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Q1/6 Focus on ETFs
Q4/5 LW Canadian Equity
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Q2/4 BG Small Cap
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Q4/3 BG Canadian Equity
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Q1/3 Saxon Stock
Q1/3 BG Balanced
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Beutel Goodman Canadian Equity

During 2003 the Beutel Goodman (BG) Canadian Equity fund posted a 26.7% gain, matching the performance of the S&P/TSX Composite Total Return index and surpassing the average Canadian equity fund by 6%. Over the longer term, the fund's performance has consistently exceeded that of its peer group and of the index. The fund performed admirably during the recent bear market, returning an average of 8.8% annually over the past three years while the index lost 1%. Over ten years, the fund gained an average of 9.5% annually compared to the average Canadian equity fund's 7.5% return.

For the past four years the fund has been under the direction of Mark Thomson, who also manages the equity portion of the Beutel Goodman Balanced fund. Mr. Thomson brings a bottom-up, contrarian, value-based approach to all the funds under his direction. His focus is on stock picking wherein stocks are viewed as whole businesses. Companies with strong fundamentals and good business prospects but whose stock is undervalued, for whatever reason, are potential candidates for purchase by the fund. Mr. Thomson's preferred indicator of strength is a company's discounted expected-free-cash-flow. He also looks for stocks that have below-average price-to-cash-flow ratios, and above average dividend yields. To ensure that the fund buys at a deep discount, Mr. Thomson requires an expected return of at least 50% over two to three years and 100% for cyclical stocks.

The fund will hold no more than 45 individual stocks, with no stock making up more than 10% of the portfolio and no sector having a weight greater than 1.2 times its market weight. Once a stock is purchased, it is usually held for two to three years. However, if a stock reaches its target price then the fund immediately sells one-third of its position with "no questions asked", and the company is re-assessed.

Although the fund purchases mainly large-cap stocks, it gains exposure to the small-cap sector by purchasing units of the BG Small Cap fund. The target weight for this position is determined through an assessment of the relative number of buying opportunities available in the large-cap and small-cap universes. If more good opportunities are seen for small caps, then the size of the position is increased, and vice-versa.

At the end of 2003 the fund held thirty-five individual stocks. The portfolio had a dividend yield of 2.2% and an earnings yield of 5.4% (which is equivalent to a price-to-earnings ratio of 18.3). This is to be compared with the 0.5% median yield and median price-to-earnings ratio of 26 for the S&P/TSX Composite. Other value ratios were also favourable for the fund, although the price-to-book ratio, at 1.9, was somewhat on the high side. On the whole, the fund's portfolio represented good value.

The thirty-five stocks held by the fund at the end of the year represented 81% of assets. Units of the BG Small Cap fund made up a further 11%, down from 16% earlier in the year. Finally, the fund also held an 8% cash position.

Its top three sectors were Financial Services, Industrial Products, and Oil & Gas, and the top three individual stocks were TD Bank, Manulife Financial, and BCE. The fund has been fairly active recently. Many stocks reached their target price and triggered the automatic one-third sale, including the major banks and technology stocks such as Nortel and Cognos. In fact, the fund is no longer exposed to high-technology stocks. Its exposure to cyclical stocks has also recently been pared back with the sale of Suncor and a trimming of Newmont Mining. On the other hand the fund has been buying life insurance companies, adding Sun Life Financial in the fall, and increasing its holdings of Manulife. Additional shares of BCE and Molson were also added during the year.

Asked about his best and worst picks, Mr. Thomson points out the very good performance of the fund's bank stocks, as well as his decision to buy Telus and Quebecor earlier in 2003. On the other hand he admits that an investment in Bombardier, purchased a few years back at $16 on the belief that the stock was really worth $24, proved to be untimely. The fund ultimately exited Bombardier at $10, taking a loss. Of the stocks currently in the portfolio Mr. Thomson singles out Quebecor World and Royal Group Technologies as disappointments. However, he is more optimistic about the latter than when we last spoke in April 2003, having recently purchased additional shares of Royal Group Technologies.

Going forward, Mr. Thomson expects much lower returns for the fund over the coming two to three years. This is in part because many stocks in the portfolio are approaching their targets and there have been few good buying opportunities for the fund. The lack of opportunities is the reason for the fund's current large cash position. The Small Cap fund has been seeing more good opportunities and is fully invested, but Mr. Thomson feels that these opportunities are not currently good enough to justify increasing the Canadian Equity fund's small-cap exposure.

In addition to its modest 1.35% management expense ratio, the Beutel Goodman Canadian Equity fund charges a maximum front-end load of 4% of the total investment. As always, frugal investors should buy load funds through a discount broker who will waive the load. For a minimum initial investment of $10,000 the fund is available to investors across the country.

A respectable long-term track record combined with low fees, a moderate turnover, and a solid commitment to value investing makes the Beutel Goodman Canadian Equity fund very attractive. It is suitable as a core Canadian equity holding for frugal value-oriented investors.

FF: Q4 2003

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