Hanif Mamdani, RBC Global Asset Management

Hanif Mamdani, RBC Global Asset Management | BCBusiness

Investors have never faced more confounding markets: stocks defied traditional wisdom last year by soaring despite sluggish economic growth, and interest hovered near zero— for yet another year. To help make sense of the options available to investors today, we turned to local experts for some definitive direction

Hanif Mamdani

Head of Alternative Investment, RBC Global Asset Management Inc.
A hedge fund combining multiple asset classes
Finding undervalued assets in the absence of cheap money
One-year return, PH&N Absolute Return Fund: 13.86%

Hanif Mamdani’s long-term track record speaks for itself. He is lead manager of the PH&N Absolute Return Fund, an $860-million multi-strategy hedge fund that posted a 20.59 per cent five-year annualized return after fees as of October 31, 2013.

His current outlook stems from the observation that during the past year, investors rapidly adjusted to the idea that the U.S. Federal Reserve Board plans to “taper” or reduce its bond-buying monetary stimulus. “In 2014, I would argue we’ll see the onset of tapering in earnest,” he says. “Now that the taper news is well understood by the markets, it will be less about adjusting to specific taper amounts and more about investors trying to find undervalued assets in the absence of cheap money. This may require finding companies that can generate superior earnings growth yet are priced reasonably.”

Mamdani, who also manages the $3.25-billion PH&N High Yield Bond Fund at RBC Global Asset Management, has his own take on the so-called Great Rotation from bonds to stocks, which some pundits predict will gather steam as investors follow the Fed and pull out of bonds. This massive shift is already well under way, but it may not be as simple as exchanging one for the other, he says. Instead, it may be a rotation from traditional fixed income to a new-age bond-like portfolio that might include certain kinds of equities along with non-traditional asset classes. Real estate investment trusts (REITs) and high-dividend-paying stocks could become key sources of bond-like exposure with a modest element of growth but more risk, Mamdani believes.

“Be smart about defining your fixed-income bucket,” he says. Besides REITs and high-dividend equities, investors could consider shifting some traditional fixed income like long-dated government bonds toward high-yield and convertible bonds, leveraged loans and other asset classes that can provide better risk-adjusted returns.

As M&A activity heats up, 2014 will present more opportunities for alternative investment strategies such as risk arbitrage, Mamdani predicts. That’s where investors try to capture a premium between the final bid price of a stock in an announced merger and the stock’s current trading price.

“Rather than simply relying on traditional asset classes that now appear fully priced, taking advantage of some of these unconventional hedge fund strategies could generate mid- to high-single-digit returns with a lot less volatility and reduced correlation to the stock market,” Mamdani says.

Recent Investment Pick

Canadian REITs
When the government bond, high-yield bond and REIT markets sold off sharply last summer in reaction to the prospect of Fed tapering, Mamdani and his team saw a mispricing. As of October, both bond markets had recovered much of their losses, but some top Canadian REITs were hitting new lows, with unit prices declining as much as 25 per cent.

The Absolute Return Fund rotated some money out of government and high-yield bonds and into high-quality domestic REITs that were trading at about 12 times earnings, compared to 16 times just four months earlier. “On average this package probably yields around seven per cent today,” Mamdani says. “That’s a cash yield that’s fully covered by the cash flows of these REITs.”

If the economy is strong, REITs will enjoy some growth as the properties they own increase rents, Mamdani believes. The investment trusts are also continually making acquisitions, refinancing old debt that still pays a high coupon with new debt, he adds. And many of them are being smarter about how they use real estate by doing things like securing the rights to build condo towers atop strip malls.

“You put all of that into the mix and you get something like maybe four or five per cent earnings growth,” Mamdani says. “We think we can make 10 per cent per annum on these REITs including the growth, versus probably breaking even in government bonds and maybe making a low- to mid-single-digit return in high-yield bonds today.”