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illustration of Denis Taillefer.The Globe and Mail

Some investors are treating the recent market sell-off as a buying opportunity, but not money manager Denis Taillefer. At least not yet.

“We’re still holding back,” says the senior portfolio manager at Caldwell Investment Management Ltd., whose firm has been shoring up its cash position since the start of the year. Its funds are now holding about 15 to 20 per cent cash. “Although the market is looking more interesting now, we’re not at what I would call ‘peak interest rate hawkishness’ just yet.”

Mr. Taillefer doesn’t expect that peak to happen until the market prices in a slowdown or halt in interest rate increases. The U.S. Federal Reserve and other central banks are aggressively hiking rates to try to slow surging inflation while trying not to go too far and spur a recession.

Still, Mr. Taillefer says the probability of a recession is rising because of macro-economic factors such as the war in Ukraine and China’s pandemic lockdowns, which have ripple effects across the global economy and are happening alongside tighter monetary policy.

“We are looking to deploy cash,” he adds, “but we are being very picky on where we’re going. We think there might be another wave of valuation compression. Once we hit peak hawkishness from an interest-rate standpoint it will be a lot easier to put some money to work.”

Mr. Taillefer joined Caldwell a year ago and is part of the team responsible for the Caldwell U.S. Dividend Advantage Fund, Caldwell Canadian Value Momentum Fund and Caldwell North American Fund.

The firm’s U.S. Dividend Advantage Fund, which was recently relaunched, is down about 10.6 per cent so far this year as of April 30. That’s ahead of the S&P 500, which was down about 12 per cent over the same period, in Canadian dollars.

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The Globe and Mail recently spoke to Mr. Taillefer about what he has been buying and selling (before the recent market rout) and a stock he wished he had bought after attending an ice show with his wife and daughter years back:

Describe your investing style.

We combine momentum investing with bottom-up fundamental analysis. Unlike most dividend funds out there that are buy-and-hold strategies, we are more active and focus on dividend growth. We look for companies with management teams that are very disciplined in their capital allocation and grow their dividends over time. We try to stay away from any risk of holding companies that cut their dividends because that can destroy value in a portfolio.

We describe ourselves as momentum investors. For example, when the markets came off their highs in January, we started selling and trimming because a lot of our stocks lost their momentum, particularly in sectors such as technology and semiconductors. When the market starts to trend upwards, then you have positive pricing momentum, and then we become more aggressive and deploy more of our capital. For instance, we’ve been long energy for quite a few months.

What have you been buying in recent months?

We’ve increased our exposure to the defence sector, well before the war in Ukraine. We like the industry for a few reasons: It has high barriers to entry, and most of its clients are government agencies, so it’s a lot easier for them to pass through inflationary costs. It also does a lot of research and development shared with government agencies, leading to a higher return on invested capital. One name we’ve added is Northrop Grumman Corp. NOC-N, a prime contractor in the aerospace and defence sector. It has a good track record of growing its dividend. It also has exposure to large programs, including space spending and the nuclear modernization program in the U.S.

We also added Booz Allen Hamilton Holding Corp., an IT name that also has exposure to defence. It too has a lot of government exposure, including in areas such as cybersecurity and artificial intelligence. These areas are growing rapidly, and there’s little or no risk of the government pulling back spending in those areas.

What have you been selling?

We sold off a few of our semiconductor names earlier in the year, such as Micron Technology Inc. and Lam Research Corp. LRCX-Q We liked their stories; they were good, strong companies, but we saw them as higher-risk areas in the portfolio. We still own Broadcom Inc., another semiconductor stock, but trimmed our position there.

We also sold out of Magna International Inc. MG-T earlier in the year. It wasn’t overly expensive, but we had concerns about the global supply chain challenges and that they would take longer to resolve.

Name a stock you wish you bought?

I have an 11-year-old daughter, and about seven years ago, we took her to the Disney DIS-N on Ice show Frozen. Before the show, we bought a plastic wand that lights up; something that probably cost $3 to make was being sold for about $50. When the lights went out during the show, there must have been 5,000 of these wands in the audience. My wife turned to me and said, ‘You need to buy Disney stock.’ I didn’t, but looking back, I probably should have listened to her. We’re looking at that stock for our portfolios now that it has come down quite a bit.

What investing advice do you give friends and family when they ask?

Most people think investing for the future is simply buying stocks. I say, no, there’s a whole process involved, and buying stocks is the last piece of the puzzle. There are so many important decisions that you need to make first with an investment adviser or financial planner. Also, find someone you feel comfortable with because it’s probably a relationship you’ll have for 20, 30 or 40 years. You need to have a partner in this journey.

This interview has been edited and condensed.

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