Portfolio manager Andrea Horan in 2016. (File Photo).Christopher Katsarov/The Globe a/The Globe and Mail
While some investors are calling for a recession in the not-too-distant future, Agilith Capital Inc. portfolio manager Andrea Horan doesn’t see it. Ms. Horan expects growth to slow but believes there’s “significant mis-pricing” in the market. “We’ve seen a shoot first, ask questions later approach,” Ms. Horan says. “The bad news is obvious, it killed our performance in the fourth quarter. The good news is that it presents all sorts of investment opportunities.”
Her North American Diversified Fund was down 22 per cent in 2018. Ms. Horan says half of that drop was in December and virtually the full amount happened in the fourth quarter. Her fund had a big exposure of U.S. banks and Canadian asset managers and insurance companies, which were hit hard. She says the drop reflected the market pricing in a near-term recession. “Everyone can acknowledge slower growth, but the market isn’t just pricing in slower growth, it’s pricing in negative growth,” says Ms. Horan, who oversees nearly $100-million in assets.
Ms. Horan says that her fund has had a compound annual return of 17 per cent over the past 10 years, since the beginning of 2009, a period that includes a number of market swings. The Globe and Mail recently spoke with Ms. Horan about what she’s been buying, selling and shorting.
What’s your investment strategy?
We have a value bias to our investment strategy and an element of contrarian, thematic investing. We look for extremes in the market and test whether or not they’re based on reality. If our judgment is that they’re not, we’ll take the other side of the investment, both long and short. The good is that tends to lead to strong outperformance over time. The bad is that, just because we recognize the extreme that suggests mis-pricing, doesn’t mean the market will recognize it the next day. We tend to have long holding periods. We try very much to ignore near-term market volatility and see that as noise rather than signal.
What concerns are you hearing from investors today and what’s your response?
The concern is the market volatility. Investors also want to know if we’re heading for a recession. There is this perception that we’ve had a bull market since 2009 that’s now long in the tooth. But if you look at the S&P/TSX Composite Index since early 2008 and draw a line, there’s been zero capital return. The only return has been dividends. ... This bull market that people feel like has happened has been in a pretty narrow range of stocks. A lot of the heavy lifting was retracing the loss from the financial crisis. In terms of a recession, it’s not like there are no risks on the horizon, but all the evidence we’re seeing suggests there is going to be economic growth this year, it will just be more tempered.
What’s your take on where markets are heading in the short term?
What we are seeing now is significant volatility, up and down. Our experience is that typically, when you see that level of volatility, it’s indicative of a change in sector leadership. Our strong belief is that we will be shifting to more of a value-oriented market. Value as an investment style has underperformed momentum in recent years, which is an unusual relationship relative to historical trends. We do think that value investing, as a style, will begin to outperform as it has over time.
What stocks have you been buying lately?
Some of the stocks we’ve been adding to include Manulife Financial Corp., Martinrea International Inc. and ATS Automation Tooling Systems Inc. In all three cases, they’re trading at attractive earnings multiples. Manulife is as inexpensive as it has been in years. It has been hurt by a flattening yield curve, but we think as [the curve] steepens it’s well positioned [for price growth]. Martinrea, which supplies auto parts, has been hurt as the auto industry went through NAFTA negotiations. From an investment perspective, it’s attractive for its expertise in making lightweight parts, which is important as fuel efficiency continues to be a priority. Martinrea has also been growing its earnings at double-digit rates and beating earnings estimates. ATS, which builds systems to help manufacturers automate production, is very well positioned in the current market as corporations look to improve productivity.
What have you been selling?
Our feeling is that now is a terrible time to sell. We did have two of our positions taken out in M&A in the fourth quarter: Mitel Networks Corp. [bought by Searchlight Capital Partners] and Symbility Solutions Inc. [taken over by CoreLogic Inc.] We have also increased short positions in companies we feel are expensive [relative to earnings or operating profit], especially if the balance sheet is weak. An example is logistics technology company Descartes Systems Group Inc., which has been growing through acquisitions. We think those types of stories are likely to experience multiple contraction, even if they continue to plug away at the same strategy. There’s nothing wrong with the management of the company, it’s just that it has been awarded an extremely rich multiple. Another is Emera Inc., a heavily levered utility company that has also been rewarded with a high multiple that’s a function of a low interest-rate environment. We think many of these defensive categories, utilities in particular, are so expensive that it’s a misrepresentation to call them defensive because their leverage and their earnings are so high.
You work with high-net-worth investors, any advice for those looking to reach that status?
You don’t have to own every great stock in order to have a diversified portfolio and a strongly performing portfolio. Stick to what you know and don’t worry if other investments are doing well. If you follow price momentum too closely, it can lead you to chase stocks that have already had their big move. Also, investing early is important and at a level that’s consistent with your risk appetite. Set your strategy, then, step back. Chasing returns is typically a fool’s game.