Value investing is growing in popularity, and David Taylor knows the ropes. The Toronto-based portfolio manager spent the last 24 years working in the industry and in March launched his own firm, Taylor Asset Management.
Its aim is to avoid two huge pitfalls: Buying into bad businesses and overpaying for good ones.
“We learned to find well-run companies that are trading at attractive prices,” says Taylor. A good place to look, he adds, is companies on which markets have temporarily gone soft because of a short-term problem. More often than not, these companies will bounce back.
“It works because you tend to protect capital when you’re buying companies that have already taken it on the chin,” he says. “They’ve traded down so you protect capital because you’re better off buying companies trading at low multiples instead of high multiples.”
If it’s that simple, why isn’t everyone jumping in? Simple, says Taylor; too risky. “I’m looking in areas that the majority of investors aren’t,” he adds. “Most don’t have the stomach, so you’ve got a larger universe and less competition.”
Taylor says his aggressive approach doesn’t diminish the number of advisors eager to do business with him. “Even though I’m a value investor, the advisor looks to managers in whom they have confidence and who don’t stray from their investment styles.”
His process of screening companies for investment is rigorous. “We look for companies that have growing market shares, balance sheets that aren’t overly leveraged, and that have good cash flow.”
Once he identifies a quality business, he determines whether he’s paying the proper price by examining how it has traded in the past and how its competitors trade.
All the homework and the baseline strategy tend to help mitigate some risk. “If you’re already buying trades at a discount and things go wrong, they tend to fall less.”
Another tool to combat risk is a systematic price discipline.
“My portfolios are focused. They have on average 30 names in them. If another name comes along that we find attractive we don’t just add it. We’ll sell [to keep the portfolio at 30],” says Taylor. “Even though we have 30 names and we like them all, our 30th-best idea might have a 20% upside potential and our number-one idea might double.”
Conversely, if the investments available aren’t appealing, “I have no problem sitting on cash.”
Taylor sub-advises the following funds for IA Clarington:
- IA Clarington Focused Canadian Equity Class
- IA Clarington Focused Balanced Class
- IA Clarington Focused Balanced Fund