The Canada Life Canadian Focused Value Fund is driven by a rigorous fundamental analysis with an eye for market dislocations
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Beutel, Goodman & Company Ltd. (Beutel Goodman), sub-advisor for the Canada Life Canadian Focused Value Fund, is different from other asset managers and proud of it. It doesn’t have an overall economic viewpoint that drives its investment decisions. Instead, as bottom-up investors, its approach is to conduct fundamental research on what it considers high quality businesses. Beutel Goodman looks for dislocations due to any number of factors, which may include an unfavourable macroeconomic backdrop. Call it a hunt for value.
James Black, Portfolio Manager at Beutel Goodman, believes that their disciplined investment approach provides a very consistent methodology for evaluating stocks through market cycles.
According to Black, “We do fundamental research; we look for high quality companies that have either a competitive advantage or some sort of economic moat that gives them a strong market position. And that then should enable them to generate good long-term sustainable free cash flow. Ideally, that is accompanied by great management and governance. Although sometimes weaknesses create opportunities to buy high quality businesses.”
As part of the process of identifying investments, the Beutel Goodman team carries out a detailed due diligence process, which includes meeting with management of prospective investments. Once invested in a company, they’ll meet with its management on a regular, ongoing basis.
The investment process culminates in a detailed research report that is presented to the investment team. This research report includes the investment thesis and detailed information and analysis that the analyst has considered in formulating their recommendation. They must justify and defend from constructive challenges by other members of the team. No investments are made without meeting these high hurdles and having the consensus approval of the entire investment team.
It’s an approach that promotes candour, encourages robust conversations in-house and subjects their investment decisions to vigorous internal peer review.
Taking out the emotion
Beutel Goodman employs a disciplined equity investment process which is designed to take emotion out of investment decision making. It also aims to reduce greed and ego in the process, and to prevent team members from either becoming overly confident in their own work on the one hand or becoming fearful on the other.
Beutel Goodman’s disciplined investment process differentiates it from its peers. When it buys a name, it requires an estimated 50% return potential over a three-year horizon – a high hurdle that includes the dividends it expects to receive. Its approach is very selective, which tends to result in a relatively low turnover of stocks. A target price and a downside price are established at the time of purchase. When the target price is reached, there will be a 1/3 sale of the investment and a target price update. A downside breach requires another team member to perform a stock review and recommend next steps for the team’s consideration.
Beutel Goodman manages over $20 billion of Canadian equities. Black and the other equity portfolio managers are both analysts and portfolio managers and they conduct their own independent research.
The Beutel Goodman team runs concentrated portfolios, looking to buy securities that are temporarily out of favour and that the market may be viewing through an overly pessimistic lens. It seeks to take large positions in companies in which the team has high conviction, and it looks to own them over the long-term with a shared interest with management in each company’s performance.
Black emphasises, “We really act like owners, not renters of stocks.”
Black says, “We try to buy businesses that have pricing power, and that can pass through inflationary cost increases in prices too. We look for companies that have resilient cash flows.”
Black notes that there are substantial macroeconomic risks. There are geopolitical risks as well. However, as bottom-up investors, their outlook isn't dominated by wider market conditions.
But these macroeconomic factors are secondary risks compared to what Beutel Goodman would consider the fundamental risks affecting stocks.
Black lists the three fundamental risks that they look out for, starting with valuation. This is closely followed by the quality of the business, and finally by how it allocates its capital. He sees their role as aiming to buy businesses that are trading at a low valuation, that already have discounted a range of macroeconomic concerns, and that are resilient.
“The macro, we can't control, but those fundamental risks are within our ability to evaluate and make investment decisions,” Black says.
He adds, “Our approach is designed aiming to generate good long-term risk adjusted returns by looking to buy high quality businesses at a discount to their intrinsic value. And in times of market duress, our aim is that the quality of our portfolio and the valuation that we're buying at means that the portfolio, through any cycle, should be able to weather the market, and ideally outperform.”
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