Stephen Arpin, managing director of Canadian equities at Beutel, Goodman & Co. Ltd., in Toronto, Jan. 16, 2025.JOHN PACKMAN/The Globe and Mail
A master’s in American history seems an unlikely path to becoming a money manager, but it may have helped Stephen Arpin. After landing an equity-trading role at Beutel, Goodman in 1993 — the decade when mutual funds took off — he was hooked by the challenge of picking winning stocks. Because his bosses liked the fact that he could look at the world differently, he was offered a job as an analyst and then lead manager on the Beutel Goodman Small Cap Fund. His stock bets, meanwhile, have paid off. The F series of this $592-million fund, which he co-runs with William Otton, has outpaced the S&P/TSX SmallCap Total Return Index since 2006. That fund is part of $1.6 billion in small-cap assets the pair run at the firm. In January, we asked Arpin for his small-cap outlook and why he likes MDA Space.
What’s your strategy to beat your index?
We’re a value manager focused on high-quality, free-cash-flow-generative businesses. We are looking for companies that trade at a substantial discount to our assessment of their real value to try to get a 100% return over four years. Our portfolio holds 35 to 45 companies. We aim to control downside risk, which is a large part of how we drive returns. But we have made mistakes, such as with ABC Technologies and VerticalScope, which didn’t work out.
Given that your benchmark index gained 19% last year, what’s your outlook for this year?
Energy and materials make up over 50% of that index, so that helped returns. But we own names in other areas where there’s a better opportunity, and we are more overweight industrials and financials. Small caps tend to be better positioned when economic growth is strong and are also more sensitive to the risk appetite of investors. High-yield bond spreads are tight, and interest rates have been easing. That is positive, because money is cheaper and can drive more acquisition activity, too. But there’s one very important exogenous risk, and it’s the U.S. tariff threat, because that could drive a substantial economic slowdown.
MDA Space is a big holding. What’s the attraction?
MDA is a global leader in manufacturing satellites and builds the Canadarm series of robotic arms. Over the past decade, the cost of putting satellites into orbit has decreased dramatically. Instead of putting up large satellites, we now see these low-Earth-orbit satellites. Elon Musk’s Starlink satellite, which has been vital for communications in Ukraine’s war against Russia, is an example. MDA has a large backlog of orders, and satellite manufacturing does not require heavy capital expenditure, so the prospect for free cash-flow generation is attractive.
What other names do you favour now?
Fashion is a difficult business, but we like Aritzia because this retailer really resonates with women. It’s a real entrepreneurial success story. We see substantial opportunity for expansion in the United States and maybe internationally. Another is EQB, which owns Equitable Bank. It’s the leader in the near-prime lending business for single-family homes in Canada and has also been generating a return on equity in the mid-teens.
Your fund is light on resources but owns Alamos Gold and Triple Flag Precious Metals. Why?
Declining interest rates are generally favourable for gold. It’s hard to predict the gold price, so we look for businesses in safe jurisdictions with low cost structures. Alamos Gold, which has a strong balance sheet, used its cash flow from its Mulatos mine in Mexico to make smart purchases in acquiring the Young-Davidson mine and Island Gold mine in Canada. Triple Flag is a gold royalty company, so it doesn’t have capital expenditures, and offers diversification across different mines and geographies.
Do potential takeover targets play a role in your investing strategy?
We don’t buy businesses with the expectation that they’ll be taken over, but as larger companies find it harder to grow internally, they naturally look for acquisitions. Our takeovers last year included Canadian Western Bank, Copperleaf Technologies, Heroux-Devtek, Sleep Country Canada, Altius Renewable Royalties and Softchoice. Primo Water was a merger with BlueTriton Brands, but we sold it afterward because the combined entity became a U.S.-listed stock.
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