Prakash Chaudhari is holding a lot of cash right now, but the portfolio manager says it’s not a preventive move in the event of a market downturn.
"We don’t concern ourselves with trying to forecast an economic downturn," says Mr. Chaudhari, managing director and senior portfolio manager at Manulife Investment Management. Instead, he prepares his fund to be resilient.
"We look for companies with a strong competitive advantage. Our businesses, in a downturn, are taking market share and are able to remain profitable in a downturn. They’re strengthening their position in tough times and good times. These are great businesses that are getting better."
Mr. Chaudhari and his team oversee more than $22-billion in assets across six mutual funds and other institutional mandates. He’s the lead manager of the $1.8-billion Manulife Dividend Income Plus fund. The F series of this fund, generally available from fee-based advisers, has returned 19.3 per cent year-to-date, as of May 31, and 6.5 per cent over the past year. The five-year compound annual growth rate is 12.4 per cent as of May 31, which Mr. Chaudhari says is about double the return of the S&P/TSX Composite Index over the same period. These returns are after the management expense ratio of 1.11 per cent.
The fund has just less than 20-per-cent cash today, versus about 15 per cent in December and 3 per cent in mid-January. The fund’s top three sectors are consumer discretionary at about a 32-per-cent weighting, industrials at 17 per cent and information technology at 15 per cent. The geographic mix is about 65 per cent in Canada, 20 per cent in the United States and the rest in international economies such as Asia, Britain and Europe. The top three holdings in the fund today are Canadian National Railway Co., Aritzia Inc. and Gildan Activewear Inc.
The Globe and Mail recently spoke with Mr. Chaudhari about what he’s been buying and selling and his current cash position.
Why are you holding so much cash right now?
We don’t think about cash drag. We focus on capital preservation. We think about the opportunities we invest in. When we aren’t finding these great opportunities, we just won’t make an investment. We are very responsive in terms of the ideas and opportunities that we see, which I think is quite unconventional relative to most traditional managers. It's part of the reason why we are so successful, being able to double the return of the TSX over the past five years. We want to build a portfolio, which we see as a conglomerate, with a lot of asymmetries.
What have you been buying?
CAE Inc. is a new buy in the fund in the past three months. What appeals to us about this company is that it’s uniquely positioned in the aerospace industry as the leader in training for pilots in the civil aviation, defence and security sectors. The aviation industry is an exciting industry that’s growing at a faster rate than GDP. Both the number of pilots and their average age are increasing, which means more training will be required. CAE has also been able to take its skill set – which is training in a simulated environment – and move into the health-care industry. It’s doing things like training doctors in a simulated operating theatre. It’s a small but growing part of their business.
Demant A/S [which trades in Denmark] is another company that we bought recently. It’s in the hearing-aid business and a global leader in the space. The opportunity, in terms of growth, is an aging demographic and an increasing group of people who will need hearing aids. The company is also expanding internationally.
What have you been selling?
One stock we sold recently was Arista Networks Inc. [a Santa Clara, Calif.-based company that sells cloud-networking solutions such as operating systems and switching and routing platforms]. We owned it for about a year. It was improving, but at a slower rate. The upside was becoming smaller.
We also had four businesses that were taken private so far this year: WestJet Airlines Ltd. [bought by Onex Corp., subject to regulatory and shareholder approvals], Solium Capital Inc. [bought by Morgan Stanley], Versum Materials Inc. [bought by Merck & Co. Inc.] and Quantenna Communications Inc. [bought by ON Semiconductor Corp.]. They were all taken out at a high premium. We sold all four in the market after the takeovers were announced. We didn’t wait for the final takeout. The profit from these takeovers is another reason why we have more cash in the fund overall right now.
What are some common traits you see among high-net-worth investors?
For people who achieve high-net-worth status, it’s usually through skill, not luck. Many of them are successful business owners. They recognized an opportunity and pursued it. They found something with a long runway and followed a tried and true process to achieve their success. We think about investing the same way most high-net-worth investors do.
This interview has been edited and condensed.