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October 2017 | Caldwell Canadian Value Momentum Fund Commentary

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October Recap:

The Fund gained 4.8% in October versus a gain of 2.7% for the S&P/TSX Composite Total Return Index ("Index”). The Financial sector (+4%) drove the market higher on a 4.5% gain in the Banking Index. The Utilities, Consumer Discretionary, Telecom and Industrials sectors were also strong, each up over 3%, offset by declines in Energy (-0.4%) and Health Care (-0.3%). Strength in the CCVMF portfolio was broad-based with nearly 80% of stocks out-pacing their sector returns and only 4 stocks under-performing the broader market.

 

Top CCVMF performers in October were Calian Group (+16.2%), Martinrea (+11.6%) and WSP Global (+11.4%). Calian announced  a contract renewal with the Canadian Armed Forces, which removed a key overhang on the stock and provides incremental revenue opportunity with an initial four year term totaling $275 million plus an eight-year extension option for an additional $600 million. While there was no company-specific news behind Martinrea's move, strength in auto sales in both Canada and the U.S. are positive for auto-suppliers. WSP moved higher following its Analyst Day in late September. While there were no major changes to the outlook, investors walked away with increasing confidence in WSP's growth and diversification strategy and attractive runway of opportunity.

 

Two stocks were added to the portfolio in October: Chorus Aviation (CHR) and Empire (EMP.A). Chorus is in the businesses of contract flying, aircraft leasing and aviation services.  The contract flying business is dominated by a capacity purchase agreement (CPA) with Air Canada (AC) where Chorus operates scheduled service under the Air Canada Express brand. Now that investors have become comfortable with the economics and cash flow generation of the new CPA signed with AC in 2015, focus has shifted to the opportunities in growing the aircraft leasing portfolio, where Chorus has become a major player in the regional jet market. Demand in this part of the market continues to be robust as the world's fleet of regional jets is only 20-25% leased versus commercial jets at 40%+. Empire is a food retailer operating under the Sobeys, Safeway, IGA and Freshco brands. After years of poor execution following the Safeway acquisition, a new management team has been put in place to execute a turnaround plan that involves accelerating sales growth and extracting meaningful cost savings. Early progress looks promising as the company recently posted its first positive tonnage quarter after thirteen consecutive quarters of negative tonnage, while simultaneously improving margins.

 

One of the key features of the CCVMF is that it is a very complementary portfolio to other Canadian Equity strategies. The Fund's proprietary screening process allows us to identify under-the-radar companies that have tremendous opportunity to grow in value. One such company is Calian Group (noted above), whose CEO, Kevin Ford, was recently featured in the Ottawa Business Journal as the 2017 CEO of the Year. Calian was initially purchased in the CCVMF in February 2016, with the stock up nearly 80% since that time.

 

The Fund held an 11.2% cash weighting at month end. 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 CCVMF

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.

October 2017 | Blockchain, South Park, Keynes & Friedman

Blockchain, South Park, Keynes & Friedman

The creators of South Park, Trey Parker and Matt Stone, called it “Space Cash”, we call it Bitcoin. Bitcoin has been addressed in the mainstream media, and while it is true that Bitcoin may have reached a high in popularity, a quick review of history suggests that at its core, Bitcoin or something like it has been expected for some time. Technology needed to advance in order for cryptocurrencies to evolve. In 1999, Milton Friedman predicted that the evolution of the internet would have profound ramifications on our society. He also saw a role for a digital currency, as quoted below:


“I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A. The way I can take a $20 bill hand it over to you and then there’s no record of where it came from.”


Bitcoin is a digital currency whose value is based upon two things: the first is the use of the payment system, or how many people buy into the story, and the second is the volume and velocity of payments running through the ledger. Many people are confused about where the value in Bitcoin comes from; Bitcoin currency does not have some arbitrary value that people are trading. Bitcoin is valuable because it is frictionless and people can exchange it with no fraud and very low, or no, transaction costs.


