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A fund to buy for a market setback

If investment optimism fades, consider Beutel Goodman Canadian Equity Fund. Its undervalued stocks are meant to offer a measure of downside protection.

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That’s what most investors think about market setbacks. But Beutel Goodman’s Canadian Equity Fund’s undervalued stocks are meant to offer downside protection.

In the first half of this year, positive trends in vaccinations rates in North America encouraged investors to believe in a faster-than-expected economic recovery. This contributed to a strong stock market performance. Recently, however, the notion of a fast recovery has faded. Stock prices have weakened as the Delta variant and other factors have weighed on the economy.

The people at Beutel Goodman Investment Counsel likely find these market developments interesting. More importantly, however, such twists and turns in the market only serve to remind them of why they focus on their disciplined value investment process and the companies in their portfolio rather than economic forecasts and timing the market.

In the first half of the year, Beutel Goodman Canadian Equity Fund (Class D fund code: BTG770(FE)) slightly outperformed the S&P/TSX Composite Index, returning 17.4 per cent versus the index’s 17.3 per cent.

But while the market had gotten more expensive by the end of the first half, the fund’s managers thought many of the stocks in the fund were undervalued relative to their target prices. The portfolio, then, was consistent with the investment process of searching out opportunities to own great companies trading at a discount to the managers’ estimate of intrinsic value.

Portfolio may hold up well

And as we move deeper into the fall, with markets looking precarious, such a portfolio may hold up better than those filled with many of the overvalued stocks in today’s markets.
Currently, the fund holds 34 per cent of its assets in financial stocks. So far this year, financials have outperformed the overall market, and have held up slightly better than the market in September.

Two of the fund’s biggest investments are bank stocks—Royal Bank and TD. Together, these stocks account for just over 14 per cent of the portfolio. Both are reasonably valued, and if they do fall dramatically in an autumn market setback, we think they’re likely to rebound strongly in a market recovery.

The fund’s third-largest holding, at 5.1 percent, is Brookfield Asset Management, also a financial stock. The stock currently trades at a reasonable 8.1 times the company’s estimated cash flow for 2021. As such, it has good capital appreciation potential over the next few years, regardless of what markets do in the near term.

By and large, we find most of the fund’s main holdings offer good value. As such, they’re worth holding on to and adding to in a stock market decline.

Beutel Goodman Canadian Equity Fund is a buy if you want long-term growth from a value investment approach.

This is an edited version of an article that was originally published for subscribers in the October 1, 2021 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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