David Taylor- Taylor Asset Management Inc.

Smaller funds have a big advantage, manager says.

Diana Cawfield 15 March, 2013 | 6:00PM
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David Taylor, who left the Dynamic family of funds to launch his own firm a year ago, is no longer a multi-billion-dollar money manager. And this, he says, is a big plus for investors in the IA Clarington mutual funds that he now manages.

"If you loved David Taylor running $8.5 billion, you have to love him running $300 million for Clarington," says Taylor, manager of IA Clarington Focused Canadian Equity Class.

"The size of the fund makes a huge difference in reducing risk, being able to be nimble," Taylor says. "When the fundamentals of a company change, it might take you six months to sell it in a huge fund. When the equity fund is only $240 million, you can be out in five minutes."

Taylor is the president, chief investment officer and portfolio manager of Taylor Asset Management Inc. At the end of March 2012, he became a sub-advisor to IA Clarington Investments Inc., and launched his Toronto-based company in April. His non-compete agreement with his former employer GCIC Ltd. (previously named Goodman & Co. Investment Counsel Ltd.) expired on March 4.

Taylor has managed IA Clarington Focused Canadian Equity and the equity position of IA Clarington Focused Balanced, which represents about 80% of the same equities, since their launch in June 2012.

A value manager, Taylor is best known as the former manager of Dynamic Value Fund of Canada. Under his tenure, the fund won back-to-back awards in the Canadian equity category at the Morningstar Canadian Investment Awards in 2009 and 2010.

David Taylor accepting the award for Best Canadian Equity Fund at the 2010 Morningstar Canadian Investment Awards.

Taylor runs fairly concentrated portfolios, typically holding about 25 stocks with roughly a 4% weighting. He'll look to trim an individual stock holding if it reaches about 5.5%.

Dividend-paying companies represent about 90% of the holdings, but Taylor does not select stocks on the basis of their yields. "They are growth companies that just happen to pay dividends," he says.

Taylor's bottom-up stock selection starts with looking for good businesses and for short-term aberrations that present great investment opportunities. "So something that's negative that's caused the typical manager to panic."

A current top holding, Apollo Global Management LLC APO, a global alternative asset-management company, is an example of a contrarian play. "When we looked at Apollo, the stock was down 30%," says Taylor, "and yet their assets had gone from US$60 billion to US$110 billion."

Taylor believed that when the market came back, Apollo would double its earnings. "Again, (the stock was) not widely covered by the Street. Everybody else owned the banks. We bought it at US$14, today it's at US$23, and the beauty is that they pay out about 70% of their earnings in dividends."

Using model-based screening and in-house, hands-on research, Taylor is always looking for stocks that are at their 52-week lows. For example, the issuing company may have cut its dividend or be facing a lawsuit.

For Taylor, the art of investing is trying to identify whether a company is going through short-term or permanent difficulties. His research includes working with his own veteran analyst, who does "a ton of ground work."

Taylor says he looks for 50% returns over a three-year period. Sometimes a stock holding will hit that target in six months. He reviews his holdings daily, looking for the upside potential and asking himself: What is the 25th best idea?

Taylor currently holds foreign content of about 38% of the portfolio, and can go as high as 49%. The foreign holdings are mostly based in the United States, where Taylor is finding the best opportunities and where he says his expertise lies.

To the extent that opportunities don't present themselves in either Canada or abroad, Taylor will hold cash. "A lot of managers are fully invested," he says, "but I'll take the cash to 100% if I can't find anything to buy."

Drawing on 25 years of investment experience, Taylor is a graduate of York University who received an MBA in 1988. Upon graduation, he joined Confederation Life as a senior equity analyst, where he was immersed in the firm's value philosophy.

In 1991, Taylor moved to Ontario Teachers' Pension Plan Board as a portfolio manager, and received the CFA designation that year. From 1995 to 2001, he served as vice-president, equities, and portfolio manager at Altamira Management Ltd. Then he worked briefly in AGF Management Ltd.'s private-client division before joining Goodman & Co. in October 2002.

Taylor says it was a tough decision to leave the closely knit Goodman & Co. team managing the Dynamic funds. "I loved the independence of Dynamic," he says, "and if they hadn't sold (the company to Bank of Nova Scotia), I would have stayed there for the rest of my life."

After careful consideration of various employment options, Taylor agreed to a sub-advisory contract with IA Clarington. "I wanted to offer a portfolio that doesn't look like everybody else," he says.

Taylor says he'd never want to go back to running "big money" again. "It's just the right thing to do for clients. I'm only 49 years old, I love this business and we've proven right out of the gates that David's back."

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About Author

Diana Cawfield

Diana Cawfield  An award-winning writer who has been a regular Morningstar contributor since 2000, Diana's numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.

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