Bitcoin at its most fundamental level is a breakthrough in computer science. It is the first practical solution to the “double payment problem”. This longstanding problem in computer science is not new, and was originally derived from what many call the “Byzantine Generals Problem”, where a group of Generals of the Byzantine army camped with their troops around an enemy city. The troops were communicating only by messenger and the Generals needed to agree on a coordinated battle plan. Since the Generals did not trust each other, they were faced with finding a method to reach a common agreement. How can one build a network with a secure consensus with parties that don’t trust each other? The answer lies in combining cryptography and economic incentives, the foundations of a network that builds consensus in a secure fashion, or Blockchain.


This is far from the calls of a fad or Ponzi scheme. Could the value of Bitcoin go to zero? Yes! Will it be a bubble? Yes! However, the technology derived from solving the above problem is about to profoundly effect the way our society operates. Keeping an open mind is key.


The practical consequence of solving the “Byzantine Generals Problem” is that Bitcoin gives us a way for one internet user to transfer property rights to another user. The transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and no one can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.


As the Second World War was ending, economic experts of the Allies met in a New Hampshire resort to hammer out an international monetary system that would help prevent a recurrence of the Great Depression. The ensuing debate centered around two main proposals. John Maynard Keynes, the greatest economist of the 20th century, presented the British case while Harry Dexter White, one of Franklin D. Roosevelt’s key economic advisors, presented the American one. Keynes’ point was not to repeat the past. The global economy is closed and it needs a global currency and a fixed adjustment process to force the economy to deal with trade imbalances in real time, while having incentives for countries to adjust.


Keynes lost on most key points and the result was the Bretton Woods system, named after the small town in which the conference was held. As part of the agreement, it also created what would later become the International Monetary Fund and the World Bank. This served as the system of managing international trade and currencies for nearly three decades. The die was cast and it was predicted that the global economy would have another major structural adjustment in approximately 80 years, that period is upon us now.


Keynes suggested that a global medium of exchange, called Bancor, be introduced. Bancor was country agnostic. The Americans wanting the U.S. dollar to replace the Pound Sterling as the global medium of exchange refused. Keynes foresaw that the U.S. would slowly evolve from a creditor nation to a debtor nation. He also predicted that the U.S. economy would no longer be able to absorb the excess capacity that the global economy was producing and the rise of populism was going to be a certainty.


The basic problem with international trade is that imbalances can develop, with big winners and big losers. Some countries get big export surpluses, while others develop major trade deficits since the world cannot be in surplus or deficit with itself. The global economy has found it very difficult, if not impossible, to go through any needed structural adjustment without breaking out in war.


President Trump ran his election campaign on a populist agenda. Many question the ability of a centralized authority to focus on the common good of society and the desire for decentralized systems is now becoming a global phenomenon.


Bretton Woods was disassembled in 1971 when President Richard Nixon suspended the convertibility of the dollar into gold. The introduction of a digital currency, in a perverse way provides a solution that Keynes would have preferred in 1945. Bitcoin may not last, but the technology behind it will. The consequences of solving this important computer science question cannot be underestimated.


No one knows who will be the winners during this new phase of evolution, but we do know this new regime will be life changing for many. The global economy continues to evolve from a world based on analog to an economy based on its true native digital state. We can be sure that too much capital will be allocated and a bubble will be created, just as it happened during the internet of information in 1999, as well as the building of the railroads throughout the 19th century. That is the normal part of the evolutionary process. This time it is not different.


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.

October 2017 | Caldwell US Dividend Advantage Fund Report

 

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October 2017 | Caldwell Balanced Fund Commentary

Portfolio Additions

LCI Industries (LCII-us)

About the Company: LCI Industries is a leading supplier to RV OEMs where it holds #1 or #2 market share positions in its product lines. It is also a supplier to the manufactured housing and marine industries (18% of sales) and has an aftermarket business (8% of sales). LCI generates 98% of revenue in the U.S.

Investment Thesis:

  1. Strong RV Demand: RV units are on track to grow 11.5% over 2016. Strong demand is being driven by several factors, including demographic tailwinds from aging baby boomers and stronger interest from millennials.

