Late-stage global cycle favours Canada, value manager says

David Taylor expects rising commodity prices to boost resources stocks.

Jade Hemeon 8 March, 2018 | 6:00PM

David Taylor, president and chief investment officer at Taylor Asset Management Inc. in Toronto, is a committed value investor who says he will never deviate from his signature style of seeking attractive companies selling at bargain prices.

Finding value before it's spotted by the crowd requires dedication and patience. Although global stock markets have been shaken by growing volatility in 2018 after several years of steadily rising values, the true value investor faces a tough challenge ferreting out undiscovered opportunities.

"If something represents significant value and hasn't participated in the bull market, there's likely something wrong with it," Taylor says. "If you stay true to a value style, when it's late in the cycle, the potential opportunities shrink and the quality of those opportunities declines."

Taylor manages a handful of mutual funds on a sub-advisory basis for IA Clarington Investments Inc., including IA Clarington Focused Canadian Equity, IA Clarington Focused U.S. Equity and the equity portion of IA Clarington Focused Balanced. He also manages a closed-end fund, Taylor North American Equity Opportunities, and Taylor Partners which is sold by offering memorandum.

Taylor has honed his investment process through more than 30 years in the industry, with stints at Confederation Life Insurance Co., Ontario Teachers Pension Plan, Altamira Investment Services Inc. and Dynamic Funds before hanging his own shingle in 2012. He is a three-time winner of Morningstar Canada's Canadian Investment Award for Canadian equity fund manager of the year.

With assets of $250 million, IA Clarington Focused Canadian Equity is Taylor's biggest single mandate. It falls into Morningstar Canada's Canadian Focused Equity category, which allows it to have up to 49% of its assets in U.S. and global securities. Taylor currently holds 35% of assets outside Canada, mostly in the U.S.

"Stock markets around the world have been doing exceptionally well, but Canada has lagged," Taylor says. "It never went up with the U.S., and got crushed along with it in the recent correction. Canada is a hotbed of opportunities."

Typically, Canada does well in the later stages of a strong global economic cycle, Taylor says. With the U.S. experiencing healthy growth, unemployment falling to low levels and factories operating at high production levels, pricing pressures are increasing on the products that Canada produces, including steel, lumber, copper, nickel, iron ore, oil and coal, Taylor says. "Commodity prices are firming and Canada should be starting to shine."

Yet the Canadian stock market has been snoozing, except for a few popular industries like Canadian banks, Taylor says, and "remains a value investor's dream -- or possibly nightmare."

Fiscal stimulus such as the recent corporate tax cuts in the U.S. will juice the profitability of U.S. companies, he says. Meanwhile, when it comes to Canada, international investors are concerned about the renegotiation of the North American Free Trade Agreement, and a government that seems more concerned about environmental protection than stimulating business.

"In the U.S. it's growth at all costs, and the government is willing to leverage for growth," he says. "The U.S. government is cutting taxes while increasing military spending and the infrastructure build."

While the lack of interest in Canada is a source of some frustration, Taylor believes value will ultimately be recognized. "U.S. companies have enjoyed little cost inflation or wage pressures in recent years, but they're in for a rude awakening as raw-material costs rise," he says. "What Canada produces is feedstock for the U.S. economy."

In his relatively concentrated portfolio of about 25 stocks in IA Clarington Focused Canadian Equity, Taylor holds 19% of assets in energy and 16% in materials. Holdings include Labrador Iron Ore Royalty Corp. (LIF), as well as energy companies Paramount Resources Inc. (POU) and Birchcliff Energy Ltd. (BIR). He also has a position in OceanaGold Corp. (OGC), a low-cost, multi-national gold producer that he holds as a hedge against rising inflation.

Taylor's biggest weighting is in financials, at 33%, but only a small share of that is in the big Canadian banks. His assortment of financials includes U.S.-based insurance companies  Allstate Corp. (ALL) and Assured Guaranty Corp. (AGO) as well as the U.S.-based multinational conglomerate  Citigroup Inc. (C). The Canadian mortgage company Home Capital Group Inc. (HCG) is one of his top holdings.

Home Capital stumbled severely last year after inadequate disclosure practices led to regulatory involvement, triggering a crisis in confidence and a run on deposits. Taylor took advantage of the plunging stock price to take a position. He later sold some stock as the company recovered after the famed value investor Warren Buffett made an equity injection, but still has a sizable weighting.

Taylor has also taken profits in the U.S.-based railway operator  CSX Corp. (CSX), after enjoying gains triggered by the hiring of Hunter Harrison as president in early 2017. Investors viewed Harrison as a star manager who could boost results, but he died a few months later.

Taylor has sold part of his position in Whirlpool Corp. (WHR), a U.S.-based home-appliance manufacturer, as he expects it will be pinched by rising costs for materials such as steel. Meanwhile, he has added to steel producer Stelco Holdings Inc. (STLC). He took advantage of the recent correction to buy favourites such as  Rogers Communications Inc. (RCI.B) and pipeline company  TransCanada Corp. (TRP).

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Allstate Corp107.49 USD-0.54
Assured Guaranty Ltd46.28 USD0.22
Birchcliff Energy Ltd2.06 CAD0.98
Citigroup Inc69.50 USD-2.42
CSX Corp68.99 USD-0.26
Home Capital Group Inc26.56 CAD-0.34
Labrador Iron Ore Royalty Corp22.99 CAD-1.29
OceanaGold Corp3.08 CAD2.67
Paramount Resources Ltd A5.57 CAD-0.18
Rogers Communications Inc Class B65.33 CAD2.03
Stelco Holdings Inc10.10 CAD-0.10
TC Energy Corp67.38 CAD0.00
TC Energy Corp51.19 USD0.39
Whirlpool Corp159.54 USD0.58

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Jade Hemeon

Jade Hemeon