Fund in Focus: Sentry Canadian Income Fund

Multi-year FundGrade A+® Award winner

While Sentry Canadian Income Fund has been a solid performer for a long time, in the past three years it has trailed the Canadian market significantly. Its 3-year average annual compounded rate of return to March 31 was 2.7%, while the S&P/TSX Composite delivered 9.3%. While it’s easy to point to the large market cap of the holdings for the underperformance, I believe there is another reason.

The fund really started to underperform in 2016 and 2017 and has been focused on larger companies for at least the past five years, if not longer, meaning moving up cap is not the main reason for its recent underperformance. Rather, I believe the underperformance is more a function of the investment process, which has focused on higher-yielding equity securities.

Managers Michael Simpson and Aubrey Hearn look for well-managed, high-yielding equity names that have the ability to deliver strong and growing cash flows.

The portfolio will typically hold around 60 names and tends to look much different than its benchmark. It can invest up to 49% of the fund in the U.S., and it can also hold preferreds, corporate bonds, and low-risk options to help boost the internal yield.

While not a value fund per se, valuation plays a key role in the stock selection process, and this eye on valuation has resulted in the fund’s maintaining an underweight position in Canadian banks, which has dampened performance in the short run.

Unlike other Canadian-focused dividend strategies, this fund does not currently have a bank in the top 10 holdings, mainly because the managers feel the sector is vulnerable to an overheated housing market and excessive consumer debt. In contrast, banks comprise nearly one quarter of the S&P/TSX Index.

The managers’ steadfast refusal to chase hot trends and momentum plays has hurt the fund over the three years. But as we head into a more volatile period, I believe the market will again rewards those companies that are producing strong levels of cash flow, have low levels of operating leverage, and are well managed.

The biggest drawback to the fund is its cost, with an MER of 2.35%, which is in the upper end of the category. However, the managers continue to focus on the fundamentals, and that discipline has been very successful for them over the long-term. The fund remains a very strong pick for the long term, and I believe it can be a core holding in most portfolios. It also generates an attractive distribution yield.

Sentry Canadian Income Fund
Fund company: Sentry Investments
Fund type: Canadian Focused Equity
FundGrade Rating: C (March)
FundGrade A+ Awards: 2012-2016
Style: Large-Cap Blend
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Michael Simpson since Apr 2002; Aubrey Hearn since June 2008
MER: 2.35% (Front-end load units)
Fund code: NCE717
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.