  2. Incremental Growth Opportunity: LCI has identified $4 billion in revenue opportunity, which provides a long growth runway given the company currently generates $1.8 billion in revenue. The company sees revenue growth of $200-$400 million per year over the next 3-5 years as it increases its content/RV, expands into adjacent industries, expands internationally, grows its aftermarket business and targets appliances and electronics. LCI has shown strong execution in these areas already – for example, content per vehicle has doubled in the last 10 years and aftermarket and International revenues have doubled in the last few years.

  3. Strong Barriers to Entry: LCI has very strong relationships with its key customers given its strong innovation focus. The company outspends its competitors on innovation and has unmatched product breadth. This has translated into double digit Return On Equity (ROE) over the cycle.

  4. Valuation Appears Attractive on Peak Cycle Fears: Investors seem very much fixated on the U.S. RV market and when the cycle will top. However, management noted that $2.2B of the $4B identified opportunity is outside of the U.S. RV market. Additionally, investors seem to be anchoring to the 08/09 downturn, which was rather harsh. Looking at prior cycles, declines are more reasonable and management expects to be able to offset industry-driven declines with these other opportunities.  With an excellent balance sheet (only $12M in net debt) and cash flow that should inflect positively going forward, we believe LCI is an attractive opportunity for investors.

 

Tyson Foods (TSN-us)

About the Company: TSN is the largest diversified protein company, fully integrated chicken producer and beef processor, and third-largest pork processor in the U.S. It is also now one of the largest prepared meats producers following its acquisition of Hillshire Brands in 2014. TSN generates 98% of revenue in the U.S.

Investment Thesis:

  1. Moving Up the Value Spectrum: TSN has done a very good job of transitioning its business away from commoditized products, which generate lower margins and higher earnings volatility, and into higher value add product. Today, an estimated 65% of their operating profit comes from value-add products; as margins increase and earnings become smoother and more predictable, the stock’s valuation multiple should continue to expand.

  2. Playing Into Consumer Trends: Protein fundamentals remain strong and consumers are increasingly demanding high-quality food in convenient “on-the-go” packaging. This plays into TSN’s move into higher value products.

  3. Synergies from the APFH Acquisition: TSN acquired AdvancePierre Foods in early 2017. The company is a leading national producer and distributor of ready-to-eat sandwiches and other snacks to foodservice, retail and convenience stores. The acquisition provides significant cost and cross-sell opportunities.

  4. Strong Competitve Position: With leading or very strong market share in every segment in which they operate, Tyson’s extensive expertise and considerable scale advantage act as large barriers to entry.

 

Portfolio Deletions

Chevron (CVX-us)

Reason We Sold: After years of high capital spending on massive projects, Chevron’s cash flow is beginning to inflect higher. These projects are ramping up production, capital spending is moving dramatically lower, and the company has secured an enviable position in the Permian basin, the hottest play in energy this past year. We originally bought Chevron into concerns around its heavy capital investment; now that that period is over, our investment thesis has played out. While energy has been a bad place to be since our initial purchase of Chevron in April 2012, the stock has significantly outperformed the TSX Energy sector (+15.5% versus -8.8% for the sector). The stock has held up remarkably well through the energy downturn….at the current price of $118/share, Chevron is trading at the same level as it did in April 2014, when crude was over $100/barrel (versus ~$52 today).

 

Omnicom (OMC-us)

Reason We Sold: While Omnicom is a very profitable business that generates consistent earnings results, growth opportunities are becoming more elusive as consumer product companies, who are large Omnicom clients, face their own growth challenges amidst intensifying competitive pressures. Competitive threats are also growing for Omnicom, particularly from technology consultants who are broadening their offerings into the marketing sphere (this fund has good exposure to technology consultants through Cognizant, Accenture and CGI Group). We believe these headwinds can persist for some time and will keep a lid on Omnicom’s share price; as such, we believe TSN and LCII are better opportunities.


Commentary: Reviewing Performance Year-to-Date (to September 30, 2017)

Performance this year has been frustrating. In some cases, its been justified while in many others, recent headwinds seem to be setting the portfolio up for stronger performance going forward. We discuss these below.

