How this Denver investment manager adjusted his strategy in a turbulent market

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Denver money manager Fred Taylor of Northstar Investment Advisors.

Source: Northstar Investment Advisors

Managing investments in a year fraught with headline risks requires a sound strategy and the conviction to stand by it, but also the flexibility to take advantage of fast-changing market conditions.

Denver money manager Fred Taylor has long focused on companies that pay meaningful dividends, and short-term Treasurys, but when the stock market corrected in December, he found lots of opportunity in fast-growing digital economy stocks with no debt.

Taylor, co-founded Northstar Investment Advisors in 1995. His firm manages about $700 million in private client accounts. He recently spoke with CNBC about his investment strategies amid a trying time for the market, which has reached for new highs, even as worries fester about the strength of the economy.

Here are seven questions with Taylor:

1. How have you adjusted your strategy this year?

“We took advantage of the near 20 percent correction at the end of 2018. To do this, we moved 10% to 15% of our client’s money into non-dividend and digital economy stocks that had become too cheap to pass up. For over a decade, we had only bought companies that had paid a meaningful dividend of 2% to 6% percent and had a history of increasing their dividends two to three times the rate of inflation for years. Going forward, we feel the world is rapidly changing to a digital and artificial intelligence economy and our clients need exposure to the companies that will benefit most from this significant change.”

2. Can you offer some examples of investments that fit your adjusted criteria?

“When the FANG and other digital economy stocks were trading cheaper than large consumer staples stocks and, in a few case cases, cheaper than utility companies, we thought it was a tremendous opportunity. It was a chance to buy great companies with double-digit growth rates, no debt and strong balance sheets. To make room in client portfolios, we sold companies with a lot of debt and no growth. Many of the old blue chip dividend payers had taken on a lot of debt to maintain and increase their dividends over the last decade. In the next recession, these debt laden companies will have a hard time making interest payments regardless of how low interest rates are.”

3. How have you managed volatility this year?

“We have managed stock market volatility three ways. First by investing in short-term U.S. Treasury bonds that mature between one and five years. Every time we have a major stock market correction, investors panic by selling their stocks and rush to the safety of short term U.S Treasury bonds. We really saw this during the financial crisis in 2008-2009. We have also increased the number of companies in our model portfolio from 35 to close to 70 for more diversification across all 11 sectors of the S&P as a another way to manage volatility. Lastly, we equally weight all the names in the portfolio to reduce risk.”

4. How would you describe your research process?

“Unlike most Registered Investment Advisors, we don’t outsource the money management piece. We aren’t multi-asset class allocators. We own individual stocks and individual bonds for our clients, because we like knowing what we own and why. We do a very through analysis on the 60 to 70 companies we own by looking closely at their balance sheets, debt levels, and ability to pay and increase dividends.”

5. How much do you worry about the rising debt levels of companies?

“In anticipation of the next recession, we have spent the last two years culling out companies in our client’s portfolios that aren’t growing their sales and revenues. More importantly, we have been looking at the debt levels of these same companies and if management has been increasing the debt load just to maintain a dividend or increase a dividend we have been selling them in favor of faster growing companies with little or no debt. We have been very proactive in this regard.”

6. What risks do you foresee to the market and economy in the next year?

“There are both short-term and longer-term risks to the economy. The shortest-term risk to economic growth is the trade war between the United States and China. Massive tariffs between the two countries will hurt both economies and have a negative impact on the rest of the world. What the Federal Reserve does with short-term interest rates between now and the end of the year will have a major impact on the economy. Lower interest rates keep the housing and auto sectors strong and consumer spending high. Longer-term what happens with impeachment proceedings, the fallout from Brexit, and who is president of the United States in January 2021 will have the biggest impact on the economy the next four years.”

7. What do you do when you’re not working?

“I like to give back to my community. I am currently chairing the Children’s Hospital Colorado Foundation board and serve as vice chair of CollegeInvest, Colorado’s 529 plans. I was recently honored and humbled to be a national finalist for a Lifetime Achievement award from the InvestInOthers charitable organization for my two decades board work at Children’s Hospital Colorado Foundation. This is the pediatric hospital who saved my son’s life at age 7 from a near fatal brain aneurysm.”

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