors look into the valley because they’re short-term focused and generally want an instant return. Patience is often rewarded, but that can be a painful process.

What’s your investment outlook?

We think the ‘old economy’ areas, like energy and industrials, will outperform over the next decade because more investment is now required. We’ve run out of spare capacity. So, we need to start building things again. In our view, companies that are the beneficiaries of that build-out will be the new secular growers. So we want exposure to those types of companies in our portfolios.

What have you been buying recently?

MEG Energy Corp. MEG-T is a new position we bought into last month. It’s a high-quality oil company that’s exposed to heavy oil. It generates significant free cash flow and trades at a valuation below its peers. We’re expecting the fundamental outlook for heavy oil differentials to materially improve over the next 12 months as additional pipeline capacity is added to Canada. Also, the U.S. is one of the biggest buyers of heavy oil, so that will present a great opportunity for Canadian heavy oil producers. It’s also an M&A (mergers and acquisitions) target. It’s a name that many investors haven’t paid attention to because, historically, it was seen as a highly levered and risky business. It has significantly de-levered its balance sheet, and I think the market is under-appreciating the company’s free cash flow potential over the next 12-to-18 months.

FedEx Corp. FDX-N is another recent buy. The company’s earnings are depressed following the COVID-19 boom in the goods economy. FedEx saw record-high freight prices and its valuation was revised lower dramatically. That presented the opportunity to get into the stock at what we think are depressed earnings levels. As the economy recovers, there’s room for the company’s earnings to improve and to close the gap with its competitors. Cost-saving initiatives should result in higher margins and greater earnings power over the next several years.

What have you been selling?

We sold Northrop Grumman Corp. NOC-N, a U.S. defence company. The stock did extremely well in 2022 due to the war in Ukraine, and its valuation became very expensive. So, we decided to sell out of that one recently to reallocate the money into other opportunities.

Rogers Communications Inc. RCI-B-T is a stock we trimmed but still own. The stock did very well due to strong fundamentals and investors getting excited about the takeover of Shaw Communications Inc. SJR-B-T. Now, the company needs to execute; to deliver synergies. We think the competitive environment will get to be more intense here. Rogers has also taken on quite a bit of leverage as a result of the debt that it took on to finance the transaction, so we just decided to reduce our position.

Name a stock you wished you bought and/or didn’t sell.

I wish I had bought Apple Inc. AAPL-Q in 2016, when its valuation was cheap, trading at 10 times earnings. That turned out to be a great bargain. At the time, we were concerned about competition, innovation, and a longer replacement cycle for the iPhone, which was incorrect. I don’t feel compelled to own it at current valuations [of about 26 times earnings].

A stock I wish I didn’t sell is Microsoft Corp. MSFT-Q. We sold it in 2020 after the stock had a huge run-up to about US$230. We felt the stock was already starting to get expensive at that level. But then, many of these growth stocks went parabolic at the end of 2021. Microsoft tacked on another US$100 from there [it has since dropped to about US$270].

What investing advice do you give family and friends when they ask?

Find a good investment manager who follows a disciplined investment process and doesn’t waver in their philosophy. Also, diversify across geographies and styles. Finally, be patient. There can be a tendency for investors to want to buy what has worked and not what’s going to work. Owning some stocks in your portfolio that are good companies but not popular ones can be rewarding for long-term investors.

This interview has been edited and condensed.

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