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Andrew Pyle.The Globe and Mail

Veteran investor Andrew Pyle is hedging his bets on whether central banks will overshoot on their interest-rate hikes, using a three-pronged strategy.

It includes having more cash on hand, a range of about 10 to 15 per cent, as both a defensive move and readying to buy stocks when they seem like a bargain.

“I want that liquidity to start picking away, but not dumping a truck of cash into the equity market,” says the portfolio manager and senior investment adviser at CIBC Wood Gundy, who oversees about $220-million in assets.

He’s also starting to buy shorter-term government and investment-grade corporate bonds, believing the fixed-income rout is largely over, for now.

“We see a buying opportunity given the 20-per-cent correction in government bonds over the past year,” he says.

With equities, his choice is higher dividend-paying stocks in sectors such as banking, telecommunications and energy, and using covered call options (selling someone the right to purchase a stock you own at a set price in a specific time frame).

“A lot of the strategies that we employ aren’t intended to be there forever,” Mr. Pyle says, adding that it’s a way to try to protect portfolios from getting hit too hard.

The strategy has offered some downside protection over the past year. The average performance for his clients with a balanced portfolio (50 per cent stocks and 50 per cent fixed income) was a drop of 7.8 per cent for the 12-month period ended Oct. 31. For the balanced income portfolios (40 per cent equities, 60 per cent fixed income), the drop was 9.2 per cent. That compared with a decrease of 17 per cent for the S&P 500, an 11.9-per-cent drop in the European Stoxx 50 index, and a 5.5-per-cent drop for the S&P/TSX Composite Index over the same period. For fixed income, the S&P Canada Aggregate Bond Index was down 11.7 per cent over the past year, as of Oct. 31, while the S&P U.S. Aggregate Bond Index fell 14 per cent. All performance data are based on total returns, and portfolio performance is after fees.

The Globe and Mail recently spoke with Mr. Pyle about what he’s been buying and selling.

Describe your investing style.

Given my background as an economist, I like to take a macro perspective. That’s been important considering many issues impacting portfolios this year, including Russia’s invasion of Ukraine, inflation, and rising interest rates. We manage everyone’s portfolio around their strategy but with more tactical overlays. So if I think the economy is going into recession and equity markets will be challenged, we’ll be defensive on the equity side, and vice versa if we think it’s bright skies ahead. We also take a bottom-up approach, investing in specific equities and fixed income where we see opportunities.

What’s your take on a recession?

I think we’re going into a recession in 2023, at least a mild one. If inflation doesn’t cool in the next two to three months, then there’s a risk that we will have a major monetary policy overshoot, which means that a modest recession now risks becoming a protracted one.

What have you been buying or adding?

We’ve been adding to better dividend-paying names in the banking, telecom and resources sectors. With banks, we tend to favour those with more U.S. exposure: Royal Bank, Toronto-Dominion Bank and Bank of Montreal. We are equal-weighted between the three. I still like the U.S. economy right now, relative to Canada. It’s probably more adaptable to what’s going on in the economy.

With telecom, we’ve been buying more BCE. We did lighten up on telecoms in the spring, but if you look at the sector now, after a significant drawdown from April to October, its dividend yields are more attractive. My view is that dividend is safe.

In resources, TC Energy is one company we’ve been adding to. The stock has come under pressure in recent months, but it’s a diversified energy company that acts like a utility with its high dividend. We think a lot of the recessionary fears have been priced in the stock.

What have you been selling or trimming?

We’ve been trimming exposure to stocks that are more sensitive to a recession, stocks that are not paying us to play right now. They have lower dividend yields. An example is Stella-Jones, which is in the pressure-treated wood sector. It’s a strong, well-managed company, but we got out of it due to risks in a recessionary environment. We also sold out of Restaurant Brands International, the company behind Tim Hortons and Burger King. We bought it as a reopening stock in December last year. It has done reasonably well, but we decided to take some money off the table. It has a decent dividend yield of around 3.5 per cent, but not as strong as the banks.

What’s one stock you wished you had bought?

H&R Block comes to mind. In a year when markets have been challenged, the stock is up about 75 per cent year-to-date. It doesn’t pay a big dividend, but it would have been nice to own, given its performance.

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

I try to ignore questions about specific stocks to buy. I don’t know their risk tolerance or how much money they have. Investing is too case-specific. I do tell people that if they want to buy speculative stocks, they should have a high risk tolerance.

This interview has been edited and condensed.

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