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Inside the Market What this $600-million value fund manager has been buying, selling and thinking about markets

Himalaya Jain, portfolio manager and wealth adviser at the Rosedale Group, a division of Scotia Wealth Management.

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Himalaya Jain started preparing his portfolio for a potential market downtown in the spring, selling down equities and adding some alternative investments as a hedge. “Over the summer, we started to become more cautious because of some of the risks that were starting to mount, chief among those were [rising] interest rates,” says the portfolio manager and wealth adviser at the Rosedale Group, a division of Scotia Wealth Management.

Mr. Jain has also been warning clients that the markets may be heading into a period of lower returns, as compared with recent years. Still, he doesn’t believe we’re headed for a repeat of the 2008 global financial crisis. “We don’t see the risks as high to cause something like 2008,” says Mr. Jain, who oversees $600-million in assets with his business partner Gord Love.

His portfolio is down 4 per cent year-over-year, as of Nov. 28, compared with a drop of about 6 per cent for the S&P/TSX Composite Index. The portfolio has returned an average of 7 per cent annually over the past five years. Today, the holdings include about 45 per cent equities, 25 per cent fixed income and cash, 20 per cent alternative asset classes such as hedge funds and structured products, and 10 per cent preferred shares. By comparison, in mid-2017, the portfolio was about 65 per cent in equities, 8 per cent to 10 per cent in preferred shares and the rest in fixed income and cash.

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The Globe and Mail recently spoke with Mr. Jain, a self-described value investor, about what he’s been buying and selling and an iconic company he wished he owned.

What’s your take on the markets today and in the short term?

You have to stand back and look at the bigger picture. We’re pretty close to the end of an economic cycle. Every cycle varies in length. We’ve been in an upcycle for nine years. What typically brings an end to a cycle is interest rates rising. That’s the purpose of interest rates rising, to slow things down and keep them from overheating. We’re starting to see some cracks in the market, including a slowdown in the U.S. housing market and corporate profits – the guidance companies are providing for next year [suggests] they’re experiencing margin pressure. It’s really that big-picture outlook that has us becoming more cautious. There are always short-term factors ... but the big picture is that the labour market in the U.S. has strengthened significantly.

How are you positioning your portfolio in response?

We have played offence for years and now it’s time to play defence. Fixed income is one potential way to do that. The danger in a rising-rate environment is, depending on the duration of your bond portfolio, you may suffer losses there as well. You have to be careful what you buy. We have been starting to buy more short-term fixed-income investments. We’re also starting to buy more market-neutral hedge funds, where net sensitivity to the market is fairly low. We’re also buying structured products [pre-packaged, market-linked investment products], which provide downside protection and give some participation to the market. We are creating the opportunity to make money, but also limiting the downside risk.

What have you been selling lately?

Once we decided to get more defensive back in May, we start to trim positions, mainly in the U.S., in particular stocks in more cyclical sectors such as technology and U.S. banks. We’re not completely out, but that’s where we’ve been selling. Those sectors have had a good run in recent years.

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What have you been buying?

We’ve been mostly selling down equities and moving into alternatives such as hedge funds and structured products. That said, the sectors where we’re favourable and are not intending to sell include areas such as utilities, telecom, real estate and pipelines. They should decline less in an economic slowdown because they’re more defensive. Their earnings tend to be less correlated to the economy.

What’s the one stock you wish you’d bought?

[Warren Buffett’s multinational conglomerate] Berkshire Hathaway Inc. That is the stock and the company and the management team that most value investors aspire to. There are rare occasions, during very volatile situations in the market, where you can buy that stock at a decent valuation. The last time was a couple of years ago, in early 2016, when the price-to-book value was attractive, and we missed it. It’s a stock we still believe in long-term. We just have to be patient to buy it at the right time.

This interview has been edited and condensed.

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