Latest Ideas

April 2018 | Entropy: The Degree of Disorder or Randomness in the System

Pendragon

Entropy: The Degree of Disorder or Randomness in the System

When a high level of entropy exists, people tend to just shut down. When events occur too frequently, chaos develops, volatility increases to extreme levels and risk aversion ensues. With President Trump, through the desire to implement trade policy through the unconventional means of social media, the level of entropy has hit an extreme high. In reality, the trade war was actually lost decades ago. The key issue is the fact that in China’s 2025 economic strategy high tech industries are the main focus, and this is the battle ground.


The reality is that this is not so much about trade wars but trade theatre. With mid-term elections coming in the fall, the President needs to be seen fulfilling his election promises. A deal on intellectual property rights will be made and it may take some time. In the end President Trump’s bark is bigger then his bite.


The United States can on longer absorb the excess capacity generated by Germany and China. John Maynard Keynes warned that this bridge would eventually be crossed during the negotiations at Bretton Woods in 1944. He rightly predicted that the World Trade Organization was not strong enough to deal with the inherent problems created by a closed economy. Countries that manufacture trade surpluses are reticent to back up or create conditions to consume more internally. This is known, and will be dealt with through negotiations.


While economic conditions point to a period of strong company earnings, the heightened political risk, caused by concern regarding an impending trade war, has caused extreme volatility in the financial markets. Prudence suggests investors reduce exposure, and we have with the Pendragon Fund. While earnings will be strong, we expect the market to be volatile in the short-term and a deal will be made before the mid-term election season starts. When this happens, fundamentals will again take center stage. Until then, a high level of entropy will exist in the markets.


This does not mean the evolutionary process and the global economy has stopped. If the politicians and regulators step aside, the financial markets and the global economy will continue to grow and the new data driven economy will continue to evolve at a rapid pace.


Investors should look at this period as the pause that refreshes.


Dr. James E. Thorne

Chief Capital Market Strategist & Senior Portfolio Manager

 

Accredited Investors Only

The Fund is available on a private placement basis only to residents of Canada who are qualified “Accredited Investors” as defined under National Instrument 45-106 Prospectus Exemptions and who are resident in Canada. This material is for information purposes only and does not constitute an offering memorandum or an offer or solicitation in any jurisdiction in which an offer or solicitation is not authorized. Please read the Fund’s Offering Memorandum before investing. Prospective investors should rely solely on the Offering Memorandum which outlines the risk factors in making a decision to invest. The indicated rates of return are historical annual compounded total returns net of fees and expenses paid by the Fund, including changes in unit value and reinvestment of all distributions, but do not take into account sales charges or income taxes payable by any security holder that would have reduced returns. Investments in the Fund are not guaranteed, their values change frequently and past performance may not be repeated. Investment losses do and may occur, and investors could lose some or all of their investment in the Fund. The information herein does not consider the specific investment objectives, financial situation or particular needs of any prospective investor. No assurance can be given that the Fund’s investment objective will be achieved or that investors will meet their investment goals. Prospective investors should consult their appropriate advisors prior to investing. Information presented herein is obtained from sources we believe reliable, but we assume no responsibility for information provided to us from third parties. Caldwell Securities Ltd. and Caldwell Investment Management Ltd. are wholly-owned subsidiaries of Caldwell Financial Ltd. Officers, directors and employees of Caldwell Financial Ltd. and its subsidiaries may have positions in the securities mentioned herein and may make purchases and/or sales from time to time. This information may not be reproduced for any purpose or provided to others in whole or in part without the prior written permission of Caldwell Investment Management Ltd. All information and opinions indicated herein are subject to change without notice. Inception date: September 15, 2016.

March 2018 | Caldwell Canadian Value Momentum Fund Commentary

< Back

 

March Recap:

 

The Fund gained 1.6% in March versus a loss of 0.2% for the S&P/TSX Composite Total Return Index ("Index”). The Index's performance was mixed on a sector level, with the strongest performance coming from REITS (+1.7%) and the Gold sub-sector (+6.8%) while Industrials (-2.4%) was the worst performer.

 

One of the core features of the CCVMF is investing in stocks that have the ability to unlock value regardless of the market's underlying performance. The Fund's out-performance this month is telling given its largest sector exposure - Industrials (38% of the portfolio at month end) - was also the market's worst performing sector. Looking at the CCVMF's individual holdings within Industrials, 8/10 (80%) out-performed the Industrials sector while 6/10 (60%) posted a positive return in a down market. This type of performance is the result of a high-conviction portfolio of stocks with strong company-specific catalysts, made possible by a proprietary, bottom-up, investment process.

 

This is the 3rd consecutive month that the CCVMF out-performed the Index in a down market. Since inception (Aug 2011), the fund has outperformed the Index in 23 of 30 down months for a 77% success ratio. The CCVMF's return and down-capture in March led all of its peers in the Canadian Equity category. The CCVMF's down capture in March was actually negative (a good thing) given the Fund posted a positive return in a negative market.

 

Top CCVMF performers in March were Premium Brands Holdings (PBH: +14%) and Stuart Olsen (SOX: +12%). While PBH reported a mixed quarter, issues seem to be temporary and the company continues to progress with its acquisition strategy, having announced 4 acquisitions that will be accretive to current year earnings. The company’s guidance was in-line with the consensus estimate but did not include any contribution from these acquisitions. This suggests upside to the company’s guide and analysts estimates have moved higher accordingly. Stuart Olsen had a very strong quarter with a 14% EBITDA beat driven by higher than expected margins. Leverage and payout positions have improved significantly and the company is making progress on its diversification efforts, evidenced by new contract wins.

