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The value focus in FundGrade A+ Award winner Beutel Goodman American Equity
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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Thursday, March 02, 2017


All the big investment money these days seems focused on growth – the value side of the equation is, well, so boring in comparison to the latest tech skyrocket, or that big diamond or gold lode. But skyrockets are few and sporadic, and often subject to the whims of a volatile and unforgiving market. And that’s where the multi-year FundGrade A+ Award-winning Beutel Goodman American Equity Fund (BTG774) is a classic example of the merits in the value proposition.

The fund’s average annual compound rates of return over 5 and 10 years (15.4% and 9.0%respectively) both rank in the top 10 of the crowded U.S. equity category (212 funds). Its volatility, based on Beta as well as standard deviation over three and five years, is on the low side.

However, the fund’s 3-year Sharpe ratio at 1.59 and 5-year ratio at 1.94 are far above most of its peers. The metric is the ratio of a fund’s excess return (return – risk-free rate) to its standard deviation, and generally the higher, the better. The fund may not be a firecracker, but you get a better bang for the risk you’re taking when diversifying south of the border.

“We’re a large-cap value fund, very bottom-up, with a long-term investment horizon,” says Rui Cardoso, vice-president of U.S. and Global Equities at Beutel, Goodman & Company Ltd. in Toronto, and portfolio manager (with Glenn Fortin ) of their American Equity Fund. “We spend most of our time analyzing stocks, but we spend as much time figuring out the downside as the upside.”

“We have a three- to five-year investment horizon, we’re very much concentrated on downside protection, and we focus our time and money,” Cardoso adds, in reference to the fund’s highly concentrated portfolio (25 to 35 names) and low annual turnover (25%). “We have a very different mindset to most fund managers. We’d like to find 25 to 35 gems and hold them forever, although it never works like that. Companies merge, fundamentals change...but that’s the ideal.”

The fund’s mandate limits sectoral weightings to 10% over S&P benchmarks, but there is no minimum. “We’re not allowed to fall in love with a sector, but for example, we haven’t found good value in utilities, so that weighting is zero.”

The result currently is a small portfolio with several blue-chip household names, such as American Express Inc. (NYSE: AXP), Verizon Communications Inc. (NYSE: VZ), and Eli Lilly and Co. (NYSE: LLY). But holdings include some less recognizable holdings too, like Parker-Hannifin Corp. (NYSE: PH), Teradyne Inc. (NYSE: TER).

“Parker-Hannifin is a world leader in motion control,” says Cardoso. “They supply manufacturers of hydraulic and mechanical motion control systems, such as the lifts on buses or landing gear on planes. They’re well managed – senior management pay is based on the return on capital – and we bought them at a deep discount to valuation.

“Teradyne is one of those stocks that were left for dead,” says Cardoso. “They produce semiconductor test equipment and have over a 50% market share. The market is lumpy, but the dynamics are getting better. And 30% of their book value was in cash when we bought it.”

Cardoso acknowledges, however, that U.S. stock prices generally have been rising. “It’s getting harder to find new opportunities, but it’s still not egregiously expensive,” he says, citing the example of Verizon: “They’re in a very competitive market and they have a great balance sheet; in a price war, the guy with the best balance sheet wins. The dividend is 4 1/2%, and they were trading cheap, at 6 1/2 to 7 times EBITDA (earnings before interest, tax, depreciation and amortization).”

As for what president Trump augurs for investors, Cardoso says: “I have no idea. Nobody knows how the election plays into the economy, how the economy plays into the market, how the market plays out with different sectors and so on. We just focus on those 25 gems – if we can get most of them right with a limited downside, we’ll do very well for our unitholders.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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