Craig Jerusalim may be known as a growth-oriented investor, but the multibillion-dollar money manager is seeing a lot of opportunities in the market shift toward value stocks in today’s rising-interest-rate environment.
“We’re in the midst of a massive rotation in equities from growth to value,” says Mr. Jerusalim, a senior portfolio manager at CIBC Asset Management who manages about $6.3-billion in assets across multiple dividend and growth funds.
It’s not a change in his investing mandate, Mr. Jerusalim says, but a switch from “expensive growth to more quality growth” and seeking out “mispriced” assets in sectors such as energy and financials.
“I’m seeing more growth in some of those value sectors, so I’m going toward where the growth is,” he says.
The strategy shift started late last year, when it was clear interest rates were set to rise amid surging inflation. His team started to sell some of its higher valuation technology stocks and increase its holdings in oil and gas, as well as banks and insurance, betting on strong earnings growth to come.
That search for growth has been profitable for the money manager in recent years: Mr. Jerusalim’s two growth funds have returned an average of 32.3 per cent, 23.3 per cent and 13.7 per cent annualized over the past one, three and five years, respectively, as of Dec. 31. The dividend funds have returned 26 per cent, 16.7 per cent and 9.5 per cent annualized over the past one, three and five years. The returns are before fees, which vary by client.
Globe Investor recently spoke with Mr. Jerusalim about what he’s been buying and selling and the advice he gives friends and family about investing:
What have you been buying lately?
We’ve been adding to sectors that we’ve identified as having pricing power and the ability to pass on higher costs, such as waste management, telecommunications, the Canadian railways and financials, as well as sectors with strong fundamentals, such as energy.
Within energy, for example, we’re sticking with the highest-quality companies such as Canadian Natural Resources, Cenovus and Tourmaline – all of which have long-life assets and are trading at very reasonable valuations. Each one also has different levers of growth that they can pull, while returning money to shareholders.
Tourmaline is a top pick of mine. It has close to 100 years of inventory and, at current commodity prices, it’s generating a lot of excess free cash flow. The company recently issued a $1.25 special dividend and we’re expecting more special dividends over the course of the next year.
With waste management companies, I like Waste Connections and GFL, both of which I own and find attractive at current valuations. Throughout the pandemic, they’ve demonstrated their ability to grow volumes while also increasing prices. Even if higher energy prices or wage inflation hurt the cost side of the equation, they’re more than able to offset it with price increases to their customers as well as make accretive acquisitions.
The telcos are another sector with pricing power. BCE and Telus have more expensive valuations than the cable companies, like Quebecor and Rogers, but as a group, the services they offer are essential services that people are willing to pay more for. Telus is one of my top picks because it’s also diversified into other areas like digital health and agriculture, which offer additional avenues of growth similar to its successful Telus International spin-out.
What have you been selling?
We were overweight technology for much of 2020 and 2021. Toward the end of last year, we moved to an underweight position in tech. We’re still trying to identify the best companies in the tech space – and there are a lot of them – but valuations did get ahead of themselves. We were expecting a contraction. However, we’ve been surprised by the magnitude and the pace of the decline for many of the companies – even the highest quality ones. There are still some businesses, like Shopify, for example, where we see long-term growth. It’s a name we trimmed, but we still own it in our funds.
What are some stocks you wish you bought or didn’t sell and why?
It’s easy to look at stocks that have gone up tremendously and have a little pang of regret for not buying them, but too much of that is just hindsight bias. My regrets are more with the great companies that I did own and trimmed or sold outright too early, such as Intact Financial, FirstService and Waste Connections. Those companies have been core holdings in my funds over the years. A couple of years ago, I reduced some of them on valuation concerns.
The mistake that I made is that these are extremely high-quality market leaders, each with defensible competitive advantages that consistently create value for shareholders. Fortunately, I learned from my earlier missteps and have since restored my overweight position in all three of those companies. I sleep better at night knowing these are great businesses that I own.
What investing advice do you give family members when they ask?
I encourage my family, and especially my younger friends, to avoid the pitfalls of market timing and really let the time value of money work to their advantage. It’s the best get-rich-slow scheme. It’s not sexy as a get-rich-quick scheme, but the probabilities of success are greater.
I always suggest dollar-cost averaging into a well-diversified fund or index or a basket of high-quality companies – and just continue to add to those investments throughout the market cycle. There is only one mistake you can make as a long-term investor – and that’s selling at the bottom.