Football was Dennis Mitchell’s first love. But the rigours of playing took a toll on his knees, forcing him to turn to his second love—finance. Fifteen years later, this executive vice-president and chief investment officer of Sentry Investments is still in the thick of the action with ambitious new mandates and growth funds.
Three-time winner of the Brendan Wood International Canadian TopGun Award, Mitchell is lead portfolio manager of the new Sentry Global Growth and Income Fund, and co-lead manager of the Sentry Global Balanced Income Fund. He has an HBA from Wilfrid Laurier University (1998) and an MBA from the Schulich School of Business at York University (2003). Mitchell is also a CFA charterholder.
How do you choose your investments?
We don’t try to time the market or mirror an index. Individual businesses catch our eye. We seek 30 to 40 of the world’s best companies. We screen for dividend growth, low leverage and return on invested capital, among other things. The screening is the beginning of a much longer process to arrive at 30 to 40 businesses we want to own. Some we eliminate because we may not like the industry; others because they might have had one good year that made them appear on our screen.
We do more research on companies that have consistently performed well and are in industries we like. As we go deeper, we may still eliminate them if we find the business is deteriorating, or will be subject to greater competition in the future. Once we hone in on companies that are great businesses in well-performing sectors, we find out if they’re cheap. If our valuation model tells us the company offers attractive returns, we may initiate a meeting with the management, or start buying immediately. First and foremost, we’re looking for companies domiciled in OECD nations because:
- we can trust the accounting data and conventions applied in those countries;
- there are peaceful transitions of power; and
- the judiciary is separate from the legislature.
Ultimately, by investing in OECD nations, we feel comfortable we’ll be able to compound capital at high rates of return and repatriate that capital when desired.
Businesses we like…
- Generate strong returns on invested capital: if we’re trying to generate strong risk-adjusted returns in our portfolios, it makes sense to invest in businesses that have generated strong risk-adjusted returns themselves.
- Operate with low leverage: leverage magnifies operating risk. Less leverage means less volatility in returns and more free cash flow for equity investors.
- Operate in favourable industries: industries with high barriers to entry mean less competition, and higher margins and returns.
- Are run by competent, rational management teams: management teams that squander capital by making poor acquisitions, hoarding capital or mismanaging the business can destroy capital instead of generating returns. We want management teams that behave like owners, preferably because they own stock.
When picking companies, we track return on invested capital and dividend growth because those tend to be the best scorecards for management effectiveness. We’re cognizant of payout ratios because we’re looking for sustainable distributions, as opposed to just high yields. We also pay close attention to balance sheet and leverage levels.
We’re interested in oligopolies (companies that have few competitors). They have pricing power, less competition, and the ability to pass on inflation or cost increases, which usually means higher returns on invested capital.
Take the pharmaceutical distribution industry in the U.S., which has only three big players: Cardinal Health, Amerisource Bergen, and McKesson. There’s enough room for each to offer differentiated services so they don’t have to compete on price and volume. And consider Schlumberger, the world’s leading supplier of technology, integrated project management and information solutions to the oil and gas industry, which spends more on research and development than all its competitors combined.
That gives it huge technological and competitive advantages. For example, its technological expertise in enhanced recovery techniques (such as horizontal drilling) has rejuvenated the Bakken region, the Permian Basin and the Western Canadian Sedimentary Basin.
Some companies we eliminate right away. We’re not interested in businesses that offer commoditized services and have to constantly compete on price: for example like food and beverage or retail businesses. A brand like Michael Kors might have had a good run, but 10 years later it might not exist—fashion is ephemeral. When I first started investing in 2000, I bought Abercrombie and Fitch at $9. I sold it at $36 in 2001. You can now buy it for $39. That’s not much growth.
How do you evaluate asset classes?
For our balanced mandate, we pay attention to risk-adjusted returns. With interest rates at historic lows, unemployment rates beginning to fall and inflation picking up, rates are probably going to be higher a year from now.
Directionally, that tells us we should maintain overweight in equities, and minimum thresholds in fixed income. In our balanced funds, that’s where we currently are.
We’ve often been rewarded with share buy-backs and consistent dividend increases. Year-to-date the Sentry Global Growth and Income fund has already seen 17 dividend increases, and the average increase has been about 11%.