 

Unexpected Rate Rises Create Currency Headaches:

Through September, the U.S. market (S&P 500) was +12.5% year-to-date versus +2.3% for the Canadian market (TSX Index). This should have been a positive for the portfolio given its greater exposure to the U.S. market (~65% versus 35% for Canada), but strength in the Canadian Dollar “CAD” (or, relative weakness in the U.S. Dollar “USD”) after two unexpected rate hikes by the Bank of Canada masked these results. At its recent peak (82.18 cents/USD on September 8th), the CAD was 10.4% higher than its 74.46 cent/USD level at the start of the year. That translates into an ~9% headwind on individual U.S. holdings and a 6%+ headwind on a portfolio with 65% U.S. exposure. Given that Canada’s growth has been largely driven by consumer and government spending, which are debt-fuelled given underwhelming growth in business investment and exports, we were (and remain) comfortable with our USD exposure. The rate hikes were based on data that had very easy prior-year comparisons, making growth in Canada look un-sustainably high. As year-over-year compares get more difficult, we have seen more tepid economic results and are now seeing the Bank of Canada back-peddle on their decision in an effort to talk the CAD back down (a stronger CAD is not helpful to the Bank of Canada, whose plan entails stronger business investment on the back of higher exports – a stronger CAD makes exports less competitive, which creates a headwind to export growth).

 

Currency has Masked the Winners:

The portfolio’s strongest performers have all been U.S. names (as expected, given the relative out-performance of the U.S. market). KKR, Steris and Cognizant are all up ~30% this year while Amdocs, Broadridge and Accenture have also made new highs recently. We continue to see attractive growth opportunities at these companies, all of which are industry leaders and/or are benefiting from strong end market demand.

 

Some Deserved Underperformers:

Energy: The portfolio has particularly struggled with its energy servicers positions, with Trinidad Drilling and ShawCor down 43% and 23%, respectively, this year. Our performance in the Energy sector has been both very good and very bad. On the integrated side, Suncor and Chevron have performed very, very well. As mentioned, Chevron is trading at the same level as when crude was over $100 while Suncor is actually out-performing the broader TSX since we initiated a position in early 2014. The servicers, however, have been significant drags on the portfolio. Trinidad has been particularly frustrating as its been a cheap stock that has only become cheaper. The cyclical recovery seems to be continually being pushed into the future and it hasn’t helped that management has been making questionable investments. As one analyst put it to us: “…there is lots of asset value here but its not getting any respect/love from the [market].”  While the extended industry downturn has been frustrating, we have been seeing better tone from management and we think the shares can move meaningfully higher from here. Shawcor is a very high quality company and industry leader. The stock could see continued volatility in the short-term as 2018 is an ‘air pocket’ of project work, but 2019 and beyond look very promising on high levels of budgetary and bid work.

Amazon: An analyst we recently spoke to stated that “the laws of valuation don’t apply to Amazon.” While the stock prices of most companies are anchored to earnings or cash flow generation, this does not seem to be the current case with Amazon. We under-estimated the impact of changing consumer preferences on Kohl’s, which has struggled with declining customer traffic despite numerous initiatives to reverse the trend. Interestingly, Kohls recently signed a partnership with Amazon that will carve out a section of its stores to offer Amazon’s home devices like Echo, and allow returns of products purchased on Amazon’s website. Given the valuation discount to the market, and that Kohls has a unique position versus other department stores with its off-mall store footprint, we think shares ultimately move higher. Due to how quickly consumers can change their minds, and how difficult that makes it on companies that sell to consumers, we have largely shied away from the consumer space, preferring to invest in companies whose customers are other businesses. The Amazon effect is another reason to continue doing so.

 

Looking Forward

We have added 5 new stocks to the portfolio over the last several months (TFII, SOY, KEYS, LCII and TSN) that have strong catalysts that we believe will propel shares higher for investors. These join the group of strong performers that have been making recent highs and have additional runway of opportunity. The FX headaches have begun to reverse and we expect stocks that have been overly-penalized by the market to recover.  We continue to use a 2-3 year time frame when selecting investments as this allows us to look beyond the 1-year outlook that analysts work off of.

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.

