Casinos, Concerts Allow Top Fund to Avoid Dismal Canada MarketBy
Sentry Small/Mid Cap Income Fund targets oligopolies
Likes ‘nice and safe’ but doesn’t want to pay for it
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 C$1 billion ($794 million), 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 C$1.7 billion fund has gained 10 percent in the past 12 months, outperforming the 0.6 percent decline in the S&P/TSX Venture Composite Index, where a weighting of almost 70 percent in materials and energy stocks has bogged down returns, according to data compiled by Bloomberg. Canada’s broader S&P/TSX Composite Index is also lagging; its 5 percent 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 selloff after the 2015 Paris Bataclan terrorist attacks depressed entertainment stocks. It’s returned 40 percent since then and now makes up 4.2 percent of the fund’s holdings.
The Beverly Hills, California-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, Hearn said. The Richmond, British Columbia-based firm has risen 28 percent over the past 12 months but remains cheap, with a price to earnings ratio of about 17 compared with 21 percent for the S&P/TSX.
“It’s a pretty stable business and so the stock is very inexpensive,” said Hearn. “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 percent 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, said Hearn, “We like nice and safe too, we just don’t want to pay for it.”
Betting on drugs produced by Canadian health-care companies like Valeant Pharmaceuticals International Inc. and Concordia International Corp., both which have been wracked by myriad issues, is like “betting on a drill hole,” 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, Hearn is wary of the nation’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. The self-proclaimed “contrarian” investors bought the stock when oil was at a low last year, betting on a recovery that would echo previous rebounds.
“In hindsight, we wish we hadn’t made that trade”, said Hearn. “The thesis didn’t play out and we’ve been wrong.”