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Sentinel's Steady Ride

Responsible, modest growth has been the name of the game at this fund shop.

David Kathman, CFA, 04/06/2011

Sentinel is one of the oldest mutual fund shops around, with two funds (Sentinel Common Stock SENCX and Sentinel Balanced SEBLX) tracing their origins back to the 1930s. Despite being owned by a large insurance company (National Life), Sentinel has always had a fair amount of autonomy, which it has generally used well. Throughout its long history, Sentinel has never tried to grow into a behemoth or be all things to all people; it remains essentially a boutique with a relatively modest lineup of 15 funds, only three of which have more than $1 billion in assets. While the shop has not remained static, its expansion has been modest and judicious, in line with the temperate strategies underlying most of its funds.

Christian Thwaites became president and CEO of the Sentinel funds in January 2005, following a rough patch for the shop that included the departure of some key managers. One thing Thwaites has tried to do during his tenure is give the Sentinel funds a more consistent identity, in which the funds are predictable and corelike, but not so cautious that they become bland index-huggers. The model for that tricky balance was the flagship Sentinel Common Stock fund, which has beaten the S&P 500 Index with appealing consistency for more than a decade without any major blowups.

Under Thwaites, Sentinel fired Invesco as the longtime subadvisor of the International Equity SWRLX fund and hired Kate Schapiro in late 2005 to manage the fund in-house, making it into more of a core foreign-stock fund. That move has worked out well, as the fund beat the foreign large-blend category each year from 2007 through 2010 amid tremendous market turmoil. Efforts to right the long-underperforming Mid Cap SNTNX fund have taken longer to bear fruit, but that fund is now in the hands of Chuck Schwartz and Betsy Pecor, who have done a fine job of managing the $2 billion Small Company SAGWX fund since 2004.

Thwaites has also led an effort to broaden Sentinel's lineup and increase assets under management, but in modest and incremental ways that don't compromise the firm's identity. Part of this effort has involved buying small fund shops that fill a niche and can fit in with the rest of the Sentinel funds. In 2006, Sentinel bought the Bramwell funds (now Sentinel Capital Growth BRGRX and Growth Leaders BRFOX), which are more growth-oriented than Common Stock but place a similar emphasis on stability and predictability. The following year, the firm bought Synovus, folding two of its funds into the Sentinel lineup (Mid Cap Value SYVAX and Georgia Municipal Bond SYGIX) and merging away two others. In 2008, Sentinel got into the socially responsible investing space when it bought the Citizens funds, again rebranding two of them as Sentinel funds (Sustainable Core Opportunities MYPVX and Sustainable Growth Opportunities WAEGX) and merging away the others. None of these acquisitions involved more than $500 million in assets, but each of them added something new to the Sentinel lineup.

Sentinel has never been prone to launching trendy funds, and that has not changed under Thwaites. It launched a new Small/Mid Cap fund in late 2007, designed to allow Chuck Schwartz and Betsy Pecor to own larger stocks than they could in the Small Company fund, but that was later merged away when Schwartz and Pecor took over the Mid Cap fund. The only other fund launched since then was Total Return Bond SATRX, rolled out in December 2010 as a more diversified complement to manager David Brownlee's Government Securities SEGSX fund. It's basically a mutual fund version of a portfolio that Brownlee and Jason Doiron were already running for Sentinel parent National Life, and it's being rolled out slowly, with $25 million in seed money. Also in December 2010, the Conservative Strategies SECMX asset-allocation fund was revamped to include more asset classes, all managed by Sentinel managers, with Thwaites himself overseeing the allocation.

Another way Thwaites has tried to increase Sentinel's assets under management is by beefing up and diversifying its distribution network. When he started in 2005, National Life's proprietary broker-dealer accounted for a majority of the Sentinel funds' sales, but now that percentage is far smaller. Thwaites hired key people on the distribution side, as well as more wholesalers to expand distribution into new territories. He also started giving special attention to the intermediaries who provide the most business for Sentinel. Morningstar has always been somewhat wary of fund company efforts to boost assets, but in this case Sentinel has avoided doing anything rash, and the growth has been reasonably modest.

Sentinel is a load shop, so it has always needed to balance the interests of shareholders who own its funds and the intermediaries who sell them. For the most part, it has done a pretty good job of striking that balance under Thwaites. He hired more analysts, made compensation more competitive, and changed the compensation structure for managers so that bonuses are based solely on fund performance, with a greater emphasis than before on long-term performance. In late 2008 Sentinel got rid of its money-market funds and also got out of the securities lending business, out of a desire to avoid helping short-sellers. All this comes on top of some fairly standard, but still welcome, measures meant to protect shareholders. The company actively monitors fund flows to prevent excessive trading of Sentinel funds and uses fair-value pricing for foreign securities. The funds have been disclosing their portfolio holdings on a monthly basis since before Thwaites came on board, and he has increased transparency in general.

That's not to say that everything has been perfect. Sentinel could have done a better job handling asset flows into its popular Small Company fund, which closed in 2004 but then reopened in spring 2006 with a promise of a hard close once its assets consistently exceeded $1.6 billion. The fund bumped up against that asset level, but instead of closing the fund, Sentinel launched a new Small/Mid Cap fund under the same managers, ultimately merging the new fund away when the managers (Schwartz and Pecor) were put in charge of the Mid Cap fund. Not until January 2010 were Small Company's A and C shares closed to new investors, though existing shareholders can still add money. None of this was necessarily bad for shareholders, but it was handled awkwardly and could have been explained better.

That speed bump aside, the moves Thwaites has made have generally made sense for shareholders, and for the most part the company has moved in a positive direction under his guidance. There are some pretty good funds under the Sentinel umbrella, but it remains a low-key shop, in terms of both its marketing and its investment strategy.



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