September 2017 | Blockchain

Blockchain is a digital decentralized system and a transparent distributed ledger, which everyone in a network can see. It facilitates the implementation and recording of transactions significantly reducing transaction costs. Blockchain has been responsible for disrupting what economists refer to as “rents that traditional middlemen get from facilitating traditional analogue transactions” and has contributed to a reduction of both time and money of transaction costs.


Simply put, any transaction in the old economy that requires an intermediary (to complete the transaction) has the potential of disruption. Industries that contain a high number of intermediaries are ripe for upheaval. As more decentralized networks become marketplaces the global economy will be transformed and will create a massive shift in wealth.


In a Blockchain network, it is the network that establishes trust, verifies identity, clears transactions and records transactions in a distributed public ledger that is transparent and secure. It is the notion of a shared digital public ledger that is rewiring the global economy, from analogue (opaque) to digital (transparent) and reducing the time and capital needed to complete basic transactions.


Blockchain enables what we refer to as the “Internet of Value”. What if value could be exchanged as quickly and as cheaply as information? Information moves around the world instantly with a very low transaction cost. The problem for decades has been “How do you transfer value in a digital world?” Early in the internet’s evolution, researchers could not solve what they referred to as the “double payment problem”. Blockchain finally solves this problem. The “double payment problem” solution lies in cryptography, the art of writing or solving mathematical codes for secure communication in the presence of a third party referred to as an adversary.


Through a process referred to as mining, Blockchain ensures that property rights are transferable. When a transfer is made everyone in the network knows about it - including who now owns the property right. The verification process is key, participants in the network are motivated to solve a mathematical problem, the first one to solve the problem is compensated with a portion of cryptocurrency (e.g. Bitcoin).


This is an over simplification of the process, but for our purposes it illustrates that the process of our global economy is slowly beginning to evolve from an analogue world to a digital world. It took farmers over 40 years to replace the horse with the tractor in our economy. With Blockchain we are entering a regime that is substantially larger than the mania we experienced when just the
internet of information was upon us.


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.

October 2017 | Bond Strategy Update

Bond Strategy Update

Overview

With inflation subdued and growth at best moderate, bond yields in the United States have been trending lower. The U.S. Treasury 10-year yield fell to 2.03% on September 7, 2017. This is a significant drop from the high of 2.62% on December 16, 2016, shortly after the U.S. election.

The Bank of Canada

Government of Canada bonds participated in this bond rally up until early June 2017, when the Bank of Canada signaled it might want to remove the 0.50% interest rate cuts that it implemented to cushion the crude oil crash. Bond yields in Canada started to rise significantly. The Bank of Canada raised the benchmark interest rate from 0.50% to 0.75% on July 12, 2017 and raised it from 0.75% to 1.00% on September 6, 2017.

As a result, the Government of Canada 10-year bond yield rose from 1.39% on June 6, 2017 to 2.13% by September 27, 2017. The Canadian dollar appreciated dramatically from 74.3 U.S. cents to 82.9 U.S. cents in the same period.

The higher loonie and higher interest rates together tightened overall financial conditions in Canada. One can logically expect these policy actions will have negative effects on the Canadian economy.

Indeed, Gross Domestic Product (“GDP”), a measure of economic growth, came in flat for July, in other words there was no growth. Since the first rate increase was on July 12, 2017, its full impact was not felt until August. The second rate increase was on September 6, 2017 and its full impact was felt through that month and into the fourth quarter.

Bank of Canada Deputy Governor Timothy Lane spoke on September 18, 2017 and expressed concerns regarding the strong Canadian dollar and that it will factor “strongly” in their future decisions. Unlike the Federal Reserve, officials from the Bank of Canada speak with one voice. It is very clear that the Bank of Canada does not like the loonie at 82 U.S. cents and wants it lower. Lane also mentioned their concern about higher interest rates and elevated levels of household debt. We expect the ‘element of surprise’ accompanied with the two rate hikes will have an oversized impact on the Canadian economy. As growth and inflation expectations are pared back by these rate hikes, longer-term bond yields will fall.

Bank of Canada Governor Stephen Poloz spoke on September 27, 2017 and reinforced Lane’s message. He also expressed concerns about how the elevated level of household debt could “amplify” the impact of the rate increases. In short, the Bank of Canada has started to question its two interest rate increases and will likely tread more carefully going forward.

