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
“We’re a large-cap value fund, very bottom-up, with a long-term investment
Rui Cardoso, vice-president of U.S. and Global Equities at
Beutel, Goodman & Company Ltd.
in Toronto, and portfolio manager (with
) 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.”
is an experienced financial and business journalist and a frequent
contributor to the Fund Library.
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