Income funds for retirees

Sentry Select is not your run-of-the-mill fund company. In fact, an investor would have a hard time constructing a well-diversified portfolio using only Sentry funds.

For example, there are no bond funds in their line-up. There are no global or international funds. There is no U.S. equity fund. There isn’t even a broadly-based Canadian equity fund. What they do offer is several highly-focused funds, some of which should be of special interest to income-seeking investors, particularly retirees.

Sentry Select is a highly innovative company that was started in 1997 by John Driscoll, a pioneer in the oil and gas and royalty trust sectors. The company offers a range of securities including flow-through shares, principal protected notes, and mutual funds. It claims to have been the first in Canada to launch a professionally managed diversified income trusts portfolio, the first to launch a mutual fund focused on real estate investment trusts (REITs), and the first to launch a fund specializing in small-cap income trusts. Sentry now has over $8 billion in assets under management and says it is the largest provider of securities on the T, with more than 25 listings. The company says it has specifically designed its products with three goals in mind: capital protection, income generation, and tax efficiency.

The company’s two major areas of expertise are natural resources and income trusts so that’s where you will find the best opportunities. Here are two income funds I believe are worth a special look. Talk to your financial advisor before investing.

Sentry Select Canadian Income Fund. This income trusts fund is a strong entry in the field, with good cash flow and above-average total returns. Manager Sandy McIntyre has constructed a well-diversified portfolio that includes business trusts, energy trusts, and REITS. The largest holding, by a wide margin, is Canadian Oil Sands Trust which holds a big stake in the Syncrude Project. It has doubled in value in the past year, making it one of the major contributors to the fund’s 12-month gain of 26.9 per cent (to April 30). Energy trusts were the largest single component in the mix in early 2006 with 22.5 per cent of assets but overall this is a well-balanced portfolio. The biggest REIT in the mix is H&R Real Estate Investment Trust, a solid performer.

The fund had a three-year average annual compound rate of return of 30 per cent to April 30, well above the category average of 24.9 per cent. Cash flow is currently running at 7.75c per unit monthly, which produces a projected 12-month yield of 5.7 per cent based on the recent NAV of $16.43. This is a good choice for investors seeking steady cash flow plus capital gains potential, although be aware that the trust market is expensive at present. Rating: $$$.

Sentry Select REIT Fund. This is the only mutual fund in Canada that invests primarily in real estate investment trusts (REITs), although the portfolio can hold other securities as well such as common shares of real estate companies. The fund has been around since late 1997 and has done particularly well over the past three years, with an average annual return of 21.3 per cent to April 30 according to Globefund. That’s well above average for the Real Estate Funds category, although the comparison is something of an apples and oranges situation since no other fund specializes in REITs. The closest competitor to the Sentry fund is the iShares CDN REIT Sector Index Fund that is run by Barclays Global Investors and trades on the Toronto Stock Exchange under the symbol XRE. Over the same period it underperformed the Sentry fund by a small margin, with an average annual gain of 20.3 per cent despite the advantage of a much lower MER, 0.55 per cent against 2.41 per cent.

What the Sentry fund has in its favour is broader diversification. The iShares reflect the composition of the S&P/TSX REIT Index. The Sentry fund goes farther afield and includes smaller Canadian REITs that aren’t in the Index, some U.S. REITs, common stocks like First Capital Realty, and some income trusts that don’t fall into the REIT category, like Royal LePage Franchise Services Fund and Home Equity Income Fund. Sentry manager James McIntyre seems to be effectively using this flexibility to overcome the disadvantage of the higher MER. The fund recently raised its monthly distribution to 8.33c a unit ($1 a year) which is another positive. All in all, this is a good choice. Rating: $$$.

Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that provides advice on fund selection and strategies. For subscription information: