By Canada Life | March 24, 2023
On the latest Canada Life Portfolio Manager Connect Series event, we welcomed Beutel Goodman’s Tim Hylton, Senior Vice-President, Institutional Client Service and Business Development, and Dominic Plante, Vice-President, Client Service and Business Development.
Read on for information you can share with your clients about how they could benefit from a value investing approach with the Canada Life Canadian Focused Value Fund. We cover why Canada is well-positioned, how Beutel Goodman’s team maintains a diversified portfolio in the concentrated Canadian market and how they’ve been able to provide stability in volatile conditions.
What’s in this article:
Tighter financial conditions have made investing in equities generally a challenge in the near term. This is especially true for the technology sector and other areas of the economy where strong growth had been expected. But the outlook for the Canadian economy specifically is quite good relative to other developed markets.
For instance, economists have pointed to Canada’s strong fiscal position and net debt-to-GDP ratio compared to other developed markets. Given its relative strengths, Beutel Goodman believes that Canada should be able to perform well in a high inflation environment.
The value investing approach used by Beutel Goodman takes advantage of Canada's strengths to find opportunities, without following the index. A strategy tilted to this style can help provide downside protection against rising interest rates and increased inflation. Importantly for Canadians, its bottom-up focus on individual companies also helps to diversify portfolios and reduce concentration risk. The global nature of markets means that companies in some countries are concentrated in particular sectors. In Canada, three sectors – energy, financials and materials – make up nearly two-thirds of the value of the stock market.1
Investors could historically make a decent return by following the broader Canadian market. But in today’s environment, following the index may lead to a concentration in these sectors. This concentration risk can lead to missed opportunities and a more volatile portfolio. Beutel Goodman doesn’t mimic the market. Instead, it maintains a portfolio of high-quality companies by paying close attention to fundamentals:
Sector weights* – Canada Life Canadian Focused Value portfolio
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Benchmark (%)
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Consumer discretionary
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13
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4.9
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The key tenets of Beutel Goodman’s value investing approach are a focus on the preservation of capital and purchasing companies at a significant discount to what they believe to be their business value. Put simply, they’re “buying fear and selling greed,” said Hylton.
Discipline is essential to making this approach work for clients. The team establishes target prices for both buying and selling positions. When a company’s stock value reaches their sell target, they sell one-third of the position to help lock in gains and free up capital for further investment. Their approach is also dynamic: after a sale, they restart the research process using a different analyst. This minimizes biases and gives them a chance to set new targets that reflect current conditions.
In our current environment, Hylton and Plante pointed to risks ahead for investors eying “growth” stocks. These companies are poised to grow quickly in the future. But they’re also riskier investments that are exposed to a higher drawdown risk due to elevated valuations, Hylton said.
In fact, the difference in the market price of growth versus value hasn’t been this high since the dot-com bubble of the late 1990s. This means that when the market sours, growth stocks could experience greater short-term losses than a portfolio of value picks. But avoiding a growth-tilted portfolio doesn’t mean investors should be eyeing the bargain bin. “We’re not looking at broken or poor companies that are very cheap – that can lead to value traps,” Hylton cautioned.
Canadian and U.S. bond markets have priced in continued interest rate hikes into early 2023. Beutel Goodman expects that this policy tightening will work its way through the real economy, forcing central banks to cut rates by late 2023 to avoid causing a full-blown recession.
While these macroeconomic changes are important to track, ultimately the team is “very focused on high quality companies that are going to do well, regardless of the macro, and that are priced appropriately,” Hylton said.
Talk to your Canada Life wealth wholesaler today to find out how you can put Beutel Goodman’s value investing approach to work for your clients through the Canada Life Canadian Focused Value Fund or other offerings on the Canada Life™ shelf.
You can read more about Beutel Goodman’s approach in this article from Wealth Professional, featuring Portfolio Manager James Black: Digging into fund’s hunt for value.
Canada Life funds with portfolios managed by Beutel Goodman
The views expressed in this commentary are those of this investment manager as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice.
This fund is available through a segregated funds policy issued by The Canada Life Assurance Company or as a mutual fund managed by Canada Life Investment Management Ltd. offered exclusively through Quadrus Investment Services Ltd., IPC Investment Corporation and IPC Securities Corporation. Make your investment decisions wisely. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. A description of the key features of the segregated fund policy is contained in the information folder. Any amount allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.
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