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Sticking to strategy

Market crash took a toll on his flagship hedge, but it came back with a vengeance


Rohit Sehgal admits he's been to hell and back. Navigating his hedge fund with its big bets through the 2008 market meltdown is not a time he wants to relive any time soon.

"We ran into an unbelievable global liquidity crisis," recalls the manager of the $596-million Dynamic Power Hedge Fund. "I would be arrogant if I said that I wasn't scared...

"What we went through was hellish. When you have big names like Lehman Brothers going broke and Goldman Sachs [being bailed out], everybody was scared like hell that the whole world system was collapsing."

The market crash took a toll on his flagship hedge fund, sending it plunging 72 per cent in 2008. But it came back with a vengeance last year with a 159-per-cent gain. While the return is flat for three years, the fund still has an impressive average annual return of 25 per cent over five years.

"The right thing I did was that I didn't panic or change my portfolio because I was absolutely confident that the fundamentals of the names I had were still sound," said Mr. Sehgal, also chief investment strategist at Goodman & Co. Investment Counsel Ltd., which runs Dynamic Funds. "That is the reward I am getting for sticking to my strategy."Can we see a repeat of the 2008 market collapse?

The probability of that happening again I think is very low... What happened in 2008 was the climatic conclusion of 10 years of excesses. That happens once in a blue moon, or in a 100 years.

What is your market outlook, particularly Canada?

We are quite positive. The Canadian market has the advantage of being more linked to what has been happening to China and India because of our commodity exposure. We still think that the emerging economies like China, India and Brazil and so on are going to outperform the United States and the more advanced economies. I am not that bearish on the United States either ... I like the U.S. market because half of their earnings are coming from abroad.

What returns do you see in North America this year?

I think we are going to the pre-Lehman level in the next three months, which will suggest an upside of around 10 per cent for Canada and the United States ... It could be better as the economy continues to improve. I think the market will start responding to that. Ten to 15 per cent is not unreasonable for both markets.

What commodity sectors do you favour?

On the energy side, we like heavy oil or oil sands. The cost structure has come down dramatically over the last two to three years. One thing driving that cost is that natural gas prices have come down dramatically.

The good thing about oil sands is that the decline rate is very low. For a conventional oil field, from day one, you are facing a steep decline in production. In the case of oil sands, we can continue to produce at very high levels for 50 to 100 years ... We are not as attracted to the Canadian natural gas. We still think there is going to be more supply than demand.

What is another sector you like?

I also like banks - they are giving the best of the worlds. You are getting the defensive characteristics because of their high yields. The average yield of a Canadian bank is 4.5 per cent, which compared to the bond market is very attractive. And the Canadian banks have a return on equity of 14.5 and 15 per cent, which I think will increase as the credit cycle starts improving.

What advice would you give investors?

I think that we are in an environment where a little bit of a risk is not a bad thing. You are going to be rewarded for that, but you have to be careful where you invest.

But I think the penalty of not being in equities is going to be high because cash is not giving you very good returns.

People say cash is king. I believe in the opposite. Cash is detrimental to the overall health of your portfolios ... You have to have a long-term horizon. There is no way I can tell what is going to happen in the markets next week or next month.

Are you ever bearish?

I have an optimistic bent. I think if you are investing in equities - and you don't have that [view] - you should not be managing money. Shorting is a very different mindset. Yes, I am an optimistic but I am also realistic. Things do go through excesses, but over all, the tendency of the world economy and businesses are to grow. Some grow faster than others.

My job is to find companies that are growing at an above-average rate, and you do have periods where you go through business cycles.

What is the big risk to your bullish scenario?

The biggest risk is from the policy makers. The central banks I think so far have done not a bad job saving the system, but of course at a big cost. There is an enormous amount of liquidity in the system, and at some point, they have to take the liquidity out before it starts creating another bubble.

So the timing of that will be very critical ... It depends from country to country. In China they are already seeing very rapid growth in loans and they are worrying about it. So they are trying to cool things there. And in countries like India, they have to worry more about food inflation. So they probably will become a little more restrictive.

But in the case of the United States, there is very high unemployment so they can't risk raising interest rates too early because that will put a damper on the economy. When you have high unemployment, that's a big risk and the timing will be even more critical.

To me, in the case of the United States, I think the Fed will probably keep a very relaxed policy for another two or three quarters.


For Rohit Sehgal, now in his early 60s, the road to success is making concentrated bets in emerging names. He stuck with Athabasca Oil Sands Corp., which is about 30 per cent of his fund, through the downturn. The private company was revalued in the wake of PetroChina Co. Ltd.'s $1.9-billion-deal to buy a big stake in this oil sands play. "As this company becomes public [this year], I will be reducing [my position] of course," said Mr. Sehgal "I am always looking for the next Athabasca. And I think I have them." Here are his current favourites:

Pacific Rubiales Energy Corp. (PRE-TSX)

Yesterday's close $14.66, up 90 cents

The Canadian-based oil and gas producer operates Columbia's largest oil field with state-run Ecopetrol SA. This will be an "exciting year" because its $850-million capital program will double net production to 92,000 barrels a day from 46,000, Mr. Sehgal said. His one-year target is $20 a share.

Alange Energy Corp.(ALE-TSX)

Yesterday's close 64 cents, unchanged

The Canadian oil and gas producer, which has assets in Columbia and plans to grow through mergers, "is the next Pacific Rubiales in the making," he said. He expects production to rise to 11,500 barrels a day from 3,300 by the end of next year. His one-year target is over $1.50 a share.

Petrominerales Ltd. (PMG-TSX)

Yesterday's close $20.43, up 47 cents

The oil and gas explorer and producer, which operates in Columbia and Peru, is a subsidiary of Calgary-based Petrobank Energy and Resources Ltd. Its recent well lifted production by more than 30 per cent to 32,000 barrels a day, he said. His one-year target is $30 a share.

Bankers Petroleum Ltd. (BNK-TSX)

Yesterday's close $6.50, up 8 cents

The Canadian oil and gas explorer and producer, which is developing a heavy oil field in Albania, is set to increase production by using modern recovery methods. Production should rise to 22,000 barrels a day next year from 8,100, he said. His one-year target is $10 a share.

© 2007 The Globe and Mail. All rights reserved.

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