Number Cruncher

A small-cap strategy that pays dividends

The Globe and Mail

What are we looking for?

What the pros who manage small-cap funds are buying.

Checking out their top holdings is good way to unearth investment ideas, or research a fund before buying it. Today, we look at Sentry Small/Mid Cap Income Fund at sentry.ca.

More about the fund

Aubrey Hearn of Toronto-based Sentry Investments has run the $189.4-million Canadian small-to-mid cap equity fund since 2005. The fund returned 7.9 per cent for the year ended Jan. 31 versus an 8.4-per-cent loss for the S&P/TSX Small Cap Total Return Index. Over five years, it has posted an annualized gain of 12.2 per cent.

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Unlike many small-company funds, 90 per cent of the names in the portfolio pay a dividend so “we don’t have a lot of exposure to materials and even energy,” he said. The fund, which has about 20-per-cent invested in U.S. securities, is now 36-per-cent invested in industrials and nearly 19-per-cent in consumer discretionary stocks.

Mr. Hearn is bullish on the small-cap sector. Many stocks struggled last year amid concerns about Europe’s debt crisis and slower global growth. The industrial companies should do well as the U.S. economy improves, he said. “We are pretty much fully invested.”

What did we find?

Most stocks are trading at or close to their 52-week highs. Canadian Helicopters Group Ltd. leads the pack of one-year gainers with about a 54-per-cent return.

Badger Daylighting Inc., which runs a Canadian and U.S. fleet of hydrovac trucks that are used to dig and remove soil, is a well-run company with a return on equity that has averaged in the high 20s over many years, he said. His 12- to 24-month price target price is $30 a share.

Stantec Inc., a conservatively managed engineering and consulting firm, also has more upside, he said. The firm plans to pay its first dividend in April. Investors have been concerned because it gets 50 per cent of revenues from the United States, where the economy has been sluggish, he said. “We feel the worst is behind them.” His target price is $36 a share within two years.

Pension consultant Towers Watson & Co. remains attractive because it benefits from a high client retention rate even in the midst of an economic downturn, he said. “This is a worldwide company, and is continuing to grow. They have net cash on the balance sheet.” His target is $72 a share within 24 months.

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