Lyle Stein.The Globe and Mail
Money manager Lyle Stein was among the camp of investors who didn’t believe inflation would be “transitory,” as the U.S. Federal Reserve and some other economy-watchers forecast last year.
His portfolios were light on fixed income, heavier in cash and targeted an average equity allocation during most of 2021 to protect from what he anticipated would become stubbornly high inflation. Around this time last year, U.S. Federal Reserve chair Jerome Powell conceded it was “probably a good time to retire” the word “transitory.”
Mr. Stein started deploying more cash this year and increased his exposure to fixed income by purchasing short-term treasuries and guaranteed investment certificates (GICs) with yields of around 4 to 5 per cent. The moves were based on a belief that inflation pressures would continue to eat away at consumer budgets and corporate profits. Plus, central banks aren’t finished with their rate increases.
“Inflation appears to have peaked now, we hope, but the question is: ‘Where does it settle? And at what level?’ It’s still a risky environment,” says Mr. Stein, president of Forvest Global Wealth Management (Canada) in Toronto, a division of Geneva-based Forvest Group, which oversees more than $1-billion in assets.
He’s also concerned that earnings expectations for many U.S. companies are too high.
“‘Don’t fight the Fed’ is something I learned when I started my career and still holds true today,” says Mr. Stein, referring to the advice not to invest against the central bank’s policy. Mr. Stein has managed billions in assets for various firms for more than 35 years before starting the Canadian arm of Forvest in September, 2020.
His strategy has helped his clients maintain the value of their investments this year. Mr. Stein says his portfolios are flat year-to-date, based on total returns and after fees, while most market indexes are in the red year-to-date.
The Globe and Mail recently spoke to Mr. Stein about his investing style and what he has been buying and selling:
Describe your investing style:
We have a total-return investment approach. It starts with the yield on 10-year government bonds as the low-risk asset. From there, we assess the risk of earning an incremental return above that treasury bond. For example, equities typically have a longer duration than 10 years, so they should be expected to earn a higher rate of return. Corporate debt is riskier than the 10-year treasury because it can go into default. Therefore, you should earn a risk premium above the 10-year return. Once you have the low-risk benchmark established for a specific time period, then you can assess the relative merits of corporate bonds or equity markets in general and then, ultimately, specific equities. For example, more volatile technology stocks should have higher anticipated returns than bank stocks.
We take that investment approach and apply it to three areas for our clients: “comfort,” which is the current income necessary to meet their lifestyle; “contingency,” the assets that can preserve their comfort when markets are volatile; and “children and charity,” which are the long-dated assets in their portfolio for legacy purposes.
What have you been buying?
One stock we bought recently is Peyto Exploration & Development Corp. PEY-T as a natural gas play. Natural gas, in our view, is increasingly being acknowledged as a “green” energy source. Like it or not, we can’t live without it. Peyto also pays an attractive dividend. It was the most downtrodden, so we picked it up at a cheap valuation.
We also bought Novo Nordisk A/S NVO-N, the Danish multinational pharmaceutical company focused on diabetes and obesity, two big issues in health care today. We purchased it through American depositary receipts.
We also have been buying GICs, as noted earlier. You’ve heard of “TINA” – there is no alternative to stocks. Now it’s “TARA” – there are reasonable alternatives with products like GICs. Once yields hit 4 per cent, they were attractive again. It’s been particularly good in retirement accounts for clients looking to build a GIC ladder. It’s about de-risking the portfolio.
What have you been selling?
A name we sold a few months ago, after holding it for about six months, was Generac Holdings Inc. GNRC-N, which makes power generators and related products. It was a great growth story in the industrial products sector. It was a higher P/E [price earnings] stock that we bought on a dip, but it had bad earnings and didn’t recover. So, we sold it at a loss and moved on.
We also sold many of the big technology stocks we owned at the end of 2021 when we thought the P/E contraction wasn’t priced into those stocks. We saw that interest rates would remain higher for longer. The only tech stocks we own today are Microsoft Corp. MSFT-Q and Apple Inc. AAPL-Q
What general advice do you have for investors?
I’ve learned over the years that just because a stock is cheaper doesn’t mean it is cheap. We learned that in the tech wreck at the turn of the century when some tech stocks were down 90 per cent. They were cheaper, but not cheap. And most investors who had money in the market then know what happened to many of those tech names.
This interview has been edited and condensed.