Beutel Goodman: 2016 Equity Fund Manager of the Year

Stephen Arpin and William Otton of Beutel Goodman Small Cap navigate the resource sector carefully.

Jeffrey Bunce, CFA 6 February, 2017 | 6:00PM

 

 

Jeff Bunce: Today, we're excited to have Stephen Arpin and Bill Otton from Beutel Goodman Small Cap Fund, and the Morningstar Equity Fund Managers of the Year.

If you look at the returns from 2016 and compare it to the typical Canadian small cap benchmark, performance may not look that strong. But I think given that the market was driven by more cyclically-oriented metals and mining and energy names, I think your performance, given that you're underweight those sectors, really did stand out. Can you point to some highlights from 2016?

Stephen Arpin: What I would say is that the foundation of Beutel Goodman's process and the small cap process is really around the idea of capital preservation. We control risk on a business-by-business basis. We run a concentrated bottom-up portfolio, usually on the average of about 40 names, and we look for businesses that are free cash flow generative and have good franchises, and then we buy them at a significant discount to what they're worth.

We also have longer-term holding periods. We look for about a four-year timeframe, and we demand superior returns in the small-cap area. We think that what's critical to compounding money over time is preserving your capital and making company-by-company decisions that control risk. And we've been really successful with that over time. It has led to a portfolio that has less of a resource bias. But I think we've had some excellent companies that we have owned with those characteristics that have really helped our performance. Two of those names that I would mention would be CCL and Uni-Select.

Bunce: Touching on the resource base, I know you guys are underweighted, and it's not usually one of your favorite areas to ply your trade. But I think you guys did have some good stock picks in that area this year. Can you touch on Alamos Gold, for example, and how that fits with your process and how you responded to the market rally in that stock this year in 2016?

William Otton: Alamos Gold is an excellent quality gold company. We value our gold companies based on our view of the long-term gold price. We look for companies that have very strong balance sheets, good management, good asset bases with the ability to grow, and Alamos Gold fit that criteria. In the rally in 2016, obviously, the stock went up and we did trim our position and were able to reduce our exposure to gold in an opportune time in 2016.

Bunce: Looking forward to 2017 and beyond, are there areas of opportunity or macroeconomic themes that you see in the market that may create challenges or opportunities for the fund?

Arpin: In general, as you know, Beutel Goodman really prides itself on all of its work being a bottom-up basis. We end up with our sector weights based upon our valuation of where value lies in the market. And as I said before, because of our bias toward businesses that have sustainable free cash flow and competitive advantage, we do tend to end up with businesses that are less resource-focused.

That being said, in 2016, we did take the opportunity to add to positions that we thought were attractively priced but were under pressure because of commodity prices, particularly energy. We bought a position in Canadian Western Bank and we bought a position in Wajax. Also, we've been able to find a lot of opportunities in businesses on a stock-by-stock basis, companies where we can buy them at significant discount. We continue to find those opportunities, and I think that that's the most important thing to our potential ability to create long-term value and returns for our shareholders.

Bunce: Great. Steve, Bill, congratulations once again and thanks for joining us.

Arpin: Thank you.

Otton: Thank you, Jeff.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alamos Gold Inc9.26 CAD-0.32
Canadian Western Bank30.70 CAD5.07
CCL Industries Inc Class A60.30 CAD2.20
Uni-Select Inc11.13 CAD0.18
Wajax Corp16.19 CAD6.86

About Author

Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.