Investment Strategies

A US Fund's Manager Trumpets "Repeatable" Formula For Success

Tom Burroughes Group Editor London 16 December 2021

A US Fund's Manager Trumpets

This news service interviews a manager of a US equities fund now available for the UK market. The fund concentrates on hunting "value" stocks where the businesses are renowned, "quality" brands rather than less-understood or publicised.

There’s a lot of macro-economic, health and political news driving markets these days, but it is important to remember how investment managers hunting for “Alpha” also drill into the details of companies’ performance to deliver returns over the long term.

One such investment entity is the BA Beutel Goodman US Value Fund – a Brown Advisory fund where Beutel, Goodman & Company Ltd is the sub-advisor for the US group. The fund, which was launched a year ago and is available to UK investors, is managed by Rui Cardoso, based in Toronto. 

In about six months, the fund has drawn in more than $400 million of new client money from high net worth and other investors. Clients include wealth managers and family offices located in the UK, Germany, Switzerland, the Netherlands and Singapore. Brown Advisory seeded the fund with $25 million of private client money. This is a “value” fund – seeking to find undervalued companies with potential to rise – but it also has a strong “quality” bias, its promoters say. Holdings include such big-ticket names such as Kellogg Company, Oracle, eBay and American Express. The fund typically has a portfolio of 25 to 35 businesses, making this relatively concentrated. 

WealthBriefing recently spoke to Cardoso about the fund and its strategy. 

How many funds from other firms do something similar to this one? 
Cardoso: The US Large Cap Value universe is competitive representing over 1.7 trillion dollars and boasting over 270 products following a fundamental bottom-up investment approach [source: eVesment as of 30 September 2021]. However, we believe that our strict, rigid and repeatable investment process is our unique competitive advantage versus our peers. 

It has resulted in top quartile results against the universe on a 10-year annualised basis and we are confident that it will allow us to continue our client’s long-term investment success and continue Beutel Goodman’s growth in the market.

Are there types of companies that you are keeping an eye on at the moment that you are considering adding to the portfolio?
We are constantly searching out opportunities to own high quality companies with stable, growing businesses and strong balance sheets, while trading at a significant discount to our estimate of their intrinsic value, as guided by our rigorous research process. By nature, we are therefore quite contrarian and find ourselves attracted to stocks that are out of favour and have a cloud hanging over near-term market sentiment. 

“We are currently seeing value in some pharmaceutical stocks and a small number of consumer staple stocks that have been investing heavily in nourishing and building their brands well before COVID-19.

What typically leads you to exit a position and sell off a holding? Are there trigger events or specific developments that usually lead you to do so?
Beutel Goodman’s buy/sell discipline establishes a strict rule-based process for selling and exiting positions in the portfolio that removes emotion and bias from the decision-making process. Target prices are established prior to each holding’s initial investment so that once the price is achieved, one third of the position is automatically sold. After a one third sale, a new target is set, and the position is reviewed. If deemed fully valued by the analyst at this time, the position is then exited.

Less typically, if a stock breaches its downside target, also set prior to investment, it is transferred to a different analyst for review to determine whether a reasonable expectation of a positive return still exists. If not, the position will be sold in its entirety.

There is a lot of noise in the general market at the moment – fears about inflation, etc –  which can be distracting. What do you do to stay focused? 
Our focus on our process allows us to remain disciplined in searching for opportunities to own great companies trading at a significant discount to our estimate of their intrinsic value. Our buy/sell discipline is designed to remove emotion and bias from the decision-making process and our process clearly defines which stocks qualify for inclusion in our portfolios and how these stocks will enter and exit our portfolios. Regardless of near-term headlines in any given quarter, our focus on our process will never change.

As investors, to whom do you look for inspiration? Who is a role model? 
We are students of behavioural finance. We are ultimately guided by the rigid, mechanical and most importantly, repeatable structure of our investment process. It directs us through critical investment decisions around what types of stocks qualify for our portfolios, how we analyse and value investment opportunities, how we build new positions, and most importantly how we take profits and exit positions. It allows us to focus our time as analysts looking for great investment opportunities to feed into our process.

The process is grounded in behavioural finance. Its core tenet is that once we humans become emotional about a stock decision, we have no chance versus the monkey and a dartboard, the monkey will beat us every time. The process protects us from our emotional anchors that lead to poor long-term investment decisions.

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