 

No stocks were added to the portfolio in March.

 

The Fund held a 29% cash weighting at month end. As previously discussed, we expect cash balances to move lower as we progress through the CCVMF's investment process. In the meantime, we look forward to tracking the progress of the portfolio’s holdings as we see a meaningful and diverse set of catalysts to drive continued growth.

 

We thank you for your continued support.

 

The CCVMF Team

The information contained in this document is designed to provide general information related to investment alternatives and strategies and is not intended to be investment or any other advice applicable to the circumstances of individual investors. We strongly recommend you to consult with a financial advisor prior to making any investment decisions. Unless otherwise specified, information in this document is provided as of the date of first publication and will not be updated. All information herein is qualified in its entirety by the disclosure found in the CCVMF’s most recently filed simplified prospectus. Information contained in this document has been obtained from sources we believe to be reliable, but we do not guarantee its accuracy. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing in this product. Unless otherwise indicated, rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. The CCVMF is a publicly offered mutual fund that offers its securities pursuant to simplified prospectus dated July 20, 2017. The CCVMF was not a reporting issuer prior to that date and formerly offered its securities privately as follows: Series F and Series I since March 28, 2014 and Series O since August 8, 2011. The expenses of the CCVMF would have been higher during the period prior to becoming a reporting issuer had the fund been subject to the additional regulatory requirements applicable to a reporting issuer. Inception Date: August 8, 2011. Principal Distributor: Caldwell Securities Ltd.

March 2018 | The World’s Evolution To Its True “Native Digital State”

Pendragon

The World’s Evolution To Its True “Native Digital State”

“See, the world is full of things more powerful than us. But if you know how to catch a ride, you can go places,”
- Neal Stephenson, Snow Crash


The world continually changes and evolves. This has always been true and those that fail to innovate and adapt will be left behind. The evolution of the global economy is a force more powerful then us. The ride today is provided by the innovation called the Blockchain, and yes, if you catch this ride it will take you places. Do we know who the long-term winners will be with certainty? No. But we must recognize that the status quo is being attacked by very strong disruptive forces. Simply put, data is the new oil. Decentralization is upon us and the world is evolving very quickly from its analogue foundations, which were developed in the 1800’s, into its true native digital form. This is the ride that Pendragon is catching.


Throughout history, when a major innovation has been introduced, it tends to absorbed into the economy in two distinct steps. Step one, the technology is initially introduced, the 80’s and the 90’s introduced the computer and the internet to the world. Step two, the economy absorbs the technology to the point where it dramatically changes the world we live in. Today the Internet of Things, Alternative Intelligence, Machine Learning, and the Blockchain, are now dramatically changing the way we live and do business. Academics label the former Gilded Age, while the latter is labeled the Golden Age. The Blockchain, a data base innovation which applies cryptography, is front and centre catching the imaginations of many. To some, this new data model may be as significant as the printing press or double entry book keeping accounting. To others, it’s referred to as a tulip bulb. To be sure no one knows what the future holds, but it would be folly to assume that the status quo will be maintained.


In the past, civilizations were organized and settled in a centralized manner. The introduction of the internet into our society started the pendulum to swing back towards a decentralization. The Blockchain allows data bases to be secure, transparent and decentralized. The introduction of a decentralized accounting ledger, that you can only add information to and cannot be hacked, releases profound forces of disruption into the economy. Just imagine a tamper proof ledger of transactions (cannot be hacked) that exists in multiple (decentralized) locations for everyone to see. The joint forces of the internet and the Blockchain will now accelerate the rate upon which society decentralizes, and digitizes.


Many will be unhappy with this occurrence and will fight to maintain the status quo. Education is key to understanding the opportunities that lie ahead.


Dr. James E. Thorne

Chief Capital Market Strategist & Senior Portfolio Manager

 

Accredited Investors Only

The Fund is available on a private placement basis only to residents of Canada who are qualified “Accredited Investors” as defined under National Instrument 45-106 Prospectus Exemptions and who are resident in Canada. This material is for information purposes only and does not constitute an offering memorandum or an offer or solicitation in any jurisdiction in which an offer or solicitation is not authorized. Please read the Fund’s Offering Memorandum before investing. Prospective investors should rely solely on the Offering Memorandum which outlines the risk factors in making a decision to invest. The indicated rates of return are historical annual compounded total returns net of fees and expenses paid by the Fund, including changes in unit value and reinvestment of all distributions, but do not take into account sales charges or income taxes payable by any security holder that would have reduced returns. Investments in the Fund are not guaranteed, their values change frequently and past performance may not be repeated. Investment losses do and may occur, and investors could lose some or all of their investment in the Fund. The information herein does not consider the specific investment objectives, financial situation or particular needs of any prospective investor. No assurance can be given that the Fund’s investment objective will be achieved or that investors will meet their investment goals. Prospective investors should consult their appropriate advisors prior to investing. Information presented herein is obtained from sources we believe reliable, but we assume no responsibility for information provided to us from third parties. Caldwell Securities Ltd. and Caldwell Investment Management Ltd. are wholly-owned subsidiaries of Caldwell Financial Ltd. Officers, directors and employees of Caldwell Financial Ltd. and its subsidiaries may have positions in the securities mentioned herein and may make purchases and/or sales from time to time. This information may not be reproduced for any purpose or provided to others in whole or in part without the prior written permission of Caldwell Investment Management Ltd. All information and opinions indicated herein are subject to change without notice. Inception date: September 15, 2016.

