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Double-digit returns fuel Sentry energy fund

What are we looking for?

What the pros are buying.

It pays to check out the top holdings in funds to get some stock ideas or as a way to do research on these investments. Today, we will look at Sentry Select Energy Growth and Income fund at

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More about the fund

The $200.6-million natural resources equity fund was formed last year from the merger of Sentry Select Canadian Energy Growth and Sentry Select Energy Income funds. Both were and continue to be run by Laura Lau, a portfolio manager with Toronto-based Sentry Investments.

Sentry Energy Growth and Income gained 33.7 per cent for the year ended June 30 compared with an average of 31.3 per cent for its peers, and 30.1 per cent over two years.

Ms. Lau expects oil prices to fluctuate between $90 to $110 (U.S.) per barrel, and stay in the lower end of that range. The high end represents about $4.20 a gallon for gasoline, when demand starts falling off as consumers and companies look for alternative energy sources, she said.

She is more bullish on oil than natural gas whose price remains depressed because of a glut of the commodity on the market. The International Energy Agency last month would not have announced the release of 60 million barrels of oil from government-held reserves "unless they believed that the [oil] market was very tight," she said.

She also likes energy firms that are natural gas liquid plays and produce so-called wet gases such as ethane, propane and butane because their prices tend to follow the price of crude oil.

What did we find?

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Double-digit returns for most stocks over the past year, but red ink for Bankers Petroleum Ltd.

Formerly an income trust, Keyera Corp.,  which transports raw gas through pipelines to its natural gas processing plants in Alberta, still has potential upside, said Ms. Lau.

"The company has a high return on equity at about 20 per cent, and a low payout ratio of 56 per cent, she said. "They have always done a good job of reallocating capital by upgrading plants, and … they have been increasing distributions." Her one-year target is $50 (Canadian) a share.

She also likes Baytex Energy Corp., a heavy oil producer that also converted to a corporation from an income trust this year. "Their payout ratio is about 40 per cent, and they have consistently increased distributions and now dividends," she said. "We expect them to grow production at 8 or 9 per cent a year, and you get about  a 4-per-cent yield on top of that." She has a one target of $58 on Baytex.

Peyto Exploration and Development Corp., another top 10 holding, is a natural gas producer in Alberta, but still manages to be "very profitable so that is why we own it," Ms. Lau said.

"The company is growing at about 20 to 30 per cent a year in terms of production growth," she said. "Their costs are very low so they can make money at these [low]gas prices, and they also produce natural gas liquids, which get oil-like prices." Her one-year target on Peyto is $26 a share.

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