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When James Black, vice president of Canadian equities and director of equities research at Toronto-based Beutel Goodman & Co. Ltd., surveys the investment landscape he peers through the murk of such uncontrollable circumstances as persistent inflation, delayed interest rate cuts, political change and escalating global conflict.
But Black’s goal is to detect what’s actually happening in the operations and stock prices of companies held in his portfolios – as well in stocks that might ultimately be of interest.
As lead co-manager of Beutel Goodman Canadian Equity along with Vim Thasan, vice president of Canadian equities and a seven-person team, his focus is to stick to the strict buying criteria and selling triggers that have led to the $6.7 billion fund’s top quartile 10-year track record and Morningstar bronze medalist rating.
Betting Against Bad Predictions
“The history of accurate predictions is poor and things often happen outside of the consensus expectation,” says Black. “But we are always looking at our portfolio to see if any names are being overly impacted by fears or other assumptions about macro trends. We look for dislocations, both positive and negative, in quality businesses. We like to buy names when they’re out of favour, and when stock prices are doing exceptionally well that often leads to a sale.”
As of April 24, the F series of fund (also available in Series D) showed a 15-year top quartile average annual return of 9.1%, beating the 8.1% average for Morningstar’s Canadian Equity category as well as the 8.9% chalked up the benchmark index. Shorter-term, the fund hasn’t shone as brightly, showing a bottom-quartile gain for the year ended April 24 of 3.8%.
Black says the goal is not to own the stock market stars of the moment but to focus on long-term, superior performers that can survive economic ups and downs and steadily grow their cash flow.
“We’re not traders, we wait for the market to bring opportunities to us,” Black says. “Unexpected negative moves can be just as interesting as unexpected positive moves, particularly in resilient businesses being punished by temporary pessimism. It can be painful at times, but moments of pain can create opportunities to add value.”
Stock Picks Should Be Set to Gain Half in a Few
Holdings must meet strict requirements to make it into the portfolio and to remain there, and “guard rails” are in place. Before a company is purchased, it must offer the prospect of a 50% positive return during the next three years, including stock price gains and dividends.
Once a company reaches the target price, one-third of the position is automatically sold. The team then reexamines prospects for growth during the next three years relative to price and decides on whether to continue to hold the remainder.
As part of the strategy to reduce risk and preserve capital, every stock in the fund also has a downside target price, which triggers a review and possible sale if hit. However, further purchases could also be made if the risk/reward situation is favourable.
“If you look at what’s been in favour lately, there have been a lot of energy and high growth names like tech stocks,” Black says. “We are value-oriented and we won’t overpay. We are always cautious on names with high multiples, where the stock price is based on hitting high growth targets.”
In the past year, the team has added to stocks in some of the sectors where it already has the largest weights, including financials, which make up 33% of the fund, industrials at 15% and consumer staples at 11%.
Top Canadian Stocks by Weight
While the fund’s two largest holdings are Royal Bank of Canada RY, recently at 7.4% of fund assets, and Toronto Dominion Bank TD, recently at a 6.1% weight, the team chose to add more Bank of Montreal BMO shares. BMO has a smaller weight in the fund but possesses the reliable growth characteristics and oligopoly advantages of the other big Canadian banks. It also has the potential to benefit from its U.S. investment banking business, Black says.
In the industrial sector, the team has added to RB Global Inc. RBA and Canadian National Railway Co., also in the fund’s top 10.
RB Global CNR has a dominant market share in commercial vehicles and heavy equipment and owns a salvage automobile business in the U.S.
CN Rail is one of two dominant players in the Canadian rail transportation industry (along with Canadian Pacific Railway which is also a fund holding). CN has valuable infrastructure assets, Black says, and the firm will reap additional benefits if the trend toward carbon emission reductions continues.
In the consumer sector, the team augmented holdings in Metro Inc. MRU, a grocery store chain that fell out of favour when management indicated earnings growth would pause in 2024 due to the cost of expanding the distribution network.
“Metro has a long record of growth in free cash and earnings, and continues to be a high-quality business,” Black says. “It is making good allocations of capital that we believe will pay off.”
The BG team is not currently keen on the real estate sector due to interest rate hikes during the past couple of years that have hurt some Real Estate Investment Trusts.
However, in the last year, Colliers International Group Inc. CIGI was added as a new name. Its stock price had fallen out of favour along with the rest of the real estate sector, Black says, but its business is better diversified than most. Colliers offers a stable of resilient commercial real estate services that continue to see demand through economic ups and downs, including property management, consulting and engineering services, investment services, brokerage and leasing.
High Expectations, Low Turnover
Because of the high total return threshold that any company must meet to qualify for the fund and the rarity of these attractive gems, the team runs a concentrated portfolio of 30 to 35 large-cap names. Turnover is driven by opportunity but tends to be relatively stable in the 20%-a-year range.
For small-cap exposure, rather than individual names, the fund holds a piece of Beutel Goodman Small Cap, which currently accounts for about 8% of Beutel Goodman Canadian Equity’s assets.
