Manager views

When it comes to investing, boring can be good

When Mackenzie Sentinel Income Fund started in September 1974, the price of a barrel of oil had quadrupled to $12, inflation was 10.7%, and much of the world was in recession. Today, nearly 35 years later, the price of oil has been erratic, inflation is near record lows (but people are worried about it) and the world is, again, in recession. And Sentinel Income has stood the test of time, following its conservative mandate, providing investors with reasonable risk-adjusted returns. For more information on Mackenzie Sentinel Income Fund click here or go to balanced funds for a complete overview of Mackenzie’s balanced fund lineup.

Mackenzie Sentinel Income Fund

With a 35-year track record, this old fund, has shown the value of steady growth over time. It won the 2009 Lipper Award for the best 10-year performance in the Canadian Fixed Income Balanced category, which confirms what Chris Kresic has known since he started on the fund in 1997: it’s a good investment. “I still use it as the major allocation for my group RRSP at Mackenzie and I think it’s the right mix: 60% fixed income and 40% equities, and the equity exposure is on a dividend basis. It’s not sexy and it’s not cyclical. It’s steady Eddie.”

In 2008, the fund was down 9.5%, one of the five negative calendar years it’s had since inception. Kresic shows a 15-year graph of the fund versus various asset classes to show that during bull runs it doesn’t keep pace with a pure equity play, but over longer periods it is comparable, and the ride is substantially smoother. “The bull markets from 1982 to 2000 have really created an equity culture, and we’re still in that,” he says. “But when you look back at previous periods, many investors took a more balanced approach. In the early-to-mid seventies, a typical pension plan was 70-75% fixed income, 25-30% equities. If you look at the 1930s, 40s and 50s, insurance companies had very little exposure to equities in their capital accounts.”

Kresic believes that cash will still be more valuable than capital appreciation in the long run, in the form of dividends from equities and income from bonds. “You can’t rely on capital gains to provide you with returns all the time,” he says. “We’ve just gone through the last ten years where they didn’t. Who knows in the next ten years, but I still argue that having a diversified portfolio allows you to sleep at night.”

Kresic describes the Sentinel team’s approach to fixed income as disciplined value. “You find value in government bonds with macro factors, with inflation and growth outlook and government policy outlook. With corporate bonds, it’s more bottom-up, company analysis. There’s also the reality-perception gap that you have to follow, where the market is so convinced of one thing and you look at it, and you say, ‘I don’t know what’s going to happen in the future, but is it really 100% this, like the market is seeing?’”

Adding value with corporate bonds

For several months, Kresic and the Sentinel team have found corporate bonds to be the most compelling value. “Right now we’re probably the most heavily weighted in credit that we’ve been in the last five years. Especially in investment grade credit, there’s a lot of value where you’re not taking a lot of credit risk, and you’re getting a substantial amount of spread. I still think, even though it’s rallied a lot in the last couple of months, in the next five or 10 years, corporate bonds will beat the government bonds.”

The Maxxum team manages the equity portion of Sentinel Income, taking a dividend-value approach that has overlap with the two Maxxum Dividend funds. The long-term benefits of dividend investing are well known, and stock valuations are currently reasonable. “I’m much more comfortable with valuations than I have been in many years,” says Kresic. “I use the Graham and Dodd P/E, where you look at 10-year earnings normalized, versus price.”

Kresic takes out a chart that tracks Graham and Dodd P/E since 1885. When you strip out the dot-com bubble, the long-term average is 16 times. The current level is 15.4. “Stocks aren’t cheap, but valuations are fair,” he says. “The fundamentals overall might look poor, but if you can buy something cheap, you can make money. But I would say that valuations are not ‘secular low’ cheap. For reference, the secular low P/E in the 1930s was 5; in the early 80s it was 10.”

All in all, what Kresic calls for is a balanced approach.