February 2018 | Caldwell Canadian Value Momentum Fund Commentary

< Back

 

February Recap:

 

The Fund fell 0.7% in February versus a more substantial loss of 3.0% for the S&P/TSX Composite Total Return Index ("Index”). The decline in the Index was broad-based, with only the Technology (+5.8%) and Industrials (+1.3%) sectors posting positive returns. Energy (-6.4%), Health Care (-10.1%) and Gold (-11.7%) were the worst performers.

 

This is the 2nd consecutive month that the CCVMF out-performed the Index in a down market. Since inception (Aug 2011), the fund has outperformed the Index in 22 of 29 down months for a 76% success ratio. For the month of February, the CCVMF's down capture was 22.5% which ranks in the top 1% of all Canadian Equity funds.

 

Just a quick reminder that, unlike many Canadian Equity strategies that can have significant exposure to the U.S. and foreign exchange rates, the CCVMF invests entirely in Canadian stocks or cash.

 

Top CCVMF performers in February were North American Energy Partners (“NOA”: +9%) and CGI Group (“GIB.A”: +6.5%). NOA was added to the portfolio last month and significantly out-performed its sector (Energy -6.4%) on the back of a solid earnings report in which the company re-iterated their strong outlook. EBITDA is expected to grow 15% annually through 2019 driven by new project wins, successful service agreement renewals and continued expansion into non-oilsands projects. CGI also had a strong earnings report on an acceleration in revenue growth (constant currency growth moved to 4.9% versus 2.5% the prior quarter). Bookings also set an 8-quarter high as demand for the company's Digital and Intellectual Property “IP” solutions remains strong given increasing IT budgets at CGI's customers.

 

Two stocks were added to the portfolio in February: ATS Automation “ATA” and New Flyer Industries “NFI”. ATS is a leading provider of automated manufacturing solutions and serves a diverse set of clients across the Healthcare/Life Sciences (49% of revenue), Transportation (27%), Energy (13%) and Consumer Products (12%) industries. Demand trends are strong with rising wages, re-shoring, scarce low-wage labour, and higher quality control leading companies to turn to automation. Particularly noteworthy secular demand drivers are in healthcare, where manufacturers face increasingly stringent regulations, and in transportation, driven by electric vehicles. ATS also has a robust M&A pipeline that should provide additional growth opportunities. Lastly, the company has a new CEO that is looking to drive 5% of margin expansion by driving a culture of process-driven improvement. New Flyer was sold from the portfolio in late 2017 as the stock hit our sell signals. We re-initiated the position after another attractive acquisition and the company's investor day, which highlighted continued strong demand trends and further runway for product line growth and margin expansion. NFI's leadership position in electric buses has also become more clear, which removes a source of negative sentiment on the stock.

 

The Fund held a 36% cash weighting at month end. As previously discussed, we expect cash balances to move lower as we progress through the CCVMF's investment process. In the meantime, we look forward to tracking the progress of the portfolio’s holdings as we see a meaningful and diverse set of catalysts to drive continued growth.

 

We thank you for your continued support.

 

The CCVMF Team

The information contained in this document is designed to provide general information related to investment alternatives and strategies and is not intended to be investment or any other advice applicable to the circumstances of individual investors. We strongly recommend you to consult with a financial advisor prior to making any investment decisions. Unless otherwise specified, information in this document is provided as of the date of first publication and will not be updated. All information herein is qualified in its entirety by the disclosure found in the CCVMF’s most recently filed simplified prospectus. Information contained in this document has been obtained from sources we believe to be reliable, but we do not guarantee its accuracy. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing in this product. Unless otherwise indicated, rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. The CCVMF is a publicly offered mutual fund that offers its securities pursuant to simplified prospectus dated July 20, 2017. The CCVMF was not a reporting issuer prior to that date and formerly offered its securities privately as follows: Series F and Series I since March 28, 2014 and Series O since August 8, 2011. The expenses of the CCVMF would have been higher during the period prior to becoming a reporting issuer had the fund been subject to the additional regulatory requirements applicable to a reporting issuer. Inception Date: August 8, 2011. Principal Distributor: Caldwell Securities Ltd.

February 2018 | Decentralization is No Tulip

Pendragon

Decentralization is No Tulip

"Those who fail to learn from history are doomed to repeat it." - Sir Winston Churchill, 1948

With all the noise created by many pundits concerning the innovation called the Blockchain and cryptocurrency, we found it very helpful to go back to first principles and analyze the genesis and evolution of the internet and the data set. Our thinking is that the global economy is at the intersection of three major themes: the Internet of Things, Artificial Intelligence, and the Blockchain. Together, these three concepts are important components of a theme we refer to as Web 3.0 or Decentralization.


