A rare success story among U.S. equity funds

Its proven approach has made Beutel Goodman American Equity one of only a few active strategies to beat the S&P 500 over 10 years.

Jeffrey Bunce, CFA 27 February, 2018 | 6:00PM
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Beutel Goodman American Equity leverages Beutel, Goodman & Co's proven approach by investing in companies that are undervalued according to its conservative valuation methodology, and have a minimum 50% expected total return over three years.

By adhering to the firm's discipline, co-managers Glenn Fortin and Rui Cardoso have guided the fund to rare success in the U.S. Equity category -- the fund is one of only a few active strategies in the category to outperform the S&P 500 over 10 years ending in January 2018.

The experienced and sensible managers executing on a solid process make the fund a credible option for those looking for active core U.S. equity exposure. Further, a focus on downside protection should appeal to more conservative investors.

Fortin has been a mainstay on the fund since June 1997, while Cardoso is newer, having joined the firm in 2013. He has been a good fit and strengthens the team's efforts in the information technology and health care sectors. Stanley Wu joined the team in late 2016, bringing 17 years of experience. He will contribute research ideas to the fund as well as co-manage the firm's international equity strategy. His addition has paved the way for 37-year veteran Gavin Ivory's retirement in March 2018.

Fortin and Cardoso build a concentrated portfolio of 25 to 35 names. To make the cut in the portfolio, stocks in the universe must survive in-depth analysis of company management and financials, business fundamentals and industry dynamics. Managers place particular focus on finding companies with strong balance sheets and growing free cash flows.

As is true with all Beutel Goodman funds, the disciplined approach to selling stocks has been a key factor behind the team's success. When a stock's target price is reached, one third of the position is sold automatically. The position is then re-assessed; if it's determined that the intrinsic value estimate has not increased, the position is sold outright. This discipline ensures the portfolio maintains its value characteristics and avoids holding pricier stocks.

Changes to the portfolio in 2017 exemplify this approach, as the managers took their weight in the strong performing information technology sector, where valuations were rising quickly, from 22% at the beginning of the year down to 14% by the end of the year. They sold Cadence Design (CDNS) and trimmed their positions in Teradyne (TER) and Symantec (SYMC). Conversely, the managers found more favourable valuations in the consumer discretionary sector, taking the weight there from nil to 14% by years' end, buying  AutoZone (AZO),  Omnicom (OMC) and  Harley-Davidson (HOG).

A downside price target is also set and if breached, the stock is similarly re-assessed but this time by a different analyst who will determine if the original thesis is still valid. If not, the stock is sold. All told, the team's approach to selling helps limit behavioural issues such as anchoring and confirmation bias.

The managers' focus is at the stock level and understanding the risks in the individual names they hold rather than dissecting the risks at the total portfolio level. Despite this relatively light touch to portfolio risk management, the fund's focus on undervalued, cash-flow-generating stocks tends to soften the impact of market declines; its downside capture ratio versus the S&P 500 clocks in at 89% during Fortin's more than 20-year tenure. But this also means it tends to trail in frothy markets or in narrow markets led by sectors or stocks with momentum traits.

Overall, as of January 2018, the fund's F-class produced an annualized 10-year return of 12.6%, beating the S&P 500 Index by 0.6 percentage points. While a beat of this magnitude doesn't seem particularly noteworthy, the S&P 500 has proved a very difficult bogey to beat, ranking in the top decile over 5 and 10-year periods. On a style-adjusted basis, the fund looks even more favourable, beating the Russell 1000 Value annually by 2.5 percentage points over 10 years.

Further, Beutel has easily outperformed its peers, ranking in the top quartile over three, five, 10 and 15 years. Going forward, we expect this performance to be repeatable. The U.S. market hasn't experienced a notable correction since the financial crisis in 2008-09, but another will inevitably occur, and the manager's propensity to outperform in down markets leaves this fund well positioned.

The fund's commission-based share class has a management expense ratio of 2.17% (including a 1% trailer) while its fee-based share class clocks in at 1.11%. Both share classes rank favourably to the channel median MERs of 2.39% and 1.19%, respectively. For do-it-yourself investors though, the firm's offering carries an MER of 1.50% -- 0.35% higher than the channel median MER of 1.15%.

The information contained in this article is the proprietary material of Morningstar Associates. Opinions expressed are as of the current date; such opinions are subject to change without notice. The information, data, analyses, and opinions presented therein do not constitute investment advice, are provided solely for informational purposes and therefore do not constitute an offer to buy or sell specific securities mentioned within this document or any other investment options. Past performance does not guarantee future results. Morningstar Associates, its affiliates, officers, directors and employees shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use. Please read our Terms of Use for more detail.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
AutoZone Inc2,835.82 USD0.80Rating
Cadence Design Systems Inc312.10 USD1.48Rating
Gen Digital Inc24.39 USD-0.41Rating
Harley-Davidson Inc32.52 USD-1.90Rating
Omnicom Group Inc88.41 USD-1.10Rating
Teradyne Inc145.06 USD-1.75Rating

About Author

Jeffrey Bunce, CFA

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

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