PUBLISHED MARCH 04, 2022
As inflation surges, money manager Anil Tahiliani has been busy shifting some of his portfolio positions, including buying more companies that are able to pass on their higher costs to customers.
“We think inflation is going to be headed higher in the short term,” says Mr. Tahiliani, a senior portfolio manager at Matco Financial Inc. in Calgary. He points to the economic fallout of Russia’s invasion of Ukraine, which will continue to drive prices of oil and gas and commodities such as corn, wheat and potash.
Higher prices will persist, he says, even as central banks start raising interest rates to try to cool inflation.
To take advantage, Mr. Tahiliani has been buying companies in sectors such as industrials, telecoms and banks, while selling consumer discretionary stocks with less leeway to raise prices.
“We’ve also reduced our utility sector exposure, which is defensive but underperforms in a rising interest rate environment,” says Mr. Tahiliani, who oversees about $225-million in assets and his firm about $630-million.
He also started reducing his weighting of technology stocks late last year amid soaring valuations and as it became more clear that interest rates would be increasing.
His Matco Canadian Equity Income Fund, which includes stocks such as Canadian National Railway Co., Bank of Montreal and National Bank, as well as the Global X U.S.
Infrastructure Development ETF, returned 23.6 per cent over the past year as of Jan. 31.
The Globe and Mail recently spoke with Mr. Tahiliani about what he’s been buying and selling and a winning stock tip he gave his brother years back:
Our style is growth at a reasonable price, also known as GARP. We also look at dividend sustainability. We typically focus on companies that generate excess free cash flow to increase dividends, buy back stock or make acquisitions. We don’t invest in speculative stocks, cryptocurrency or any type of startup.
Wars are not new in terms of investing. And when we look at history, markets recover. The question is, how long do they take to recover? Typically, they sell off leading into the war then, once the war starts, they start a bottoming process. We’ve been telling clients that if they have cash on the sidelines, this is time to take advantage and start averaging into the market. Buy good quality companies that are paying dividends. If they’re fully invested, we’d say stay with their asset allocation and continue to invest for the long term.
One company we bought in December was Canadian Pacific Railway Ltd. It’s a new buy for us. We think it’s a great company given its acquisition of Kansas City Southern last year. There’s going to be significant cost savings as it integrates that U.S. company. Also, railway and trucking stocks have pricing power given that they provide critical infrastructure moving goods people use across North America. And CP Rail has been one of the longer-term dividend-paying stocks in Canada. We’ve also owned Canadian National Railway for a few years.
Another stock we bought in December is fertilizer company Nutrien Ltd. It’s a play on global demand for food as the population increases and the middle class grows, which increases demand for proteins and the potash and nitrogen needed to produce them. It’s also a play on inflation and companies with pricing power.
We also recently bought telecommunications company Telus Corp. We like the company’s strong free cash flow. It provides critical infrastructure and is almost finished installing its fibre-optic network to homes across Canada. We think more customers will migrate from their existing internet speeds to high-speed fibre. We already own BCE and Rogers.
Some of our recent sells have been in consumer discretionary stocks such as Canadian Tire Corp. It’s a great company and it has had a great run, but given that we’re in an inflationary environment, we don’t see consumer discretionary stocks having much pricing power.
Others we’ve sold out of recently include grocery and retail company North West Co. Inc. and Empire Co., the latter of which owns grocery store brands such as Sobeys and Safeway. Typically, grocers have some pricing power when there’s inflation, but when we look at some of the other companies that we bought, such as CP Rail or Nutrien, we think they have more pricing power. We also don’t see as much earnings growth in those discretionary names.
I wished I bought CN Rail when it went public in 1995. I bought it about five years later. It’s been one of the best-performing stocks in Canada since it went public. It’s one of those stocks that doesn’t get cheap because people see it as critical infrastructure. It goes back to pricing power. Many investors, including myself, have been surprised at how strong its growth has been over the years.
I always say buy market corrections. And buy quality companies, not junk. I also ask them: Are you investing or speculating? Make sure you know the difference.
I told my brother to buy Apple in 2006 when it was trading around US$3. He did.
He has taken me out for a number of dinners over the years.
This interview has been edited and condensed
PUBLISHED ON THE WEB, BY PERMISSION
© Copyright 2022 The Globe and Mail Inc. All Rights Reserved. globeandmail.com and The Globe and Mail are divisions of The Globe and Mail Inc., The Globe and Mail Centre 351 King Street East, Suite 1600 Toronto, ON M5A 0N19 Phillip Crawley, Publisher