As our society evolved from one based upon barter, to one based upon markets and manufacturing, a need to prove trust became necessary. Who was going to make sure that citizens or market participants could trust each other so that property rights could be transferred? In the analogue world, institutions, governments, and professions evolved to ensure that trust and property rights could be transferred. Thus our countries, cities, industries, and organizations were built to have a centralized benevolent dictator determine what was right and what was wrong. Our society has now reached a fork in the road. The rise of populism has put pressure on the existing institutions and social conventions. We are entering into a new regime, one characterized by the forces of “decentralization”. For investors, it is critical to recognize these evolutionary forces will be accelerated by three sub themes, the Internet of Things, Artificial Intelligence, and the Blockchain.


As the global economy continues to evolve from one that is centralized and built in an analogue world (with paper and humans at the center) to a decentralized digital world, one must accept the fact that the status quo will be under attack. Putting a computer chip into a machine, connecting the machine to the internet, having machines communicate to each other without human interference, while all the time learning, will have profound effects on society. Furthermore, the ability for machines to exchange value in a transparent, permanent, immutable, reliable and decentralized process, only begins to foreshadow the disruption ahead of us.


So while many in the media point to the Blockchain and cryptocurrencies as a bubble similar to tulips, our research suggests that when computer scientists solved the Byzantine Generals Problem, a problem which outlines how difficult unanimous trust is to coordinate, a critical research triumph was achieved. This accomplishment will now allow the global economy, to evolve at a faster pace into its true native digital decentralized form. So yes, we think it’s folly to suggest that Web 3.0, as some refer to it, is analogous to the tulips bulb mania. We also think this regime we have just entered into, might be the most transformative of our generation.


A brief review of history: In the 1950’s, the internet was designed to be free and decentralized. It was born out of the concern, during the cold war, that the United States needed a back up communication system in the event the Soviet Union attacked the telephone lines. This evolved into the world wide web. Unfortunately, the only way that companies could make money was to aggregate or centralize data, a far cry from the libertarian aspirations put forth by the founders of Facebook and Google. The Blockchain is the critical technology that will allow our society to evolve into its true native digital form. To prove trust in the Blockchain we need computers solving mathematical questions, proof of their work, and then their reward is a token that can be use in the network or exchanged for fiat currency. This is hardly a tulip.


Dr. James E. Thorne

Chief Capital Market Strategist & Senior Portfolio Manager

 

Accredited Investors Only

The Fund is available on a private placement basis only to residents of Canada who are qualified “Accredited Investors” as defined under National Instrument 45-106 Prospectus Exemptions and who are resident in Canada. This material is for information purposes only and does not constitute an offering memorandum or an offer or solicitation in any jurisdiction in which an offer or solicitation is not authorized. Please read the Fund’s Offering Memorandum before investing. Prospective investors should rely solely on the Offering Memorandum which outlines the risk factors in making a decision to invest. The indicated rates of return are historical annual compounded total returns net of fees and expenses paid by the Fund, including changes in unit value and reinvestment of all distributions, but do not take into account sales charges or income taxes payable by any security holder that would have reduced returns. Investments in the Fund are not guaranteed, their values change frequently and past performance may not be repeated. Investment losses do and may occur, and investors could lose some or all of their investment in the Fund. The information herein does not consider the specific investment objectives, financial situation or particular needs of any prospective investor. No assurance can be given that the Fund’s investment objective will be achieved or that investors will meet their investment goals. Prospective investors should consult their appropriate advisors prior to investing. Information presented herein is obtained from sources we believe reliable, but we assume no responsibility for information provided to us from third parties. Caldwell Securities Ltd. and Caldwell Investment Management Ltd. are wholly-owned subsidiaries of Caldwell Financial Ltd. Officers, directors and employees of Caldwell Financial Ltd. and its subsidiaries may have positions in the securities mentioned herein and may make purchases and/or sales from time to time. This information may not be reproduced for any purpose or provided to others in whole or in part without the prior written permission of Caldwell Investment Management Ltd. All information and opinions indicated herein are subject to change without notice. Inception date: September 15, 2016.

January 2018 | Caldwell Canadian Value Momentum Fund Commentary

< Back

 

January Recap:

 

The Fund fell 0.8% in January versus a more substantial loss of 1.4% for the S&P/TSX Composite Total Return Index ("Index”). Last month's out-performance of traditionally defensive sectors reversed in January with Consumer Staples (-1.9%), Telecom (-4.5%%) and Utilities (-4.5%) under-performing in a down month. Technology was the best performing sector in the market (+5.4%). 

 

Top CCVMF performers in January were BRP Inc. (+9.4%) and Ag Growth International (+6.6%). BRP was out marketing in January and pointed to continued strength in end markets and continued runway in penetrating new product categories. Meanwhile, Ag Growth seems to be picking up after drifting lower in a seasonally weaker period. We are encouraged to see renewed buying interest in the stock as there has been no change to the company's significant growth opportunities tied to the build-out of agricultural infrastructure. 

 

Two stocks were added to the portfolio in January: North American Energy Partners (NOA) and Stuart Olsen (SOX). NOA has done a very good job of improving its business through balance sheet and margin improvements and end market diversification. The company invested through the down-cycle and is now well-positioned to take advantage of an up-tick in activity. Stuart Olsen is expected to benefit from infrastructure spending coming out of Canada's 2015 federal election, which is only now starting to hit the market. The stock trades at a significant discount to peers and we expect this gap to narrow as activity picks up and operating metrics improve. 

