Fund manager Alan Radlo earned strong returns in his Canadian balanced fund over three years by ignoring a conventional investment: bonds.
"A lot of people questioned me," recalls the Boston-based chief investment officer of the Cambridge fund family at CI Investments Inc.
"People thought I was being too risky. … But I kept trying to tell people who would listen that I was making a tactical bet that securities I was placing in there [such as pipeline income trusts]were income substitutes," he said.
His move has since been vindicated. His CI Cambridge Canadian Asset Allocation Corporate Class won Lipper Awards for one and three years in the tactical balanced category. For three years ending last Oct. 31, it posted an average annual return of 9.6 per cent.
Financial advisers were "overlooking my 28 years in the industry where I have never demonstrated to be a pedal-to-the-metal type investor," recalled the veteran manager who spent most of his career running funds at Fidelity Investments Canada before joining CI in late 2007.
When the fund was launched in 2008, his three-year bet was that alternative high-yielding investments with growth potential would beat bonds that would get hurt in a likely rising interest-rate environment.
Rates did not rise, he acknowledged, but "the returns that were made on the income substitutes were much higher than many bonds, except some high-yield ones, and that is what led to the outperformance."
Four high-yielding stalwarts in the fund include Keyera Corp., Inter Pipeline Fund, Pembina Pipeline Corp. and Provident Energy Ltd. They were yielding 7 per cent to 8 per cent three years ago because of concerns they would not be able to maintain their payouts once they converted from income trusts to corporations. "Not only did they continue them, they increased the payouts," he said.
Unlike bonds, income substitutes can benefit from takeovers. Provident Energy last month was acquired by Pembina Pipeline in a deal to close in March.
The fund, meanwhile, is undergoing changes. Since mid-September, Robert Swanson, a former veteran Fidelity manager who jumped ship to CI, has taken over and added corporate bonds, preferred shares and U.S. banks. It looks like a new direction is in the works.
How the winners stacked up: