Canadian Investment Guide 2010

Bruce Corneil is a rare beast, an investment expert who consistently wrings above-average profits from those plodders of investing — bonds.

Returns above the norm are more common in stock markets. But Corneil, this year’s Morningstar Fixed-Income Manager of the Year and senior vice president at Beutel Goodman & Co. Ltd. in Toronto, has something in common with outstanding equity mutual fund managers — an unwavering focus on value. “We adhere to top quality,” Corneil says.

Quality assessment is most crucial when it comes to corporate bonds, although Corneil’s portfolios also in­clude federal and provincial bonds. He and his team, including vice presidents David Gregoris and Sue McNamara, conduct rigorous analyses of the companies and governments that issue bonds to avoid unpleasant surprises. For example, a company’s cash flow must be robust and stable to ensure that it can make good on its interest payments and be able to retire debt on schedule. As far as Corneil is concerned, default within his portfolios is simply not an option.

“We stake our reputation on avoiding problems,” he says. “We stay away from anything opaque, non-transparent, illiquid or cyclical, as well as issuers that don’t have barriers to entry in their business. We’re not interested in making a dollar today, and losing it tomorrow. We’re running marathons, not sprints.”

In deciding on the mix of bond issuers and the duration strategy, Corneil assesses a variety of factors, including the direction of interest rates, the shape of the yield curve and the spread — the interest rate differential — on rates being paid by relatively safe government bonds and by more risky corporates.

“Corneil is intensely focused on credit quality and is fanatical about not suffering a default,” says David O’Leary, manager of fund analysis at Morningstar Canada. “Credit research is one of his main pillars; he has a deep understanding of the financials and cash flows of corporate issuers.”

Corneil and his team at Beutel manage $9 billion in fixed-income assets, mostly for large institutional clients. He also manages a handful of mutual funds, including Beutel Goodman Income, Beutel Goodman Long Term Bond, Beutel Goodman Corporate/Provincial Active Bond and the fixed-income portion of Beutel Goodman Balanced. Within Beutel Goodman Income, Corneil is able to invest in all types of bonds and maturities. According to Morningstar Canada, this fund has been a top-quartile performer over periods ranging from one year to 10 years.

As of Sept. 30, 2009, Beutel Goodman Income showed a 10-year average annual return of 6.6%, handily beating the median Canadian fixed-income fund return of 5%. For the year ended Sept. 30, Beutel Goodman Income had a robust gain of 13.5%, many lengths ahead of the median return of 9.1%.

Economic trends, such as the direction of interest rates and inflation, have a big impact on the bond market, and Corneil is constantly looking through his binoculars, surveying the financial landscape. He had anticipated the credit crunch and its devastating effect on financial services institutions; his funds had no exposure to bonds in that sector when the crisis exploded in September 2008. They were concentrated in utilities and pipelines, which escaped the meltdown.

Corneil also predicted that the crisis would lead to lower interest rates — particularly, short-term rates — and that there would be a widening of the interest rate spread between corporate and government bonds. He took advantage of the negativity in the corporate-bond market during the depths of the turmoil and bought more top-quality corporate bonds, ultimately bringing corporates to about half of Beutel Goodman Income’s portfolio. As the crisis eased, investors regained their confidence in corporate bonds, and the fund’s portfolio benefited as corporate bond prices rose and spreads narrowed.

IE