The Sentry Small/Mid Cap Income Fund has long been one of my favourite small- and mid-cap offerings available. Managed by the Sentry Investments team of Aubrey Hearn and Michael Simpson, it has the dual objective of providing both consistent monthly income and capital growth. And so far, the fund has delivered on its promise. Hence the consistent Fundata FundGrade “A” ratings.
Sentry considers this fund to be a feeder fund to its highly successful Sentry Canadian Income Fund. It invests in the same type of companies, namely those with high returns on invested capital, modest cash flow expenditures, and the ability to generate free cash flow, which are trading at a valuation that is less than their true value. The big difference is the companies in this fund are just too small to be included in the large-cap focused Canadian Income Fund.
The portfolio is fairly diversified, holding approximately 60 names, with the top 10 making up just under 30% of the holdings. With its emphasis on income, the portfolio looks much different than the small-cap index. It is significantly underweight in energy, materials, financials, and real estate. It has a heavy emphasis on industrials, so it should perform well as the economy grows, even at modest levels.
The managers have also significantly increased their exposure to U.S.-based companies. They can invest up to 35% outside of Canada. At the end of March they were near their cap, with 33% invested in the U.S. They believe that the U.S. is better positioned for economic growth than is Canada. Further, it continues to provide opportunities for diversification at attractive valuations.
The fund has consistently generated returns that have outpaced not only the index, but its peer group. An exception would be 2009 when it finished in the third quartile, despite posting a 43.5% gain. As impressive as returns have been, the volatility profile has been stellar. It has been significantly less volatile than small and mid-cap stocks, but also its large-cap brethren. That’s earned it the Fundata FundGrade A Grade for April and the Fundata FundGrade A+ Rating for 2013.
Still, with a focus on mid-caps, it does have the potential to be more volatile than it has been.
Another interesting factor is that this fund pays a monthly distribution of $0.05 per unit. At current prices, this is a yield of approximately 2.9%.
The biggest drawback to the fund is that it is fairly expensive, with its 2.77% MER. Thus far, this has been a fund where the risk-adjusted performance has been worth the extra cost. Considering the management team and investment approach, I expect that at least for the medium term, that trend will continue. I expect that it will continue to deliver above-average returns with below-average risk.
Fund company: Sentry Investments
Fund type: Canadian Focused Small/Mid Cap Equity
Fundata FundGrade® Rating: A
Risk level: Medium
Load status: Optional
Manager: Aubrey Hearn since July 2005; Michael Simpson since July 2005
Code: NCE 721 (front end)
Minimum investment: $500
Courtesy of Fundata Canada Inc. © 2014. Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc. Investments mentioned are not guaranteed and carry risk of loss.