Why this fund manager is buying Meta Platforms but selling IBM

Brompton Group’s Laura Lau expects inflation to stay high, unemployment to rise and consumer confidence to wane

While some investors think the economy has sidestepped a recession as inflation starts to ease and the job market remains strong, money manager Laura Lau believes the downturn is right around the corner.

“It’s probably going to be the second half of this year or early next year at the latest,” says the chief investment officer with Brompton Group in Toronto, who oversees about $2.5-billion in assets across a range of funds.

Ms. Lau says investors were likely overly optimistic in forecasting a “soft landing” for the economy earlier this year, which explains the runup in markets in January. But volatility is back, especially after the unfolding of the regional banking crisis south of the border in recent days.

“I’ve always thought we will have a recession because, when the U.S. Federal Reserve increases interest rates, it typically takes about a year to a year and a half before we find out what they broke. Now, we know,” she says, adding that stricter lending standards from the regional banking failures will weigh on the broader economy.

She also expects inflation to remain relatively high, unemployment to rise and consumer confidence to wane.

“When people get nervous, they spend less,” she says, which means more volatility in the months ahead. “The market typically bottoms during a recession. Will it be lower than October last year? We’ll find out.”

Still, Ms. Lau sees opportunities for investors, particularly in beaten-down sectors like technology. As of March 23, her company’s Brompton Tech Leaders Income ETF is up 14 per cent year to date, down 4.7 per cent in the past 12 months, and has returned 24.7 per cent in three years, according to total price return data on Morningstar Inc.

The Globe and Mail spoke with Ms. Lau recently about her investing style and what she’s been buying and selling in the tech sector.

Describe your investing style.

Our style is top-down. We look at the macroenvironment, where we are in the economic cycle, and then we choose sectors and subsectors to overweight and underweight. Then, we make bottom-up stock selections. We concentrate on quality at a reasonable price.

What’s your strategy in this kind of market environment?

We haven’t had to make any major changes. We don’t have anything that blew up. We’re underweight banks. We also have a covered-call option strategy, which involves investing in a portfolio of stocks and then writing (or selling) call options on those same stocks. It enables us to generate income from the call options and receive any dividend income from the stocks. It also helps reduce volatility in the portfolio. We’ve already stepped up our covered-call program over the past year because of higher volatility.

What have you been buying or adding lately?

In our technology fund, we’ve been adding companies with cheap valuations and are able to do some “self-help.” That means they understood change was needed and have taken steps to improve. One example is Facebook parent Meta Platforms Inc., which has announced some cuts recently. The company hired too many people in recent years, spent too much on virtual reality, and is cutting back. Another company we bought, for some of the same reasons, is Salesforce Inc. We only buy profitable technology companies.

We also added more software names because they have more operational leverage. Examples include Adobe Systems Inc., Fortinet Inc., Servicenow Inc. and Oracle Corp. Adobe, Meta and Salesforce are all new buys, while the other names we owned and added to. We also increased our exposure to Nvidia Inc., which makes the best chips for artificial intelligence.

What have you been selling or trimming?

We have been taking profits from some other technology names to increase our software exposure. An example is payment technology company Fiserv Inc. and International Business Machines Corp., both of which we’ve sold outright.

We’ve also trimmed exposure to tax software company Intuit Inc. because, believe it or not, it tends to underperform going into tax season. We often sell Intuit seasonally.

Name a stock you wish you bought or didn’t sell.

Onsemi is a stock we wished we had bought in the technology fund. It services the automotive, internet of things, and power sectors. We thought that the supply constraints would have been more of a headwind. The stock has gone up too much to buy it now. We missed it. We do own it in another fund.