Beutel Goodman American Equity

Analysis: The Beutel Goodman American Equity Fund is managed using a highly disciplined, bottom up value approach that places a great deal of emphasis on capital preservation, with a focus on delivering absolute returns and managing risks. To achieve this, the managers look to identify high quality, well managed, dividend paying companies that have a history of generating stable cash flows and have earned a level of return that is greater than the company’s cost of capital. Put another way, the “look for companies that have shown a commitment to create shareholder value without undue financial leverage.”

Given the value bias used, any company considered for inclusion in the portfolio must not only be undervalued, but have the ability to grow their share price closer to its intrinsic value within a three year period. When evaluating a company, they pay particular attention to the price to earnings, price to cash flow and price to book ratios in the context of not only the company’s historical numbers, but also compared to the market and what the management believes to be the company’s sustainable earnings growth rate.

The result is a concentrated portfolio of U.S. based large cap companies that are leaders in their field. As of September 30, it held 29 stocks with a top ten making up 44% of the fund. It is defensively positioned with minimal exposure to commodities and deep cyclical, high beta stocks. Instead, they favour consumer and financial names, which currently make up the bulk of the portfolio.

They are patient in implementing their process, with portfolio turnover averaging 33% for the past five years. That said, they are not afraid to use periods of heightened volatility as an opportunity to improve the quality of the portfolio. This happened in 2008 and again in the first half of 2012 when several new names were added to the portfolio including Halliburton, Bemis, and JP Morgan Chase.

Performance has been impressive, generating and annualized return of 3.7% for the past five years, compared with a modest 1.6% return for the S&P 500 during the same period. It also has decent downside protection, holding up well in 2008, losing less than half of the index’s 23% drop. Overall volatility is also somewhat lower than not only the broader market but also many of its peer group.

Another positive is the relatively low MER of 1.49%, which is well below many of its competitors.

On balance, this is one of our top picks in the U.S. equity category. We believe that it will continue to deliver better than average risk adjusted returns for investors over the long term.