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This fund has consistently outshone both its peer group and the benchmark S&P/TSX small-cap index in terms of performance – with significantly less volatility. Hearn, 36, also is lead portfolio manager of Sentry U.S. Growth and Income Fund and Sentry U.S. Balanced Fund, as well as co-manager of Sentry Canadian Income Fund.

Sentry Small/Mid Cap Income Fund boasted a 10-year average annual compound return of 14% as of Oct. 31, far ahead of the skimpy 1.2% gain offered by the S&P/TSX small-cap index. For the three years ended Oct. 31, the fund gained 17.1% vs the index’s 2.6% loss.

The most recent one-year period has been more of a struggle for small-cap stocks, and the Sentry fund gained 1.6% to Oct. 31 – still a vast improvement over the index’s 10.9% loss. The fund also exceeded the average returns of its rivals in the small-cap category during the same one-, three- and 10-year periods.

Hearn was introduced to investing by his father, who worked for Labrador Iron Ore Royalty Corp. As a teenager, Hearn would tag along on visits to his father’s financial advisor.

“I saw how my father’s stocks were growing,” Hearn says, “and liked the idea of managing money to create wealth.”

With the hook firmly set, he earned a bachelor of commerce degree at Memorial University in St. John’s, Nfld., in 2003, and headed to Toronto a week after graduation to seek his fortune in the financial services sector. Landing his first job wasn’t easy.

“I knocked on a gazillion doors, but they’d never heard of Memorial University,” he says.

Hearn took a job as a customer service representative with Toronto-based AIM Trimark Investments Inc. to get his foot in the door, then moved into sales with Hartford Investments Canada Corp. (later acquired by CI Investments Inc.). He also worked toward acquiring his chartered financial analyst designation at the same time.

In 2005, Hearn came to the attention of Sandy McIntyre, vice chairman and chief investment officer at Sentry, and was hired as an analyst who focused on consumer and industrial small-cap companies. Hearn’s stock-picking acumen has taken him to the point at which he oversees about $5 billion in assets under management (AUM) in the three funds for which he is lead portfolio manager.

Part of Hearn’s process is to apply the Sentry “house style” to the small-cap companies (defined as having market capitalizations of up to $10 billion) in his bailiwick. The average company market cap in Sentry Small/Mid Cap Income Fund is $3.9 billion.

The Sentry style focuses on companies that are leaders in their industries and have an enduring advantage that cannot be duplicated easily by the competition. Sentry also is strict about debt, looking for solid balance sheets as well as a company’s ability to generate strong and growing cash flow and pay regular dividends.

“Rather than absolute dividend yield, Sentry is concerned about sustainable and growing dividends,” says Chris Davis, director of manager research with Morningstar Canada in Toronto. “That tends to lead to profitable and stable companies. [This strategy] gives [Sentry] a good compass.”

Hearn avoids unproven “concept stocks.” He seeks stable and established companies that have thrived through various economic cycles rather than, as he says, “home runs and multi-baggers.

“We like companies with pricing power and some kind of economic moat that results in limited competition,” he adds. “[Preferred firms] might operate within an oligopoly, have a powerful brand or a scale or regulatory advantage that will continue to make them a good business 10 to 20 years from now.”

Hearn is not a trader who flits in and out of stocks. He likes to commit to companies and ride their growth. A few holdings have been in Sentry Small/Mid Cap Income Fund for more than a decade, including Cargojet Inc., a cargo and charter airline; and ChemTrade Logistics Income Fund, a chemical manufacturer.

The Sentry fund pays a distribution of 3%. Although 95% of its holdings pay a dividend, a strong dividend is not reason enough to invest in a firm, Hearn says. He avoids companies that pay out too much of their cash flow in dividends. Often, a company with a lower dividend yield but good growth prospects will pay a higher dividend in the future and thus represents a better opportunity.

“How management reinvests cash flow is important to [a firm’s] ability to compound wealth over time,” Hearn says. “We like companies that pay out about half their cash flow in dividends and retain some to invest in growth.”

Hearn steers clear of firms that invest in growth for its own sake, however: “Some managers just want to be empire builders and buy stuff, and can overpay for assets. We look at what management is investing in and how it drives value.”

More than half of the S&P/TSX small-cap index is weighted in resources-related stocks, and this has been a drag on performance. The Sentry fund has had little exposure to resources during the past few years. About 47% of the fund’s AUM is based in the U.S., which has provided industry diversification as well as a boost from the strengthening U.S. dollar.

Recently, Hearn has raised Canadian exposure slightly, as lagging markets have created buying opportunities.

Photo: Sentry Investments Inc.

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