Why this money manager thinks investors should get off the sidelines but still be defensive

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Chris Kerlow doesn’t think investors should be sitting on the bench during the current period of market volatility.
“There’s probably more risk being out of the market than in the market,” says Mr. Kerlow, senior portfolio manager and investment adviser with Langsford Wealth Counsel at Canaccord Genuity Wealth Management (Canada) in Oakville, Ont., whose team oversees $580-million in assets.
“Waiting on the sidelines to buy the dip is not a proven strategy,” he adds. “Be pragmatic but opportunistic in deploying capital into areas where you see a long-term upside.”
His portfolio is currently tilted more toward defensive areas while maintaining some exposure to high-growth companies such as Nvidia Corp. NVDA-Q and Uber Technologies Inc. UBER-N.
His model portfolio, which includes about 50-per-cent equities, 25-per-cent fixed income and 25-per-cent alternatives investments, is up 5.1 per cent year-to-date as of June 19, gross of fees.
The fixed income portion includes about 8-per-cent cash, specifically in Horizons Cash Maximizer ETF HSAV-T, which he says generates “decent” returns of about 5 per cent. The cash position is down from 14 per cent held in the portfolio in October last year and March this year, when markets dropped.
“It gives us dry powder to be opportunistic when short-term opportunities present themselves,” he says.
The alternative investments in the portfolio include Sun Life KBI Sustainable Infrastructure Pool, WaveFront Global Diversified Investment Class, Picton Mahoney Fortified Arbitrage Plus Alternative Fund, Sun Life Wellington Opportunistic Fixed Income Private Pool and a small position in Purpose Ether Yield ETF ETHY-T.
The Globe and Mail spoke recently with Mr. Kerlow about what he has been buying and selling and one stock he wished he had more of right now.
Describe your investing style.
We take a multidisciplinary approach. A lot of managers take a fundamental view, quantitative or technical analysis. We involve all those things as well as tactical asset allocation. The markets are moving quickly, and investors need to adjust continuously. We run our own stock-based portfolios and also use third-party managers for some non-market-related correlations, including alternative investments. Our investment philosophy also considers behavioural finance from a qualitative and quantitative perspective. It’s an area that I’ve spent a lot of time on.
What’s your take on the market environment?
We’re in a period of slowing economic growth – which is the intention of central banks worldwide – and I think necessary to gain a hold on inflation. Still, inflation has been confusing for investors in North America. Earnings have softened, but sales growth remains resilient for many companies. Valuations in the U.S. have become expensive.
As a result, we’ve been reducing our U.S. holdings in favour of equities in Europe and Japan through holdings like BMO Japan Index ETF ZJPN-T and Horizons International Developed Market Equity Index ETF HXDM-T. We see a better backdrop from monetary and economic policy standpoints in those places – and much better valuations. Still, we do see some pockets of opportunity in Canada.
What have you been buying or adding?
We bought shares of Telus Corp. T-T a couple of weeks ago. The stock has been under pressure since the closing of the merger between Rogers Communications Inc. RCI-B-T and Shaw Communications Inc. SJR-B-T due to concerns about government-mandated price competition. That’s never good for an industry. However, Telus has one of the lowest churns of its customer base and has a high average revenue per user. Telus has also made a huge investment into its 5G network, which we think is paying off. The company is increasing its international business and health division. So, the boring Canadian telco story has a bit of a kicker. Currently trading at about $25 a share and yielding close to 6 per cent, we think it makes it a great longer-term opportunity.
We also added to our existing positions in Canadian banks stocks, specifically Bank of Nova Scotia BNS-T and Toronto-Dominion Bank TD-T. Both have high Tier 1 capital ratios, which means they’re well-capitalized. TD’s recent failure to acquire U.S. regional bank First Horizon Corp. FHN-N also leaves it with a lot of dry powder to make other acquisitions. Both banks have increased their loan-loss provisions and should the recession not be as bad as some think – something we also believe – then those loan losses will be unwrapped and be a boon to net income. TD and Scotiabank have also underperformed their industry peers, and we see more opportunities for them than other banks in the sector.
What have you been selling or trimming?
We recently sold our Canadian Tire Corp. Ltd. CTC-A-T shares, which we bought last summer. It had a nice move until earlier this year, but with the pandemic-era renovation period behind us and rising costs, it has become a challenging period for discretionary spending. The company’s same-store sales fell 4.8 per cent in its latest quarter, its worst performance since 2006. We’ve also seen higher inventories, which is concerning.
We trimmed Manulife Financial Corp. MFC-T to reduce our weight in insurance and increase our position in banks. We also trimmed BCE Inc. BCE-T when we added more Telus stock. We still own both Manulife and BCE.
Name a stock you wished you bought or didn’t sell.
Nvidia is a stock we added last September at US$122 a share. In December, after the stock rose 30 per cent and its weighting increased to more than 9 per cent of our portfolio, we trimmed it down to 6 per cent. Then, in late February, after almost doubling from our original purchase, we took it down to 5 per cent. We regained all our original capital, but as anyone following the stock knows, it doubled again. We regret selling any of it, but we were following a disciplined approach. We’re happy we still have a position in the stock.
What’s your advice for new investors?
You can’t make money following the herd. By the time you figure out what everyone else is doing, it’s usually too late. Also, don’t invest based on gut feeling or other emotions. That tends never to work out. I’m biased, but I recommended working with an adviser who does this for a living and follows a process.
This interview has been edited and condensed.
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