Fiscal Policies

At the same time our Finance Minister, Bill Morneau, is planning to raise business taxes. Note that small businesses are the greatest source of job growth in our economy. In Ontario, minimum wage will be hiked by over 20%. In has been proved that a higher minimum wage hurts marginally employable workers and most economists would agree it is a bad idea. Both measures are not friendly to consumption and growth. Overlay that with a policy mistake by the Bank of Canada, which presents more headwind for growth, and we have an environment in which Government of Canada bonds are currently offering excellent value.

Bond Strategy

The Caldwell Income Fund is actively managed and our managers have significantly shielded our portfolio from the impact of rising bond yields and it is now well-positioned to benefit from the vastly undervalued Government of Canada bonds, which will appreciate in value when the economy weakens from the ill-timed and inappropriate interest rate increases, the overly strong Canadian dollar and misplaced tax policies.

The strength in equities brings more opportunity for investors to diversify and reduce risk in their portfolios by moving, in a measured manner, from equities to the safety of Government of Canada bonds, which are AAA-rated.

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: July 27, 1997. Principal distributor: Caldwell Securities Ltd.

September 2017 | Caldwell Canadian Value Momentum Fund Commentary

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September Recap:

The Fund gained 2.8% in September versus a gain of 3.1% for the S&P/TSX Composite Total Return Index ("Index”). Energy (+7.4%) reversed weak year-to-date performance to drive the market higher on the back of a 9.4% increase in the price of crude oil. Consumer Discretionary (+5.5%) was also a strong performer driven by auto parts producers: Magna (+10.8%), Linamar (+9.3%) and Martinrea (+4.0%). While the Index posted an overall gain, traditionally defensive sectors such as Consumer Staples (-0.3%) Materials/Gold (-4.0%/-8.5%), REITs (-0.5%), Telecom (-1.3%) and Utilities (-2.3%) all posted negative returns. This was in sympathy with bond yields continuing to move higher after the Bank of Canada made its 2nd (surprise) rate increase on September 6, 2017. 

 

Top CCVMF performers in September were Enerflex (+17.5%), IBI Group (+11.0%) and Transcontinental (+7.4%). Enerflex moved higher on the strength in Energy.  The company is benefiting from the build-out of infrastructure around natural gas plays and has the ability to grow in value without needing commodity prices to move higher.  IBI Group has been gaining strength after a solid earnings report in mid-August. The company is well positioned to capitalize on infrastructure spend, particularly in transit, and continues to trade at a discount to peers despite attractive organic growth and margins. Transcontinental moved higher on a strong earnings report that beat expectations on both revenue and expenses. Organic growth showed strong improvement and the company continues to execute its transformation plan, using robust and steady cash flow from its printing division to grow its flexible packaging business. 
No stocks were added to the portfolio in September. 

 

The Fund held an 18% cash weighting at month end (cash at the time of writing is 13%).  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.

September 2017 | Caldwell US Dividend Advantage Fund Report

 

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August 2017 | The United States of America: A Banana Republic

The United States of America: A Banana Republic

In 1904, William Sydney Porter, the author known as O. Henry wrote the short story “The Admiral”, which was set in the imaginary country of Achuria, a small maritime country with one export: bananas. Achuria was ruled by the company that controlled the export of bananas to the rest of the world. The foundation of this tropical paradise was no longer policed by the rule of law and it became known as a “Banana Republic”. From this short story the term “Banana Republic” became synonymous with a country were the rule of law no longer applies. Paradoxically, the term is now being applied to describe the current environment pertaining to the financial crisis in the United States.


As Judge Janice Rogers Brown noted on April 15, 2016 in a passage of her dissent that analyzed the government’s treatment of Fannie Mae and Freddie Mac, “when assessing responsibility for the mortgage mess there is, as economist Tom Sowell notes, plenty of blame to be shared. Who was at fault? ‘The borrowers? The lenders? The government? The financial markets? The answer is yes. All were responsible and many were irresponsible. But that does not mean more irresponsibility is the solution’...What might serve in a Banana Republic will not serve in a constitutional [country]”. Meanwhile, during the Republican National Convention (“RNC”) on July 21, 2016, President Trump was focused on portraying a narrative of being the “law and order candidate”.