 

The bigger story is the market's behavior once February started. We will have more color in next month's note but we are pleased with how the CCVMF has navigated the market's volatility thus far. Specifically, the fund continues to exhibit defensive qualities on the down-side while, at the same time, retaining strong participation in the market's upside. 

 

The Fund held a 33.8% cash weighting at month end. As previously discussed, we expect cash balances to move lower as we progress through the CCVMF's investment process. In the meantime, we look forward to tracking the progress of the portfolio’s holdings as we see a meaningful and diverse set of catalysts to drive continued growth. 

 
We thank you for your continued support.
 
The CCVMF Team

Peer Comparison

The information contained in this document is designed to provide general information related to investment alternatives and strategies and is not intended to be investment or any other advice applicable to the circumstances of individual investors. We strongly recommend you to consult with a financial advisor prior to making any investment decisions. Unless otherwise specified, information in this document is provided as of the date of first publication and will not be updated. All information herein is qualified in its entirety by the disclosure found in the CCVMF’s most recently filed simplified prospectus. Information contained in this document has been obtained from sources we believe to be reliable, but we do not guarantee its accuracy. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing in this product. Unless otherwise indicated, rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. The CCVMF is a publicly offered mutual fund that offers its securities pursuant to simplified prospectus dated July 20, 2017. The CCVMF was not a reporting issuer prior to that date and formerly offered its securities privately as follows: Series F and Series I since March 28, 2014 and Series O since August 8, 2011. The expenses of the CCVMF would have been higher during the period prior to becoming a reporting issuer had the fund been subject to the additional regulatory requirements applicable to a reporting issuer. Inception Date: August 8, 2011. Principal Distributor: Caldwell Securities Ltd.

December 2017 | Caldwell Balanced Fund Commentary

Portfolio Additions

AmerisourceBergen (ABC-us)

About the Company: ABC is the leading pharmaceutical distributor in the U.S. and competes directly with Cardinal Health (CAH).

Investment Thesis: We purchased ABC as a replacement for CAH. In addition to getting a slightly better cash flow yield with ABC, we also get a better balance sheet, better positioning in the higher growth specialty segment, less contractual risk, better management and also remove headwinds form CAH’s medical supplies business. The industry continues to trade at a sizable discount to the market but we believe this gap will close as deflationary trends are improving and the group benefits from the recently-enacted U.S. tax plan.

 

Mitel Networks (MNW-us)

About the Company: Mitel is a leading provider of communication tools to businesses and other organizations (hotels, hospitals, schools, etc). Its focus is on unified communications and collaborations (UCC) which serve to integrate different types of communication tools across different end users, geographies and devices.

Investment Thesis: Mitel trades at a significant discount to the market and peers and we believe the shares can move meaningfully higher as focus shifts from their legacy on-premise to their growing cloud platforms. The 2017 acquisition of Shoretel increased Mitel’s recurring revenue to 40% of total revenue and increased recurring cloud revenue, which is growing at a double-digit pace, from 12% to 20%. Mitel has a large installed base of 60 million on premise users of which only 1.5 million have converted to the cloud model, providing a long runway of cloud growth. We also expect margins and cash flow to significantly improve on the combination of cloud growth, cost initiatives, Shoretel synergies and interest savings.

 

Berry Global (BERY-us)

About the Company: Berry is a leading specialty plastics producer whose products are used in a diverse set of end markets, including the health & personal care, household, food & beverage, food service, industrial and transportation markets.

Investment Thesis: BERY is a leader in the fragmented specialty plastics industry where its scale allows it to be the low cost producer. With $7 billion in revenue within a $200+ billion packaging industry, the company has continued growth runway through a successful acquisition strategy that has resulted in meaningful earnings per share growth. With approximately 2/3 of revenue tied to stable end markets, we expect BERY to provide stability to the portfolio. From a valuation standpoint, we view BERY’s 5% free cash flow yield, which ranks in the top 15% of our screening universe, as attractive.

 

TE Connectivity (TEL-us)

About the Company: TE is the largest global manufacturer of connectors, which protect the flow of power and data inside of millions of products used daily by consumers and industries. It has leadership positions in each major end market -transportation, industrial equipment, energy and consumer – and generates $13 billion in revenue within a $70 billion addressable market. TE does particularly well in ‘harsh environments’ which are characterized by extremes in temperature, pressure and vibration with exposure to fluids. TE also supplies sensors that measure and respond to pressure, temperature, humidity, position, force, vibration and other readings.

Investment Thesis: We expect TE’s growth to accelerate on the back of several secular trends. These include the advancement of safety, efficiency/electrification and connectivity of the auto and other vehicles (TE’s content per vehicle is expected to grow from the low $60s today to over $100 over the next 8 years), continued factory automation and demographic-driven growth in medical devices where TE specializes in minimally invasive procedures. We also expect further margin growth driven by TE’s lean operations model. Despite these strong tailwinds and a high teens return on equity that ranks TE in the top 30% of our screening universe, the stock trades at a slight discount to the S&P500 and generates twice the free cash flow yield of our screening universe.

 

Stantec (STN-t)

About the Company: Stantec is the 3rd largest design firm in North America and provides engineering, architecture, and project management services to Infrastructure (28% of revenue), Buildings (22%), Water (22%), Environmental Services (17%) and Energy & Resources (11%) projects. STN has 22,000 employees and operates in 400+ locations globally.

