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Beutel Goodman Income

Over the past ten years the Beutel Goodman Income fund has kept close pace with the Scotia Capital Universe (SCU) Bond Total Return Index. The difference between the fund's 7.6% average annual performance and the index's 8.1% during that time was smaller than the fund's 0.74% MER, which means that the portfolio actually outperformed the index before fees. It should therefore come as no surprise that the fund also outperformed its peers by a wide margin in all time periods with the exception of the past year. Where bond funds are concerned, having a lower MER than one's competitors is a significant step toward achieving strong relative performance.

The fund is managed by a team of four portfolio managers led by Mr. Bruce Corneil. As with all bond funds, the objective of the management team is the relatively challenging one of adding value to the SCU bond index. To achieve this goal the fund invests in Canadian federal and provincial government bonds, as well as investment-grade bonds issued by companies in non-cyclical industries. The fund's managers additionally favour industries where the barriers to entry for new players are high, which helps to insure consistent and uninterrupted cash flows. As a further risk control measure Mr. Corneil also indicates a preference for issuers with transparent finances and high liquidity.

The portfolio is actively managed using several strategies including interest rate anticipation, forecasting the shape of the yield curve, and relative yield plays. An average turnover of 86% is relatively modest for a bond fund, suggesting that Mr. Corneil and his colleagues achieve their impressive results with comparatively little churning of the portfolio.

At the end of the third quarter, the fund's portfolio favoured corporate bonds. Corporates made up 44% of assets while federal and provincial bonds made up 33% and 22% respectively. The average yield of bonds in the portfolio stood at 4.02%, 13 basis points higher than the index's yield, while the duration was 0.27 years shorter than the index's.

Indeed, the fund has recently been shortening its duration, thereby lowering its sensitivity to rising interest rates. It has also maintained its significant exposure to corporate bonds on the basis of their high relative yield and a stated belief in their continued high quality. At the end of the quarter, the average rating of bonds in the fund's portfolio was AA.

Asked about the fund's best move of the past few years, Mr. Corneil points to the fund's decision to focus on the long-term during the SARS crisis of 2003. The fund's managers believed that the Bank of Canada's raising of interest rates was the wrong response and increased their exposure to long-term bonds. The fund later reaped rewards as interest rates fell once again to previous levels.

Going forward, the management team foresees that the rise in interest rates will be muted because inflation will be largely contained. One driving force behind this belief is the excess industrial capacity available in China, which could become a deflationary factor as further cheap imports appear on domestic shelves. However, the continued long-term rise of energy prices is a cause for concern because it is not known when high prices will cause consumers to change their behaviour, and possibly trigger an economic slowdown.

With a low 0.68% MER and a comparatively low turnover, the Beutel Goodman Income fund offers an impressive record of performance for a low price. It is available for a $10,000 minimum investment through brokers and dealers everywhere in Canada. However, because the fund charges a front-end load it should be purchased through a dealer who will waive the load.

A commitment to adding value at a low cost, and an enviable record of success, makes the Beutel Goodman Income fund suitable for the fixed-income needs of most frugal investors.

FF: Q3 2005

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Disclaimers: Consult with a qualified investment advisor before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...