How reading omens paid off

Date: Thursday, January 15, 2009
Author: Shirley Won, GlobeAdvisor.com

Hedge fund manager Nandu Narayanan placed a big bet on a looming U.S. housing and financial crisis - a move that has paid off in spades.

During last year's devastating bear market, which has sent many rivals' investments deep into the red, his "opportunistic" funds, which he runs for CI Financial Corp., racked up robust returns of more than 40 per cent.

"I am a little bit stunned that how much I had expected has actually transpired," says the chief investment officer of New York-based Trident Investment Management LLC.

"My worst outcome was that the entire financial system in the United States would be in tatters, and most of the banks and the financial institutions would be on the ropes."

What took him by surprise is how long it took for the financial train wreck, which has triggered massive government bailouts and a sharp economic downturn, to unravel.

"It suggests there is a strong vested interest in the financial community not to accept reality," he says.

HOW DID YOU SURVIVE LAST YEAR'S BEAR MARKET?

We are an opportunistic fund so if it means buying bonds is the right thing to do, we will buy bonds. We are only in stocks when the opportunities warrant them - either long or short. There was a bear market in stocks last year, and there was a bear market in corporate credit. But there was a huge bull market in sovereign credit and sovereign bonds. So really what made us money is that we got all these three big ideas right last year.

WHEN DID YOU BECOME A BEAR ON MANY U.S. STOCKS?

I got extremely bearish on real estate around 2004-2005. You knew this whole real estate situation was going to become a rapid mess when things turned because people were not buying houses to stay there, but basically to flip ... So much of the financial system was geared to lending to the housing market, and much consumption was based on extracting equity from homes. So this was all interlinked - it was one gigantic bubble ... We were quite a lot more bearish on those companies geared to domestic consumption or domestic lending - real estate, financials and retailers.

WHAT PART OF THE U.S. MARKET DO YOU LIKE?

I would be more bullish on high-quality, low-debt U.S. companies which have significant overseas operations like an Exxon, Johnson & Johnson and - at the risk of giving a plug to my sister's company - I would say PepsiCo. [He does not own these stocks, but they may be in exchanged-traded funds he holds.]

YOU HAVE BECOME BULLISH ON CANADA. WHY?

We are long Canada. We think a lot of the Canadian oil and gas companies are looking relatively cheap to us, and we are getting very bullish on them. We don't know what is going to happen in the next month or two, but we feel that if you are willing to hold them for a year or more, it is good money in the bank ... I am not as concerned about Canadian financials as I am about U.S. financials. I don't know what is going to happen to the Canadian banks, but I would venture to say they are not going belly-up - none of the six."

WHAT ABOUT OIL?

The conditions for a bigger move up are actually much in place. Once this demand destruction slows down or abates, you are going to see the same problems of lack of supply compounded by the fact that these oil sands projects that were initiated are not going to be very economical at $40 oil ... That is going to set the stage for a much more powerful rally in oil in the next leg when the economies recover. I can't tell you whether oil is going to bottom at $40 or $30, but you have a very high likelihood that in the next two to five years, it will go to $200 [per barrel].

WHY ARE YOU STILL BULLISH ON GOLD?

With easy monetary policy and virtually zero interest rates, you basically devalue paper money. We are probably two-thirds in bullion and one-third in stocks. It's only about 10 per cent [of our funds] but in the context of the other bets we have got, it's a very large bet ... I think the move to $1,000 per ounce or higher is going to happen this year."

WHAT ADVICE WOULD YOU GIVE TO INVESTORS?

Be patient and stick to safety. Some of the energy companies in Canada are extremely good buys like EnCana and Petro-Canada, which we own, and others like Suncor and Canadian Natural Resources.

If you don't have the stomach to hold them for two or three years, then don't bother doing anything. Just be in bonds or wait in cash. Even some of the high-quality gold companies like Barrick would be very good buys right now. The other group we are getting increasingly excited about - if it gets hit any more - includes utilities or transportation companies that get a toll fee for transmitting gas, oil or electricity. There is not a lot of risk to firms like TransCanada, TransAlta or an income trust like Great Lakes Hydro.

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Nandu Narayanan

BORN: Chennai, India

Age: 45

EDUCATION: BSc in economics/mathematics and computer science from Yale University. PhD in finance and international economics, and a master's degree in management from the Massachusetts Institute of Technology. For his PhD thesis on some macroeconomic consequences of banking system regulation, his adviser was Paul Krugman who later won a Nobel Prize in economics in 2008.

CAREER: He began his investment career in 1991 as an analyst at Tiger Management, a New York-based hedge fund firm. From 1993 to 1996, he was chief equity and emerging markets strategist at hedge fund manager Caxton Corp. Before founding Trident Investment Management in 1998, he was a consultant on emerging markets for Credit Suisse Asset Management and ran several mutual funds, including CI Emerging Markets for CI Financial from 1997 to 2005.

Family connections: His sister Indra Nooyi is CEO of PepsiCo.

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Robust returns in a bear market

Figures as of Dec. 31, 2008

* Managed only since 2005** Since inception in 2001

KATHRYN TAM/THE GLOBE AND MAIL // SOURCE: GLOBEFUND.COM