Investment Thesis: STN is a high quality business that has under-performed peers on the back of oil & gas/resource exposure and several self-inflicted, but temporary (in our view) missteps. We believe these issues are behind the company and several catalysts suggest a higher share price going forward, including: 1) Analyst estimates have been reset lower, thereby reducing the likelihood of additional disappointments; 2) Infrastructure spending is picking up and STN should benefit given its leadership positions in key verticals; 3) Commodity prices have moved higher suggesting STN’s commodity-related verticals have likely seen a bottom; 4) A new CEO helps put recent missteps in the rearview mirror; 5) Renewed acquisition after an extended integration period. At the time of purchase, STN traded at a 5.2% free cash flow yield versus 4.6% and 3.0%, respectively for peers TTEK and WSP despite significantly higher return on equity. Versus our broader screening universe, STN has a higher return on equity, better balance sheet, lower capex requirements, greater profitability, equal to or greater growth opportunity and yet trades at over two times the universe’s free cash flow yield at 5.2%.

 

Delphi Technologies (DLPH-us)

About the Company: Delphi Technologies, a recent spin-out from Delphi Automotive, is a leader in products that optimize a vehicle’s powertrain.

Investment Thesis: DLPH is a best-in-class operator with a long track record of consistent execution and solid market share positioning in each of its major segments. Delphi has strong relationships with most of the major Original Equipment Manufacturers (“OEMs”) and, given its high degree of technical expertise, benefits from high switching costs. The company is well-positioned to benefit from: 1) Regulatory-driven reductions in vehicle emissions; 2) The shift from combustion to hybrid/electric-vehicle (EV) systems (where Delphi carries five times the normal engine content); and 3) A cyclical recovery in commercial truck/aftermarket volumes. We believe these growth opportunities, coupled with margin expansion and a multiple re-rate to reflect its status as a beneficiary of EV systems, will drive the stock price meaningfully higher.

Portfolio Deletions

Cardinal Health (CAH-us)

Reason We Sold: See ABC thesis, above.

 

Robert Half (RHI-us)

Reason We Sold: RHI is up ~50% since the late 2016 lows on speculated (and now confirmed) benefits from U.S. tax reform and a strengthening U.S. economy. Our concerns stem from RHI’s commentary surrounding lengthening conversion cycles and this leads us to wonder if something has structurally changed for the recruiters, particularly as companies like Google and LinkedIn (Microsoft) look to leverage their vast databases. As such, we see better risk/reward in the opportunities added to the portfolio.

 

Apogee (APOG-us)

Reason We Sold: We sold APOG following another weak quarter as our investment thesis is not playing out as expected. Despite favorable end market dynamics and a leadership position in the industry, the pricing environment has become more competitive as its peers look to stem market share losses. While management continues to be positive on the future, they have lost credibility in our minds as previous positive commentary failed to materialize.
 

Kohl’s (KSS-us)

Reason We Sold: We sold KSS into share price strength driven by better traffic results, expected benefit from U.S. tax reform and optimism on its new relationship with Amazon. KSS has struggled with traffic for years, despite management’s sole focus on traffic-driving initiatives, and ultimately, we haven’t seen any evidence that secular headwinds from online shopping will reverse. While the relationship with Amazon may prove to be the initiative that finally gets traffic going, no economics have been provided on the arrangement. We continue to view consumer trends as hard to predict and quick to change and as such, prefer exposure to the companies noted above.

 

Accenture (ACN-us)

Reason We Sold: ACN was a strong performer, +64% since our initial purchase in September 2015 versus +42% and +21% for the S&P 500 and S&P/TSX Composite, respectively. We continue to view ACN’s business favorably and maintain exposure through its peers, Cognizant (CTSH) and CGI Group (GIB.A), both of which are trading lower valuations. We simply needed a source of cash for the opportunities outlined above.

Commentary: 2017 Performance Review & 2018 Outlook

  1. The portfolio being over-weight the Technology sector, which out-performed the broader markets in both the U.S. and Canada;
  2. Security selection in Materials stocks, driven by CCL Industries;
  3. Security selection in Financials stocks, driven by KKR, Citigroup and Onex.

Top detractors included:

  1. Security selection in Technology stocks, driven by Celestica and Amdocs and the lack of exposure to Apple and Facebook;
  2. Security selection in Consumer Discretionary stocks, driven by Omnicom and Whirlpool and the lack of exposure to Amazon;
  3. Security selection in Industrials stocks, drive by Apogee.

 
 
 

Caldwell Balanced Fund Performance 2017

Table 1 - Top and bottom contributors to performance in 2017

One of the more interesting things about 2017 was the apparent shift in investor psychology. Up until the latter part of the year, fear (is this the top? are we headed for another crash?) and disbelief/skepticism (how can markets make new highs with Brexit and Trump), seemed to dominate investor thinking. As markets continued to reach new highs, however, ‘fear of loss’ seemed to shift to ‘fear of missing out.’ It has once again become exciting for people to talk about the markets and the amount of questions and money being thrown at unproven business models in digital currencies and marijuana is telling. While these are signs that the market is closer to a top than a bottom – we buy into the ‘cycle of emotion’ where market bottoms coincide with extreme fear while tops come with extreme exuberance – predicting the timing of when the top will occur is anyone’s guess. This creates difficulty given we live in a world where performance returns are published on a daily basis. Most pundits expected higher volatility in 2017 (an erroneous forecast). That forecast has now shifted into 2018.

