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Sentry manager on guard for slower U.S. growth

What are we looking for?

What the pros are buying.

It pays to check the top holdings in mutual funds to get stocks ideas, or as part of the due diligence before investing in them. Today, we look at Sentry Select Capital Inc.'s Diversified Total Return Fund at

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The search

The $107.8-million fund has been run by Andrew McCreath of Sentry Investments since January, 2009. The fund gained 26.9 per cent for the year ended May 31 compared with 4.2 per cent for the S&P/TSX Total Return Index. The strategy is capital preservation, lower-than average volatility and "to make some money," he said.

While the fund is classified as a Canadian focused equity fund, Mr. McCreath can hold up to 30 per cent in bonds, up to 100 per cent in cash and short up to 20 per cent of the assets. Half of the equity must be in Canada, and no more than 15 per cent will be in small-cap stocks, he said.

Mr. McCreath, whose fund is now 50-per-cent cash, is cautious on the markets. He sticks by his call last fall when he predicted a de-acceleration in U.S. economic growth to 1.5 to 2 per cent later this year as the fiscal stimulus fades. He does not expect problems with inflation, and suggests that the S&P 500 will be range bound between 900 and 1200 for the foreseeable future.

"Based upon my cash position I believe the market may continue to pull back," he said. "The valuation of the market needs to discount the lower rate of economic and corporate profit growth that I foresee."

What did we find?

Most of the top holdings are still close to 52-week highs except for names such as Cash Store Financial Services Inc., Golden Star Resources Ltd. and Manulife Financial Corp.

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Cash Store which is a domestic payday loan business, currently has no analyst coverage in Canada, Mr. McCreath said. "Revenue is growing about 10 per cent a year and earnings at a faster rate than that because of the leverage in the model, cost cutting going on and a restructuring of their balance sheet which will be additive to earnings growth…

"I see good dividend growth from this company, which recently listed in U.S. market," he added. "This stock is cheap relative to U.S. peers." He has a 12-month target of $20 on the stock.

He also sees potential in Golden Star Resources a West African gold producer. "It had a lot of operational problems over the last couple of years, but has fixed them," he said. "They are producing 400,000 ounces of gold this year, and we see modest growth from that." The high-cost gold producer, however, should benefit from a rising gold price, rising free cash flow, and renewed exploration for reserves on their African properties, he said. His 12-month target is $7.50 a share.

Mr. McCreath still likes insurance giant Manulife Financial but doesn't have a target price on the stock. "It's a beaten-up stock trading at about 10 times core normalized earnings," he said. "The company has superior revenue growth opportunities than comparable life insurance companies," he suggested. "We believe the company has industry-best management and a bullet-proof balance sheet."

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