Beutel Goodman Canadian Intrinsic
The Beutel Goodman Canadian Intrinsic
fund racked up an uneven record since its start in
1999. Over five years it returned an average of
11.2% annually compared with the 1.9% average
gain of the S&P/TSX Composite Total Return
index. However, this figure masks the true story.
The fund made strong gains in its first two years
but over the past three years the fund has
struggled, gaining in 2003 what it lost during the
previous year. In 2004 the fund remained flat to
record an average three-year loss of 0.19%
compared to the index's 8.9% average gain.
The fund is managed by Mark Thomson and
follows a bottom-up value style that emphasizes
absolute after-tax returns. Mr. Thomson selects
stocks of strong, well-established, but
undervalued companies for the fund. A stock's
value is based on the intrinsic value of the
underlying business, which is estimated with
emphasis placed on analyzing its future free cash
flow. Taking a long-term view, and to reduce the
impact of taxes, Mr. Thomson also aims to hang
on to his stocks for two to three years. In this way
the fund's turnover is kept as low as possible
which helps it avoid large capital gains.
What makes this fund different is its intense
concentration. The fund isn't expected to hold
more than eighteen stocks at any given time. The
stated reason for such a high level of
concentration is to effectively set the bar so high
that only the the very best stocks make the cut.
Conventional investment wisdom suggests that
such a focused portfolio is insufficiently
diversified and carries a higher risk. However, it
turns out that the fund's three-year volatility (a
measure of market risk), is just a touch higher
than the index's.
Once a stock is purchased it generally
remains in the portfolio until it reaches its target
price, at which point one-third of the position is
sold and the stock is re-evaluated. Mr. Thomson
points out that he is satisfied with the current
portfolio and isn't very active in seeking out new
stocks. This is consistent with the fund's lowturnover
strategy. Indeed, the fund's turnover
comes in at a five-year average of 23%, and for
the past two years has averaged an even lower
Based on the fund's holdings on April 21st, it
isn't too expensive. It had a 5% earnings yield,
which is equivalent to a price-to-earnings (P/E)
ratio of 20, and an attractive 2.6% dividend yield.
These can be compared with the median values
for the S&P/TSX Composite at the end of the first
quarter. The index had a median P/E ratio of 20.8
and a more modest 0.52% median dividend yield.
The fund is comparable to the index on a price-tobook-
value basis. Not deep value to be sure, but
reflective of the fund's emphasis on quality.
At the end of the first quarter the fund held
fifteen stocks and a 3.4% cash position. The top
three sectors in its portfolio were Consumer
Products, Financial Services, and Oil & Gas,
which together accounted for about 75% of the
portfolio. The top three stocks were Johnson &
Johnson, Manulife Financial, and TD Bank. As
mentioned previously the fund wasn't very active
during 2004, selling Magna International and
SBC Communications, and adding Johnson &
Johnson during the first half of the year.
So far this year the only significant activity
has centered around Molson, which merged with
U.S.-based Adolph Coors in February. At the end
of 2004 Molson was the fund's largest holding at
almost 12% of assets. Concerned that the premerger
'will they or won't they?' uncertainty was
exposing the fund's investors to undue risk Mr.
Thomson sold half of the position early in the
year. Molson now represents 6.8% of assets.
Asked to identify his best and worst picks,
Mr. Thomson points to Quebecor as one of his
favorites of the past few years. Noting the
company's better than expected management Mr.
Thomson points to Quebecor's acquisition of
Groupe Videotron in 2000 as an example of its
business savvy. On the other hand the stock that
has most disappointed is American grocer
Safeway. Mr. Thomson attributes its poor
performance, and deteriorating fundamentals, to
strong competition from Wal-Mart as well as to
overspending and unwise acquisitions.
Why then has the fund yielded such
lacklustre performance lately? The main reason,
explains Mr. Thomson, is the generally poor
performance of consumer stocks, and in particular
of the fund's American holdings which make up
nearly 30% of the portfolio. Anomalously high
redemptions in 2004, which chopped the fund's
assets in half, haven't helped. The fund was
forced to sell stocks in order to raise cash and in
so doing incurred uncharacteristically high capital
gains in 2004.
The Canadian Intrinsic fund is typical of
pension manager Beutel Goodman's retail funds
in that it charges a modest management expense
ratio (MER) of only 1.39%. For a $10,000
minimum, the fund is available everywhere in
Canada. But because it carries a front-end load
the fund should be purchased through a broker
who will waive the load.
Despite a portfolio of good businesses the
fund's performance has stalled for over a year as it
awaits the return to favour of many of its stocks.
As a result the Beutel Goodman Canadian
Intrinsic fund should only be considered for
inclusion in a well-balanced portfolio by valueoriented
frugal investors with long time horizons.
FF: Q1 2005