 

Our recommendation to investors is to have a conversation with their investment advisors on cash needs. If money is required in the next year or two, it may be wise to lock in some gains.

 

While not evident by performance last year, we continue to believe that a focused portfolio of ~25 stocks targeted at select company-specific opportunities will serve investors well going forward. As outlined above, we have made meaningful changes to the portfolio in the last several months. Studying where we have recently under-performed, while we owned high quality companies trading at attractive valuations, these companies lacked catalysts or growth opportunities to move the share prices higher. This is something we have targeted in the purchases made since this past summer; results on these investments have been encouraging thus far and we look forward to tracking the portfolio’s progress as we move forward.

We appreciate your continued support.
 
Best Regards,
Portfolio Management Team

The information contained in this document is designed to provide general information related to investment alternatives and strategies and is not intended to be investment or any other advice applicable to the circumstances of individual investors. We strongly recommend you to consult with a financial advisor prior to making any investment decisions. Unless otherwise specified, information in this document is provided as of the date of first publication and will not be updated. All information herein is qualified in its entirety by the disclosure found in the Caldwell Balanced Fund’s most recently filed simplified prospectus. Information contained in this document has been obtained from sources we believe to be reliable, but we do not guarantee its accuracy. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing in this product. Unless otherwise indicated, rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. The Caldwell Balanced Fund is a publicly offered mutual fund that offers its securities pursuant to a simplified prospectus dated July 20, 2017. Inception Date: Series A – March 1, 1990, Series F – July 4, 2014, Series M – July 15, 2016. Principal distributor: Caldwell Securities Ltd.

January 2018 | Bond Strategy Update

The Role of Fixed Income in a Portfolio

The Role of Fixed Income in a Portfolio

Risk Management is an important process in managing an investment portfolio. Proper diversification will lower the overall risk in a portfolio, likely offering the investor a higher level of comfort. The result is a lower degree of fluctuations in the performance of the portfolio.

To achieve proper diversification, it is essential that components in the portfolio behave differently in changing environments. Simply put, it is important that not every item in a portfolio goes up and down together. When one asset class goes down, the other asset class should go up and offset the overall risk level.

Government bonds have negative correlations to equities and corporate bonds. As valuations in equities climb and corporate bond portfolios become more vulnerable, the case for re-balancing and buying insurance becomes stronger. As stock markets reach new highs, it is prudent to start buying insurance, such as government bonds.

The Outlook for Government Bonds

The Bank of Canada and the U.S. Federal Reserve have been raising short-term interest rates in an attempt to return them to more normal levels. They are not motivated by rising inflation, or robust economic growth. Inflation has been very tame and economic growth uneven. Central banks, however, have less and less control in longer-term interest rates, which are determined by growth and inflation expectations. Since these expectations are benign, longer-term interest rates have not risen commensurately with short-term interest rates. This is solid evidence of moderating demand for longer-term capital and, interest rates being the price of money. As the central banks get closer to the end of their interest rate increase campaigns, the prospect of lower longer-term interest rates becomes stronger, making longer-term government bonds more desirable, as lower interest rates means higher bond prices.

The 0.25% interest rate increase by the Bank of Canada on January 17, 2018 had little or no impact on longer-term interest rates. Judging from job losses due to the closing of Sears, the troubled Carillion, and the legislated hike in minimum wage, the employment picture could deteriorate in 2018. The elevated level of household debt in Canada (the highest among the major industrialized economies) will amplify the impact from the interest rate increases. Going forward, longer-term interest rates are more likely to decline meaning bond prices rise.

The Caldwell Income Fund

The Caldwell Income Fund (“the Fund”) is designed to invest only in AAA-rated Federal Government of Canada bonds, which have negative correlation to stocks and corporate bonds. Stocks and corporate bonds rise and fall in tandem. The Fund is actively managed to better protect investors during periods of rising interest rates. It is the only fixed income Fund in Canada of its kind and offers unique diversification for portfolios that already own stocks and corporate bonds. As valuations in stocks and corporate bonds approach historically high levels, AAA-rated Government of Canada bonds provide very effective, low-cost insurance for investment portfolios.

This research report hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst’s personal views about any and all of the securities or issuers discussed herein that are within the analyst’s coverage universe and (ii) no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the provision of specific recommendations or views expressed by the research analyst in the research report. This report is produced entirely by Caldwell. All opinions, estimates and other information included in this report constitute our judgment as of the date hereof and are subject to change without notice or has been obtained from sources we believe to be reliable, but we do not guarantee its accuracy. Caldwell will furnish upon request publicly available information on which this report is based. All rights reserved. This is not an offer or solicitation of an offer to buy or sell any security investment or other product. The information contained in this document is designed to provide general information related to investment alternatives and strategies and is not intended to be investment or any other advice applicable to the circumstances of individual investors. We strongly recommend you to consult with a financial advisor prior to making any investment decisions.  Unless otherwise specified, information in this document is provided as of the date of first publication and will not be updated.  All information herein is qualified in its entirety by the disclosure found in the Caldwell Income Fund’s most recently filed simplified prospectus. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing in this product. Unless otherwise indicated, rate of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. The Caldwell Income Fund is a publicly offered mutual fund that offers its securities pursuant to a simplified prospectus dated July 20, 2017. Inception Date: Series A - July 27, 1997, Series F - July 4, 2014, Series I - July 15, 2016. Principal distributor: Caldwell Securities Ltd.

