A year ago, money manager Bryden Teich’s portfolios were almost fully invested, holding about 1 per cent cash. Today, it’s 15 per cent cash – the highest level in a decade.
The cash pile is part of a broader diversification strategy that Mr. Teich and his colleagues at Avenue Investment Management believe is necessary to protect investors from a confluence of market challenges, including surging inflation and rising interest rates further fuelled by the economic fallout from the war in Ukraine.
Central banks have been forced to speed up their rate hikes, putting the economic recovery at risk.
“We recognized that early in the year and felt like it was time to get as defensive as we can be because the path forward now has become highly uncertain,” says Mr. Teich, whose Toronto-based firm manages about $400-million in assets. Its average equity portfolio is up 3 per cent over the past year as of May 31, based on total returns.
Mr. Teich and his colleagues intend to keep the high cash portion for a while longer, not anticipating markets to bounce back as quickly as they have after recent downturns.
“I think investors have been so conditioned to buy the dip and to just expect the market to come back,” he says. “But I think we’re heading into a much different market environment than we’ve had during the last several years, with rapid monetary and fiscal tightening, which calls for a strategy that can adjust.”
Apart from a higher cash position, Avenue has also earmarked 2 to 3 per cent of its portfolio for option contracts that hedge against a market drop. The rest of the portfolio includes a handful of Canadian and U.S.-based stocks, many with international operations.
The Globe and Mail recently spoke to Mr. Teich about what he’s been buying and selling and why he warns investors that the market is not their friend:
Describe your investing style
We believe the best way to achieve long-term investing success is to focus on owning consistently profitable companies and buying them with a good margin of safety. These kinds of businesses generate high returns on invested capital, and we manage the overall portfolio in a diversified way. Our focus is on having an investment strategy that allows us to successfully manage our portfolio of investments through all kinds of different market cycles and regimes.
What have you been buying or adding in recent months?
Andlauer Healthcare Group AND-T is a stock we started buying in early 2021. The company ships time-sensitive and temperature-controlled health care items to different medical facilities and pharmacies. The company has an excellent management team who did an exemplary job running the business through the pandemic. The company has also shown an ability to make strategic acquisitions and is growing its presence in the U.S. It has also demonstrated an ability to consistently generate high profits over different economic cycles.
Another name we added at the beginning of this year is CACI International CACI-N, which provides IT and technology infrastructure services to the U.S. Department of Defense. It has a long track record of generating good returns on invested capital, and we believe that investments in national defence and technology are going to continue to be a growing area of focus for governments.
What have you been selling or trimming in recent months?
One stock we trimmed at the beginning of the year is AutoZone AZO-N, an automotive parts retailer. We owned it for a couple of years. Demand for auto parts has been strong, and AutoZone has a great long-term track record of generating high returns on capital. However, with the runup in the stock price in 2021, we decided to cut our position by about half.
What’s the best investment call you’ve made?
Our best call was getting very positive on Canadian energy in late 2020 and early 2021. We focused on buying the highest-quality producers in Canada, specifically Canadian Natural Resources CNQ-T and Arc Resources ARX-T. We have since trimmed our initial position in CNQ and ARX, but they are still two of our biggest holdings. We think the move in energy prices has further to go, so our plan is to let our stocks run.
What broad advice do you give investors?
People need to be reminded that investing isn’t supposed to be easy, despite what many investors may have experienced until recently. It can often be a gut-wrenching and soul-crushing experience. The stock market isn’t your friend, which means investors need to have a plan and tools to overcome the challenges thrown at them. It takes a lot of patience and emotional control to stick with your investment strategy for the long term.
Also, some investors spend too much energy worrying about the upside in their investments rather than focusing on avoiding the downside. If you have an individual investment idea that is not working out, the best thing you can do is sell it and move on. Investors often stick with losing positions because they hope that it will turn around. This rarely works out well. The most important thing for a successful investing strategy is to avoid taking large losses. It’s why we manage our portfolios with a hedge and are very disciplined in our risk management.
This interview has been edited and condensed.
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