Keenan Murray of Forge First Asset Management.The Globe and Mail
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Interest rates are expected to remain high this year, creating more market volatility but also more opportunities for investors who know where to look, says hedge fund manager Keenan Murray.
Mr. Murray, portfolio manager at Forge First Asset Management Inc. – a private investment manager in Toronto that oversees more than $1-billion in assets – says he believes the U.S. Federal Reserve Board will be reluctant to cut interest rates in 2023 unless employment is sufficiently weaker or financial conditions are much tighter.
“The lagged impacts of rate hikes in 2022 and falling consumer savings are likely to pressure growth and corporate profits,” Mr. Murray says. “Draining liquidity and falling growth is historically a bad setup for equities. However, there are important offsets.”
The market’s biggest issues – the Fed, inflation and the resulting move in yields – are likely to have a neutral to positive effect on equities in 2023, he says, especially for businesses that can grow earnings at an attractive rate.
His firm is finding opportunities in fixed-income credit markets and some high-quality companies in sectors such as industrials and consumer cyclicals.
Mr. Murray manages Forge First Conservative Alternative Fund, which returned 2 per cent last year. That compares to a drop of 18.1 per cent for the S&P 500 (in U.S. dollars) and a 5.9-per-cent decline for S&P/TSX Composite Index in 2022.
Over the past three years, the fund has seen an annualized return of 9.4 per cent compared with a return of 7.7 per cent for the S&P 500 (in U.S. dollars) and a return of 7.5 per cent for the S&P/TSX Composite Index over the same period. (All performance data are based on total returns, and Mr. Murray’s fund performance is net of fees).
“We have achieved these returns while realizing only one-third of the annual volatility of those indexes,” Mr. Murray notes.
The fund has a long-short strategy across equities, credit and derivatives through what Mr. Murray describes as a “three-sleeve” approach: A long-short equity portion, which he says has historically generated the majority of the fund’s returns; an income-focused portion that helps to reduce overall fund volatility and risk; and an asset protection portion that uses equity options to hedge the entire portfolio against different risks, such as equity and credit market selloffs.
The Globe spoke recently to Mr. Murray about his investing style and what he’s been buying and selling:
Describe your investing style:
At Forge First, our mission is to protect capital, diversify and perform for our clients. We believe our strategy is differentiated by our objective to manage volatility through a highly disciplined portfolio construction process.
Our long equity investments are focused on owning businesses with strong management teams. We also invest in companies with an attractive runway to compound growth in revenue, earnings and free cash flow per share, which can reinvest profits at high returns on equity and invested capital. We want to own companies that can grow across cycles. We also try to purchase these companies when we believe they’re mispriced in the market and offer an upside to earnings estimates.
Our short positions focus on businesses we believe are poised to destroy shareholder value, see declining revenue, earnings and profits and have weak reinvestment opportunities that cyclical or secular pressures can cause.
What have you been buying or adding to your fund in recent months?
In December, we used the market weakness to add to our position in Canadian Pacific Railway Ltd. (CP) CP-T and Canadian National Railway Co. CNR-T. We think both rail companies will compound earnings and free cash flow per share at low- to mid-double digits through the middle of this decade in various economic backdrops.
CP is expected to close its acquisition of Kansas City Southern, combining the best management team in the industry at CP with the best growth story in the industry at Kansas City Southern. We owned large positions in both stocks before the merger announcement.
We also added to our positions in waste-management companies GFL Environmental Inc. GFL-T and Casella Waste Systems CWST-Q. We think both names can compound free cash flow per share by 15 to 20 per cent or more over the next three years and beyond.
What have you been selling or trimming?
Quanta Services PWR-N was one of the largest contributors to fund performance over the past few years and hit an all-time high in December. We trimmed our position given the strong performance and would love the opportunity to add back on weakness.
Name one stock you wish you bought or didn’t sell, and why?
If you are a Canadian investor and your answer isn’t Constellation Software Inc. CSU-T, you’re either a large owner and very rich, or unaware of its history. We have owned Constellation Software for years, but I first came across the company almost a decade ago, and its share price has grown 20 times since then. Still, I wish I had gotten in sooner.
What investing advice do you give friends and family members when they inevitably ask?
I’m a big proponent of keeping detailed written records. I suggest writing a page or two about one’s investment strategy and objectives and why they think those will be successful. The process can be easily cross-referenced and is a useful tool to challenge thinking.
On individual stocks, I suggest owning a portfolio of names that will compound earnings confidently over time. There’s an adage that time is the friend of the wonderful business and the enemy of the mediocre.
This interview has been edited and condensed.
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