Fund in Focus: Sentry Small/Mid Cap Income Fund

Superior long-term returns, downside protection

Even with more than $1.8 billion in assets under management, CI Investments’ Sentry Small/Mid Cap Income Fund is one of the better funds available. Led by Sentry portfolio manager Aubrey Hearn, it continues to deliver above-average long-term risk-adjusted returns for investors.

Mr. Hearn uses a bottom-up security selection process that looks for small- and mid-cap companies in Canada and the U.S. that have a history of delivering high return on capital, low leverage, rising free cash flow, low earnings volatility, strong management teams, high barriers to entry, sustainable competitive advantages, and the ability to consistently grow their dividends over time. Valuation is also a consideration in the process, as the manager doesn’t want to overpay for an investment.

With about 60 names, the portfolio is well diversified. The top 10 holdings comprise about a third of the fund. Top names as of June 30 included Enerflex Ltd. (TSX: EFX), Brookfield Infrastructure Partners LP (TSX: BIP.UN), Morneau Sheppell Inc. (TSX: MSI), Parkland Fuel Corp. (TSX: PKI), and Waste Connections Inc. (TSX: WCN).

The sector mix is very much the result of the stock selection process. The portfolio often looks dramatically different than its benchmark and its peer group. The fund currently has overweight positions in, industrial services, consumer services, financial services, communications, and tech. It is underweight consumer goods, healthcare.

Somewhat surprising for a fund with an income mandate, it is also underweight real estate and utilities, which are staples of more traditional income offerings. It is also nearly 47% invested outside of Canada. Valuation levels are higher than the benchmark, but this is offset by a very healthy earnings growth outlook.

Relative absolute performance has trailed slightly in the shorter term, with the fund’s 3-year average annual compounded rate of return of 6.3% to June 30 placing in middle of the pack. And with a 3-year average annualized standard deviation of 9.7, volatility has been on a par with the peer group. However, the fund’s performance in down markets has been excellent, participating in just a third of the market drops over the past three years. Over the longer term, the fund has proven its strategy, with a 10-year average annual compounded rate of return of 14.2% compared with 9.6% for the category average. It racked up five consecutive FundGrade A+® Awards from 2012 to 2016.

Given the focus on capital preservation and downside protection, I continue to believe in this fund and view it as one of the stronger small/mid-cap offerings available. It has a solid management team, with recent additions deepening bench strength, and uses a disciplined, sound, and repeatable investment process.

In the short term, we may see higher levels of volatility, but the fund should remain less volatile than its peers. Longer term, I expect the fund to continue generating above-average returns with below-average levels of volatility.

Sentry Small/Mid Cap Income Fund
Fund company: CI Investments
Fund type: Canadian Focused Small/Mid Cap Equity
FundGrade rating: C (June)
FundGrade A+ Awards: 2012-2016
Style: Mid-Cap Blend
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Aubrey Hearn since June 2008; Michael Simpson since July 2005
MER: 2.45%
Fund code: CIG50221 (Front-end units)
Minimum investment: $500

Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.

Notes and Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.