The Pendragon Fund has been looking for investment opportunities and the aftermath of the Financial Crisis, as well as the climate President Trump has created in Washington, has created potential. Shareholders may have been wronged by government action and our research suggests that the actions taken by the U.S. government putting Fannie Mae and Freddie Mac into conservatorship and then sweeping all of their profits is a case worth investigating.


Homeownership is ingrained in people’s minds as the American Dream. Citizens from Europe came to North America on the hope of eventually being able to own land. Before the Great Depression, mortgages in the U.S. looked very different than they do today. With single family home mortgages only available for a very short-term, (typically 5 years, and featured bullet or balloon payments at the end of the 5-year period mortgages were not pre-payable) refinancing was out of the question. Initial down payments were 50% and home ownership was only at 45%.


During the Great Depression home values fell over 50%, resulting in mass defaults. Defaults on real estate loans reached 25% and foreclosures were as high as 10%. Interest rates were cut but home owners were not allowed to refinance. Many building and loan societies went bankrupt. In 1933, Franklin Roosevelt created the National Housing Act which then created the Federal Housing Administration (“FHA”). The FHA offers to insure lenders against default on long-term mortgages with low down payments. The National Housing Act contained a provision to create a privatively owned National Mortgage Association that would buy the new FHA issued mortgages from lenders. This allowed banks to turn the loans back into cash.


This program reduced the risk that banks would face in originating mortgages. Down payments were reduced from 50% to 20%, interest rates were fixed, the life of the loan was 30-years and the amortized schedule was set so that at the end of 30-years the loan was paid off. Today, these features are taken for granted, but in the period after the Great Depression, Roosevelt’s plan meant that middle class families could own a home. This program also allowed the middle class the ability to use leverage to create wealth. Forced savings allowed low income citizens to accumulate wealth and home ownership became the foundation of the American Dream.


The mortgage acts as the nucleus of financial products. A 30-year loan has significant interest rate risk, prepayment risk, and credit risk. Roosevelt’s plan could not generate any interest from the private capital markets of banks and he was forced to set up a government entity, the Federal National Mortgage Association (“Fannie Mae”) to fill the critical role. Simply put, the 30-year fixed rate mortgage would not exist if the government did not create Fannie Mae.


In the 1960’s, Fannie Mae was transformed by President Lyndon Johnson under the recommendation of the Budgetary Commission into a private company whose stock could be bought and sold. If Fannie Mae was to remain a government entity, then the debt it guaranteed should have been put on the government books as debt which would increase the budgetary deficit. In 1968, President Johnson signed the Housing and Urban Development Act. Fannie Mae was given special status and the Treasury Department could buy its debt, signaling an implicit government guarantee. Fannie Mae could borrow money at rates offered to the government, an advantage that ensured a functioning mortgage market. In the early 1970’s, Wall Street introduced a new product based on the securitization of loans. This new product allowed Fannie Mae the opportunity to package all the mortgages it purchased into a single product, known as mortgage backed securities or “MBS”. MBS over time became a staple of the global fixed income market. MBS, issued by Fannie Mae, were implicitly backed by the U.S. government, international pension funds and financial institutions. Foreign governments purchased billions, if not trillions, of these securities. MBS offered a 30-year fixed rate mortgage to help workers achieve the American Dream, and evolved into a major part of global finance sold as securities with an implicit government guarantee. Simply put, the mortgage market evolved from a dependency on local banks to absorb all the risk in lending to homeowners, to a system that was implicitly guaranteed by the U.S. government and financially supported by global capital. Homeownership increased to 65%. The American Dream was achieved. Fannie Mae and Freddie Mac were the backbone of global financing in the U.S. housing market. What could go wrong?


