Low risk, big profits

A decade ago, a small mutual fund company could still survive and prosper in Canada. But the rise of the big banks as major players changed the landscape dramatically. Independent firms were forced to grow, sell, or die. Some, such as CI, grew by acquisition. But most threw in the towel and sold out.

In a few cases, their brand name lives on. The Altamira funds are now part of the National Bank line-up. The Cundill and Saxon funds have become part of the Mackenzie Financial family. You’ll find the Bissett funds in the Franklin Templeton stable. Phillips, Hager & North now operates as a semi-autonomous unit of the RBC fund group. The Clarington funds are now owned by insurance giant Industrial Alliance. Trimark is owned by Invesco.

In other cases, the names have disappeared into financial history. The 1999 edition of my Buyer’s Guide to Mutual Funds gave good ratings to offerings from such companies as BPI, Global Strategy, O’Donnell, Pursuit, Spectrum United, and Strategic Value. Gone, all gone.

There are still a few high-quality boutique firms left but no one can predict how long they’ll stay around. The RBC move to acquire PH&N had been in the works for months before the announcement. Perhaps the same thing is happening with some of the other small companies now. So take advantage of them while you can. Who knows what the future will bring.

One of the smaller firms I like a lot is Toronto-based Beutel Goodman, which has been around since 1967. Its professionals take a conservative approach to money management, using a value style combined with in-depth, bottom-up analysis.

The company specializes in private wealth management for discreet, wealthy people. Its mutual funds employ the same style and are best suited to low-risk investors who don’t want to have to worry about their money. That doesn’t mean that BG funds never suffer losses. But when they do, you can be pretty sure that they’ll lose a lot less than almost everyone else.

Beutel Goodman funds are sold through brokers on a front-end load basis, with a maximum commission of 4 per cent. You should be able to acquire them more cheaply, although the trailer fee paid by the company is much less than the competition. The minimum initial investment is $10,000.

Here is one BG fund that is worth your attention.

Beutel Goodman Canadian Equity Fund. This is a classic buy-and-hold fund that employs a bottom-up value style to stock selection. The portfolio currently holds 31 high-quality securities including most of the major banks, EnCana, Manulife Financial, Molson Coors, Telus, and Talisman Energy. The managers’ target is deep value companies that are generating substantial free cash flow, earning their cost of capital, and growing their business over time.

The strategy has worked reasonably well. The fund was thumped in the market downturn, dropping 31 per cent over the 12 months to Feb. 28, but that was not as bad as the overall fall in the S&P/TSX Composite Index. It has recovered well since, gaining 37.3 per cent in the six months to Aug. 31). That was better than both the TSX and the category average. It’s typical of value funds to underperform in strong markets so we are pleased to see that this one managed to do better than its peers during that period.

Longer-term results are more indicative of what to expect from this fund. According to The Fund Library ranking, over the past decade this was one of the top 10 Canadian stock funds in terms of performance, with an average annual compound rate of return of 7.7 per cent compared to a 5.9 per cent average for the category.

The fund has relatively low volatility as shown by a beta of 0.77. It has a good risk/return profile and a well-designed and transparent investment strategy. Despite the drop during the market plunge, I am maintaining the fund’s top $$$$ rating as I see it doing well in the recovery that appears to be taking shape.

Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that provides advice on fund selection and strategies. For subscription information, click here

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