December/Full Year 2017 | Caldwell Canadian Value Momentum Fund Commentary

< Back

 

December Recap:

 

The Fund gained 0.6% in December versus a gain of 1.2% for the TSX Total Return Index. The Index finished 2017 with a strong commodity and 'risk on' rally with the Materials and Industrials sectors up 3.4% and 2.0%, respectively, in December, while traditionally defensive sectors were all in the negative: Telecom (-2.1%), Utilities (-1.2%), Gold (-0.4%) and Consumer Staples (-0.2%). Top CCVMF performers in December were Cargojet (CJT: +11%) and Imvescor Restaurant Group (IRG: +8.5%). We suspect that CJT moved higher on the back of strong online retail sales through the holiday season. The CCVMF sold its position in IRG following a take-out offer by MYT Group which implied a 2017 EBITDA multiple of 13.8x. The IRG trade was a successful one for the CCVMF with the stock +70% since the initial purchase on February 2, 2016 versus 38% for the TSX Total Return Index. Gains were a function of both multiple expansion and earnings growth - IRG was trading at 8.6x trailing EBITDA at the time of purchase and EBITDA grew over 20% through our holding period.

 

One stock was purchased in December: Rocky Mountain Dealerships (RME). The company owns and operates agricultural equipment dealerships with over 35 locations across Alberta, Saskatchewan, and Manitoba. After several years of weak equipment sales, the market cycle seems to have bottomed and the company is well positioned to benefit from a multi-year up-cycle. Cost and inventory reductions should lead to strong profitability as the company looks to enter a fragmented U.S. market. The CCVMF ended the year with a 38% cash position. As noted last month, we expect the cash balance to move lower as we progress through our due-diligence process on new opportunities. 

 

Full Year 2017 Recap:

 

2017 was another successful year for the CCVMF as it once again significantly out-paced its benchmark. The Fund gained 13.8% in 2017 versus a gain of 9.1% for the TSX Total Return Index for out-performance of 4.7%. *Please see below for standard performance data.  Gains in the Index were broad-based with only the Energy sector (-10%) showing a decline. Looking into the CCVMF's performance, success in 2017 was driven by both sector allocation (i.e. being in the right sectors) and security selection (i.e. being in the right stocks), with the former accounting for 2/3 of the out-performance versus the Index. 

 

Top contributors from a sector standpoint included:

  1. Security selection in Consumer Discretionary stocks, driven by Martinrea, Cogeco and BRP Inc;
  2. The CCVMF being over-weight the Industrials sector, which out-performed the broader market;
  3. The CCVMF being under-weight the poorly performing Energy sector. 

Top detractors included:

  1. Security selection in Technology stocks, driven by Celestica and Wi-Lan;
  2. The CCVMF being under-weight the Financials sector, where the fund missed out on the strong performance of the banks;
  3. Security selection in the Energy sector - although the CCVMF was under-weight energy stocks, the stocks it did own - Enerflex, North American Energy Partners and High Arctic Energy - under-performed. 
Top and Bottom CCVMF Contributors

As Table 1 shows, the top individual stock contributors out-paced the bottom contributors by a factor of 2.3x. The CCVMF also added to its winning streak of out-performing in months when the TSX Total Return Index was negative. Specifically, the Index posted negative returns in May, June and July and lost 2.1% over this three month period. Meanwhile, the CCVMF out-performed the Index in both May and June - including posting a positive return in May - and only declined 0.8% over the three month period. Since inception, the CCVMF has out-performed the Index in a down-month 20/27 times (74% success ratio) and posted a positive return 11/27 times (40% success ratio). 

Growth of $10,000

The strong result in 2017 puts the CCVMF in the top 4% of our Morningstar Canadian Equity peer group. The CCVMF's success is a function of a concentrated portfolio of 15-25 stocks where each position has a strong set of catalysts to increase its value. We continue to look forward to strong results as we progress through 2018 and beyond.

 
We thank you for your continued support.
 
The CCVMF Team

The information contained in this document is designed to provide general information related to investment alternatives and strategies and is not intended to be investment or any other advice applicable to the circumstances of individual investors. We strongly recommend you to consult with a financial advisor prior to making any investment decisions. Unless otherwise specified, information in this document is provided as of the date of first publication and will not be updated. All information herein is qualified in its entirety by the disclosure found in the CCVMF’s most recently filed simplified prospectus. Information contained in this document has been obtained from sources we believe to be reliable, but we do not guarantee its accuracy. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing in this product. Unless otherwise indicated, rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. The CCVMF is a publicly offered mutual fund that offers its securities pursuant to simplified prospectus dated July 20, 2017. The CCVMF was not a reporting issuer prior to that date and formerly offered its securities privately as follows: Series F and Series I since March 28, 2014 and Series O since August 8, 2011. The expenses of the CCVMF would have been higher during the period prior to becoming a reporting issuer had the fund been subject to the additional regulatory requirements applicable to a reporting issuer. Inception Date: August 8, 2011. Principal Distributor: Caldwell Securities Ltd.

December 2017 | Caldwell US Dividend Advantage Fund Report

 

Download the document: Download PDF