Cheap Trick performs at Live Nation’s National Concert Day in 2016. Sentry Small/Mid Cap Income Fund’s biggest holding is Live Nation Entertainment Inc., which it bought during a sell-off after the 2015 Paris Bataclan terrorist attacks depressed entertainment stocks.Andy Kropa/The Associated Press
With Canada's small-cap market dominated by downtrodden energy and materials stocks, fund managers that specialize in the sector are looking further afield.
Sentry Small/Mid Cap Income Fund, the country's top performing small-cap fund with assets of more than $1-billion, is finding some of its highest returns in a global concert promoter, a U.S. medical testing company and a casino operator.
"We try to find companies that are generally in oligopolies, that have very little competition," said Aubrey Hearn, senior portfolio manager of Sentry Investments Inc. "From that perspective, we think a lot about barriers to entry and how difficult it is for someone to get into the industry that our companies operate in."
The $1.7-billion fund has gained 10 per cent in the past 12 months, outperforming the 0.6-per-cent decline in the S&P/TSX venture composite index, where a weighting of almost 70 per cent in materials and energy stocks has bogged down returns, according to data compiled by Bloomberg. The broader S&P/TSX composite index is also lagging; its 5-per-cent gain over the same time frame has made it the fourth-worst among 24 developed markets.
Sentry's biggest holding is Live Nation Entertainment Inc., which it bought during a sell-off after the 2015 Paris Bataclan terrorist attacks depressed entertainment stocks. It's returned 40 per cent since then and now makes up 4.2 per cent of the fund's holdings.
The Beverly Hills, Calif.-based global concert promoter is a market leader among a small group of competitors and benefiting from a societal shift as millennials go to more concerts and artists go on more tours, according to the fund's managers.
Another holding, Great Canadian Gaming Corp., has also outperformed the Canadian market and has further upside amid potential bids for new casinos in Ontario and British Columbia, Mr. Hearn said. The Richmond, B.C.-based firm has risen 28 per cent over the past 12 months but remains cheap, with a price-to-earnings ratio of about 17 compared with 21 per cent for the S&P/TSX.
"It's a pretty stable business and so the stock is very inexpensive," Mr. Hearn said. "We think they can grow at mid-single digits, even without winning any new bundles, but if they do happen to win something in Ontario and B.C. we think it could be a good step up in profitability."
Laboratory Corp. of America Holdings, one of the largest clinical lab networks in the world, is another top pick. Volatility amid debate over the U.S. health-care system is offset by potential growth from aging baby boomers who will put increased demand in the system, the managers argue. Health care accounts for more than 10 per cent of Sentry's fund.
"In Canada and the U.S., people don't like volatility so they want things that are nice and safe" and are willing to pay too high of a premium, Mr. Hearn said. "We like nice and safe too, we just don't want to pay for it."
Betting on drugs produced by Canadian health-care companies such as Valeant Pharmaceuticals International Inc. and Concordia International Corp., both which have been wracked by myriad issues, is like "betting on a drill hole," Mr. Hearn said. It's hard to figure out if it will be successful.
While Warren Buffett is backing Home Capital Group Inc. and BlackRock Inc. has endorsed energy amid strong Canadian economic and unemployment data, Mr. Hearn is wary of the country's housing and energy stocks.
"We don't want any exposure to the housing market," he said, citing high home prices and weak consumer balance sheets as "reasonable" concerns.
Sentry's fund managers learned their lesson with oil after investing in AutoCanada Inc., a car retailer concentrated in oil-producing regions such as Edmonton and Calgary.