Sentry’s strategy paying off, big time

Sentry is showing healthy growth at a time when many fund firms are struggling to expand their AUM and sales. By comparison, the fund sector as a whole, as measured by the Toronto-based Investment Funds Institute of Canada, saw AUM grow by a paler rate of 10% in 2012 to $850 billion.

Sentry’s focus is on retail mutual funds, although, McIntyre says, the firm won’t turn down institutional business. Sentry no longer is adding to its closed-end funds and structured products, which are a small portion of its business.

This investment approach is paying off with recognition. Among various awards the firm has won, the $2.5-billion Sentry Canadian Income Fund was named best Canadian dividend and equity income fund at the 2012 Canadian Investment Awards, sponsored by Toronto-based Morningstar Canada. And of the 11 funds on Sentry’s product shelf that are rated by Morningstar, nine are ranked “above average” with four- or five-star ratings.

“Sentry has a high percentage of funds that are above average for risk-adjusted returns,” says Rudy Luukko, Morningstar Canada’s investment funds and personal finance editor. “The company has a highly successful track record.”

Currently, McIntyre sees better investment opportunities globally than in Canada. He says that clients, by broadening their geographical horizons, can find a better mix of profitable businesses. To give clients access, to such opportunities, Sentry introduced U.S. Growth and Income Fund in June 2010 – and it has become the fastest-growing fund on Sentry’s shelf. In addition, Sentry’s domestic portfolios are maximizing their foreign-content allowances.

Sentry also introduced Sentry Global Growth and Income Fund last year. This fund is co-managed by Dana Love, Sentry’s vice president and senior portfolio manager, and associate portfolio manager Josef Turnbull. Both portfolio managers had applied their global stock-picking skills at Invesco Canada Ltd. of Toronto before joining Sentry last year.

“About two years ago, we started talking to clients about the opportunities emerging in the U.S., and that turned out to be wise counsel,” McIntyre says. “And about 18 months ago, we felt it was time to reduce our exposure to the domestic commodities story, and since then, [we] have benefited by being underweighted in materials and energy stocks.”

Sentry recently forged a partnership with Sun Life Global Investments (Canada) Inc. of Toronto. Sun Life’s new Granite Managed Income Portfolios, a set of multi-manager portfolios, now include Sentry REIT Fund and Sentry Infrastructure Fund, along with other funds. Sentry also will act as the subadvisor for the new Sun Life Sentry Value Fund.

@page_break@ The “house style” at Sentry means disregarding market indices and choosing securities based on the internal growth of each investee company’s business, the strength of its balance sheet and the firm’s ability to produce consistent cash flow. Although no portfolio is immune to the effects of stock-market volatility, company-specific downside protection can be achieved through the focus on fairly valued companies achieving real earnings growth.

The balance sheet is considered the heart of any company, and must be strong enough to weather difficult business cycles. McIntyre favours companies that have a recurring revenue stream. For example, rather than investing in manufacturers of various electronic devices, he would prefer to own the companies that supply the bandwidth for data transmission.

“We look for strong free cash flow,” he says. “We also look to the balance sheet. We use rational discount rates and growth rates, and look for companies in oligopolistic businesses with pricing power. We don’t own [shares in] bad allocators of capital.”

There also is a need for fixed-income portfolios to meet the needs of clients, McIntyre says, so Sentry has been beefing up its expertise on the bond side. In mid-2012, Sentry hired James Dutkiewicz, previously vice president of portfolio management with the Signature Global Advisors’ fixed-income team at Toronto-based CI Financial Corp. Sentry also is expanding its expertise in emerging-markets high-yield bonds by adding team members fluent in the languages spoken in Asia, Latin America and Eastern Europe. About 10% of Sentry’s AUM is in fixed-income, and McIntyre would like to increase that: “Our priorities are to build on the fixed-income and global platforms. We are tilted toward equities, but would like to balance it out. And we’ve invested in the personnel to do that.”

Both McIntyre and Sentry founder and chairman John Driscoll have sons working for Sentry. The goal is to build a firm to pass to the next generation of employees. Sean Driscoll, son of John, recently was appointed co-CEO.

“Our goal is to create a legacy,” says McIntyre. “We have seen companies such as Fidelity [Investments Canada ULC] become exceptional businesses over a number of years, with the next generation taking it to new levels.”

McIntyre, now 61, learned important lessons about investor behaviour during his former career as a stockbroker with Jones Heward Investment Counsel Inc. of Toronto (now BMO Asset Management Inc.), at which McIntyre began, at the age of 28, to build his book of business by cultivating older clients who had more assets to invest than McIntyre’s young peers.

Now, Canadian baby boomers are heading toward retirement, and most share the same objectives as McIntyre’s former brokerage clients: they want decent income with minimal volatility.

“Older people have been my target audience my entire career,” says McIntyre. “They have savings, but their money needs to be managed differently from that of young people. As an old retail stockbroker, I’ve done a lot of hand-holding in a crisis. If a portfolio is blowing up, it’s hard to hold hands.”

As a portfolio manager specializing in high-yield investments at Sentry, McIntyre originally had heavy holdings of income trusts in his funds, which included the flagship Sentry Select Canadian Income Fund. But when income trusts began to be phased out, he transferred his analytical skills to other income-producing securities, such as dividend-paying stocks, real estate investment trusts and corporate bonds. He then set parameters for income-focused portfolio management that have filtered through all of Sentry’s 17 mutual funds, as well as through its closed-end funds and structured notes.

During the process of refining the Sentry team’s investment strategy, McIntyre also has ascended through various leadership roles at Sentry, including senior portfolio manager, chief investment officer (CIO) and president, gradually relinquishing responsibility for individual funds.

Recently, McIntyre has been turning more of the day-to-day management of the firm to others whom he has mentored, with portfolio manager Dennis Mitchell assuming the role of executive vice president and CIO in late 2011 and chief operating officer Philip Yuzpe taking on the title of president last month after McIntyre held the reins for two years. Although McIntyre has no plans to retire, he is gravitating toward a new role.

“I see my role as mentoring and making the final judgment on management decisions,” McIntyre says. “It’s time for me to be the rainmaker and let the young guys have the fun.”

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