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By By Glenn Fortin, B.Comm., CFA, and Rui Cardoso, MBA, CFA  | Monday, September 29, 2014

Glenn Fortin

Rui Cardoso

The gap between the U.S. and the rest of the world in terms of economic performance widened in August.

The U.S. manufacturing sector expanded in July at its fastest pace in three years and factory orders hit their highest level in over eight years. Orders for durable goods surged by 23% in July, the largest percentages gain on record. Recent weakness in the housing sector also reversed, with strong gains in home construction and sales of previously owned homes. New home sales remained weak, but pending sales increased 3.3% in data for July. U.S. consumer spending fell for the first time in six months, falling 0.1% in July after a 0.4% gain in June, but forward-looking measures of consumer confidence moved higher. There were gains in employment as well, with initial jobless claims remaining below 300,000 throughout August. This data was consistent with an upward revision for second quarter GDP from the initial 4.0% estimate to a very strong 4.2% final number.

Index sector performance was fairly solid this month with the more robust returns coming from the defensive Utilities, Health Care and consumer groups. The Energy, Materials and Telecom sectors underperformed the Index in August, the latter registering a negative return.

Performance commentary

The American Equity portfolio posted a positive return but underperformed the S&P500 C$ Index for the month of August. The portfolio’s underperformance was primarily attributed to stock selection. Of note, our strongest contributor to performance last month was the largest detractor this month. In July, TRW Automotive ran up in price on a takeover bid and while we trimmed our position, follow through profit taking in August reversed about a third of the gain. Combined with weakness from a few of our other holdings such as Halliburton, Verizon and Allegion, the aggregate impact was sufficient to outweigh strength from various investments in the portfolio including Merck, Kohls, Caterpillar and Kraft Foods. The portfolio’s sector weighting effect was negative primarily as a result of an overweight in Telecom.

Investment thesis

Verizon Communications is the world’s second largest telecommunications company by revenue behind only AT&T, but operates almost entirely in the U.S. Despite facing increased competition, and a consumer more sensitive to rising communications costs, VZ is well positioned to defend its leadership stature with the highest quality wireless network, capitalizing on the sustained trend growth of mobile video. Cushioned by an estimated 7% free cash flow yield and a 4.3% dividend yield, Verizon is attractive in today’s elevated markets


In August, there was one new investment and none was sold. The portfolio initiated a position in Teradyne, a well capitalized slower growth technology stock and market leader in automated test equipment used at the end of semiconductor manufacturing lines. We also continued to build our new position in Verizon. On the sell side, the portfolio made a process driven one third sale in Merck as the stock achieved its target. Microsoft was also trimmed to shift funds to Teradyne with its attractive risk/reward profile.

Outlook & investment strategy

Renewed concern over deflationary risks in Europe took German 10-year bond yields under 1% in August. Even in the peripheral economies of Europe, yields in several cases have now fallen below those of U.S. Treasuries, which also hit their lowest level in over a year, despite surprisingly strong data from several sectors of the U.S. economy.

This combination of strengthening economic conditions in North America and a low yield environment continues to benefit equity markets. While some investors are concerned that a shrinking pool of yield opportunities may be driving investors into inappropriate risks and inflating asset prices, equity valuations generally remain within reasonable ranges.

Taking into consideration the estimated remaining portfolio gains in addition to the growing stream of dividends, we believe equities still offer a favourable prospective total return to investors compared to other major asset classes.

Beutel Goodman Investment Counsel has over $40 billion of assets under management (90% institutional, 10% retail/private wealth), and specializes in the management of Canadian, U.S., and international equities in addition to fixed income and balanced mandates for institutional and individual investors. U.S. equity management at Beutel Goodman is co-managed by Glenn Fortin, B.Comm., CFA, and Rui Cardoso, MBA, CFA.


© 2014 by Beutel, Goodman & Company Ltd. All rights reserved. Reprinted with permission.

Individual separately-managed wrap account holders may experience performance dispersion versus BG funds due to differences in the underlying portfolio attributed to higher levels of portfolio concentration, specific sponsor constraints, fees charged by the plan sponsor and the timing of transactions. This document has been prepared for the general information of our clients and does not constitute an offer to buy or sell any securities, products or services and should not be construed as specific investment advice. All opinions and estimates expressed in this document are as of the time of its publication and are subject to change. No use of the Beutel Goodman name or any information contained in this report may be copied or redistributed without the prior written approval of Beutel, Goodman & Company Ltd.

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