Why this $1.2-billion portfolio manager has just cut his equity exposure to less than 50 per cent

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While most investors try to avoid volatility, fund manager Craig Basinger embraces big swings in the market.

The chief market strategist at Purpose Investments runs the $700-million Purpose Tactical Asset Allocation Fund, which automatically responds to changing market conditions to generate returns.

“What I’ve learned over the years – and I think anybody who’s been investing long enough also knows – is that you can formulate a well-researched macro view on what you think is going to happen to the markets going forward, but it rarely goes according to plan,” says Mr. Basinger, who oversees about $1.2-billion of the firm’s $13-billion in assets.

“With that humble view of our own ability to forecast the future, we opted for a quantitative rules-based approach with ETFs, which uses relative strength and momentum. It’s math-based, taking human emotion out of the equation.”

The fund has swung to as much as 93 per cent equities and as low as 17 per cent since its launch in 2015.

“Ideally, we tilt more towards equities in good times and more towards bonds in more troubling times,” Mr. Basinger says.

The shift in assets can happen quickly. For example, earlier this month, the fund was 78 per cent equities, with the rest in bonds in cash. As of this week, it dropped to less than 50 per cent equities.

The fund’s performance is down 5.4 so far this year compared with a drop of 8.9 per cent for its benchmark Morningstar Canadian Neutral Global Target Allocation Index. The Purpose fund has seen an annualized return of 6.5 per cent over the past three years, compared with a return of 3.9 per cent for the Morningstar benchmark. All data is based on total returns as of Aug. 19.

The Globe recently spoke to Mr. Basinger about his strategy and what he’s been buying and selling.

Talk a bit more about your approach.

Our Purpose Tactical Asset Allocation Fund was created to solve a problem we saw with investors and advisers, which is how to be tactical in the markets. It was born out of the view that markets have evolved over time, and they’ve become faster, and they move in bigger swings, both up and down, which has certainly become evident over the past few years. With these more sizable swings, just sticking to the 60-40 equity mix of equities and bonds isn’t ideal.

What’s your take on the markets right now?

The first half of this was really a repricing of assets downward, after a year and a half of them being largely inflated. Almost everything went down, and it created a very painful experience for investors. I that repricing is largely complete. The inflation fears are starting to decline and are being replaced with recession fears. While recession fears aren’t good, they are healthier for strategies like ours that use a mix of equities and bonds. Safe-haven assets start to perform better again, versus risk assets. We’re starting to see that more over the last couple of months.

I do think what we’ve seen in recent weeks has been a bear market rally and it has been tested in recent days. I believe that recession, fears and risks are going to become louder as this year progresses. And that will continue to make for some pretty big swings up and down between here and year-end.

What have you been buying and selling?

For the first half of this year, we were more defensively positioned, averaging 60 per cent in cash and bond ETFs, and those were primarily iShares Core Canadian Short Bond Index ETF XSB-T and the Vanguard Short Term Bond Index Fund ETF (BSV-A). That had our equity weight averaging around 40 per cent during this period.

In mid-June, our model started to signal the market becoming healthier, which brought our equity weight from about 30 per cent to 78 per cent by mid-August. That had us selling or trimming the bond ETFs and adding to the equity ETFs, including the Horizons TSX 60 ETF (HXT-T), the Invesco QQQ (QQQ-Q) and the SPDR S&P 500 ETF (SPY-A).

It’s not like we love or hate any of these ETFs; they’re just very low-coast, efficient tools to implement our strategy.

What investing advice do you give family members when they ask?

I do get these kinds of questions all of the time, but I won’t answer them. I know markets, and I know economics, and a decent amount of math and behavioural finance. But there is no way I’m qualified to give advice to individuals, including my family members. The best advice I can provide is to find a good adviser, develop a plan, and work with them to build a well-constructed portfolio. I know it’s a boring answer, but it’s true.

If I told someone to buy something now, then I’d have to tell them when to sell it. Continuous advice has a huge value for people, but it needs to be continuous.

This interview has been edited and condensed.

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