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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