J.A. Sandy McIntyre

An active-trading approach to income investing.

Jade Hemeon 29 October, 2004 | 1:00PM
As an avid reader of history, Sandy McIntyre, vice-president and senior portfolio manager at Sentry Select Capital Corp., takes a long-term view of human behavior and the repercussions for financial markets.

When stocks were flying high in 2000, he took a peek beyond the tech frenzy of the times to do some deeper analysis of investor needs, and determined that aging baby boomers would be paying increasing attention to steady income rather than the potential for speculative gains.

McIntyre decided to move from Jones Heward Investment Management Inc., where he had managed money for 20 years, to oversee income portfolios for Toronto-based Sentry Select.

"I decided to attach myself to an asset model that funds would flow to during the next decade," says McIntyre. "So far, it's been a good bet. During the next 10 years, I expect the market for income trusts to grow even larger, interest rates will likely remain low, and investors will be looking for conservative, stable investments to meet their income needs."

McIntyre is lead manager of the $230-millionSentry Select Canadian Income, launched in February 2002, as well as the newer and more risk-averse $4.5-millionSentry Select Focused 50 Income. He also manages eight exchange-listed, closed-end funds with combined assets of $2.2 billion.

It's certainly not where he expected to be when he graduated from the University of Toronto with a BA in English and philosophy in 1974, followed by a carefree year of backpacking around the world.

In 1975, looking for any kind of a job, he went to work as an administrator at National Trust and found he had a head for numbers. He also saw that different individuals had requirements for different kinds of financial assets, depending on their age, capabilities and income needs.

In 1980, he joined Jones Heward as a retail broker, and subsequently became a portfolio manager specializing in high-yield investments. Two decades later, he seized the opportunity to move to Sentry Select, known then as NCE Financial Corp. At that time, 2000, the market capitalization of income trusts in Canada was valued at about $15 billion, much lower than the current $105 billion. The value of income trusts has increased from 1.3% back then to about 8% of the current total market value of the S&P/TSX Composite Index.

To date, Sentry Select Canadian Income has been an above-average performer. For the two years ended Sept. 30, the fund reaped an average annual compound return of 26.6%, easily beating the category's median return of 17.5%. During the past year, the fund gained 33.3%, well ahead of the median return of 23.3%.

McIntyre says he is now able to achieve as much diversification across sectors and individual securities as a traditional equity manager. A "contra-cyclical" strategy of "buying when there is an excess of pessimism and selling into enthusiasm," results in frequent trading, and turnover in the portfolio last year was about 70%. He limits exposure in any one sector to 30%.

"We're patient and will wait for overpriced assets to come to us," he says. "On the other hand, when people are charging blindly into something we'll let them have it and take our profits off the table."

While the raison d'etre of income trusts is to pay out profit in the form of distributions to unitholders, McIntyre looks for more than juicy yields when making his picks. He seeks trusts with a long-term, sustainable business plan that includes enough reinvestment in the business to protect the asset base and the durability of the income stream. He also looks for strength in the debt-to-cash flow ratio.

He invests in a range of trusts from small-cap to large-cap, but keeps an eye on liquidity, taking smaller positions in the less liquid names. Typically, he holds between 60 and 75 income trusts, and won't put more than 5% of fund assets in any one name. The universe of Canadian income trusts is currently 158 names.

"The more names in the fund, the harder it is to know every company in detail," he says. "I view the portfolio as a fleet of ships doing their best to avoid torpedoes."

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Jade Hemeon

Jade Hemeon