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Kathrin Forrest.The Globe and Mail

A recession, now considered inevitable by many market watchers, may not be all bad for longer-term investors who can stomach the short-term volatility, says equity strategist Kathrin Forrest.

“Recessions can be quite painful to live through, but they are generally natural and necessary to clear out excesses following an economic expansion, and then setting up the next expansion down the road,” says Ms. Forrest of global investment firm Capital Group, based in Toronto. Her firm oversees $17.5-billion in Canada and about US$2-trillion globally.

“The good news is that recessions generally haven’t lasted very long,” Ms. Forrest adds, citing historical data from the United States dating back to the 1950s showing the average span is about 10 months.

Ms. Forrest advocates a dollar-cost averaging strategy – putting in equal sums of money over regular intervals – and investing for the long term. She also believes in having some cash on hand to take advantage of drops in stocks you want to buy and hold for the long term.

The $120-million Capital Group Canadian Focused Equity fund held about 12 per cent cash as of Sept. 30, which is about 70 per cent more than a year ago.

The fund has held up well during the market volatility, decreasing 1.2 per cent over the past year as of Sept. 30, versus a drop of 5.4 per cent for the S&P/TSX Composite Index over the same period. Both returns are based on total returns. The fund’s dividend yield was 3.8 per cent as of Sept. 30. Longer term, the fund returned 9 per cent annualized over the past 10 years.

Some of its top holdings as of Sept. 30 were Canadian Natural Resources, Toronto-Dominion Bank, Tourmaline Oil, Telus Corp. and Pfizer. The fund is focused on Canada but has the flexibility to invest about half of its assets outside of Canada.

The Globe and Mail recently spoke to Ms. Forrest about what the fund has been buying and selling.

Describe your investment style.

The firm’s investment approach is based on three key features: first, fundamental, bottom-up, on-the-ground research that is meant to generate unique insights. Second, collaboration across the investment team, across geographies and industries, to help uncover cross-currents for various companies. And third, individual conviction across a small group of experienced portfolio managers to express investment decisions.

The goal of the fund is to find and invest in companies with a long-term investment horizon. The three managers express their highest-conviction investment ideas. It means there is no top-down decision-making, and not one view dominates the fund. Instead, all decisions are bottom-up, one company at a time. We look for companies with features such as pricing power, resilient and growing end markets, financial flexibility, experienced management and sound capital allocation.

What have you been buying or adding?

We continue to find interesting companies to invest in, including various companies in the energy sector, health care and industrials.

For energy, it’s not so much a view on the current oil price, but more the secular forces of the energy transition. At the company level, we look for strong balance sheets, free cash flow and sound capital allocation supporting shareholder returns. We also consider production mix and costs, reserves and growth. For this fund, many of those are in Canada, in particular in exploration and production.

We have also increased investments in the health care industry, mostly outside Canada, particularly in the United States. It’s a diverse set of companies. In pharma and biotech, some key features are the strength of the drug pipeline, the pace of drug discovery and new opportunities from genetic medicine. Our investments include companies tackling new treatment opportunities for important health issues such as diabetes, obesity and Alzheimer’s. And in managed care, companies are creating innovative solutions to improve the quality and efficiency of care.

For industrials, we’ve been buying a mix of domestic and non-domestic companies. Most recently, we found various opportunities in Europe, particularly in aerospace. The industry was impacted disproportionately by COVID, which means it may be on an earlier track to recovery. Some of our investments include airplane manufacturers and their suppliers, for example, jet engines.

What have you been selling or trimming?

Companies we’ve been trimming and selling have less pricing power, less resilient end markets, or less financial flexibility. Some of those are in consumer sectors, such as retailing. It also includes some companies in IT and companies with less proven earnings, or earnings that are further out into the future.

We’ve also selectively trimmed some of our investments within banks and insurance, which account for about 37 per cent of the TSX as of Sept. 30. The fund is around 20 per cent invested in financials, so we’ve been diversifying away from that dominant sector within the Canadian market.

Name a couple of the best stock picks that you’ve made in recent years.

A top-10 contributor in the fund has been TSMC [Taiwan Semiconductor Manufacturing Co.], the world’s leading integrated circuit manufacturer. It has had some shorter-term challenges, but longer-term structural demand and supply imbalances are important considerations, along with a strong competitive advantage.

Another contributor has been Canadian-based First Quantum Minerals. The key activity for the company is the production of copper. It’s a cyclical commodity but may benefit from a structural increase in demand from electrification.

What investing advice do you give friends and family?

I emphasize the importance of working with a financial adviser. It’s very difficult to time markets. While cash may look tempting, it’s not a great long-term store of value. With inflation above short-term interest rates, you lose purchasing power over time.

Generally, it’s a good idea to define and then periodically review your long-term goals, risk tolerance, liquidity needs and other factors. These make a sound foundation for your investment decisions and can keep you on track through the inevitable headwinds along the road.

This interview has been edited and condensed.

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