During the Global Financial Crisis in 2008, Fannie Mae and Freddie Mac were put into conservatorship by the Bush Administration. Secretary of Treasury Hank Paulson’s thesis was these two companies needed a temporary time-out to help them rebuild capital. The assumption was that all of the mortgages that Fannie Mae and Freddie Mac guaranteed would default. The cost of protection from the government was that all of the cash flow from these entities would go to the treasury, forever. The shareholders lost everything. The government found cash flows that could finance programs that congress would not appropriate funds for. At the same time, the backbone of the U.S. housing market and the global mortgage backed security market were unable to build up any capital buffer.


The accounting of these assets proved to be extremely conservative. As the dust settled, it was found that bankruptcy rates during the period after the crisis were well within the assumptions modeled by the firms. Fannie Mae and Freddie Mac were not in a death spiral as suggested by many in the government. Shareholders who saw their rights violated sued.

 

The Biggest Bail Out in U.S. History

Source: Financial Services Committee

 

On July 19, 2017, Judge Margaret Sweeney unsealed court documents produced in discovery for the lawsuit brought by Fairholme Funds in the U.S. Federal Claims Court. This lawsuit brought into question the government narrative that the companies were in a “death spiral”. The Treasury and the Federal Housing Financial Agency (“FHFA”) were fully aware that Fannie and Freddie were about to experience a surge in profitability well before the net worth sweep was announced. In addition, a study done by BlackRock suggests that “long-term solvency does not appear endangered, [and that BlackRock does not] expect Freddie Mac to breach capital levels even in a stress case”. Treasury Secretary Paulson forced the company into a conservatorship, a time out, while not satisfying any of the 12 requisites for that action as set out in the housing and economic recovery act, meaning the companies should not have been put into conservatorship. Through the use of write downs of deferred tax assets, it was made to appear that the companies were in a death spiral, but after two years and the accounting procedure was about to be reversed, the Obama Administration changed the rules of the game, now collecting all the net worth of the companies forever. By coincidence, this was at the same time that the Affordable Care Act and Obamacare desperately needed money. The once conspiracy theory now has documentation to support its thesis. Will the plaintiff win in court? If we live in a world where the rule of law is the basis for our society, then yes. However, we could be living in a world where we are evolving into a “Banana Republic”.


Treasury Secretary Steven Mnuchin has stated that there is a goal to privatize Fannie Mae and Freddie Mac, however, privatization would require private capital to be successful. Our simple thesis is that no new private capital will invest in these entities until the existing shareholders are compensated for the past 10 years. If President Trump is truly a “law and order” President, then the past wrong will be righted. Investment in the common shares of Fannie Mae and Freddie Mac offers a compelling risk reward opportunity.


In a report released by the RNC on September 14, 2017, it was stated that “the RNC recognizes the sanctity of property rights in America, and acknowledges the need to resolve the outstanding claims of Fannie Mae and Freddie Mac shareholders in a manner than honours and respects the rule of law governing the rights of corporate stock owners”.

 

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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.

August 2017 | Caldwell Canadian Value Momentum Fund Commentary

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Update on the Caldwell Canadian Value Momentum Fund

August Recap:

The Fund was +0.15% vs. +0.4% for the S&P/TSX Composite Total Return Index ("Index”). Energy was a big negative for the market, down 3.5% in August on a nearly 6% decline in the price of crude oil. Year to date, the Energy sector is down 16% which makes it the worst performing sector in the country. While the TSX price index is down slightly year-to-date, only Energy (-16.0%) and Health Care (-13.8%) are in negative territory; all other sectors have produced positive returns. This illustrates the advantage that selective market exposure can give investors, something that CCVMF investors have benefited from since the Fund's inception over 6 years ago.

 

Happy 6th Birthday! The CCVMF celebrated its 6th birthday in August. Since inception, the CCVMF is +11.1% versus the TSX +6.2%, and continues to be one of the top performing Canadian Equity funds in the country. We include a table, below, that shows the performance of CCVMF relative to competing funds in both the Canadian Equity category and the Canadian Small/Mid Cap category. While top-quartile returns are attractive, the CCVMF also performs well on risk metrics, including the up/down capture. In addition, correlation analysis shows the CCVMF as an attractive compliment to other investment strategies available to Canadians. This is important because lower correlations between investment strategies reduce overall portfolio volatility and result in more attractive risk-adjusted returns.

 

CCVMF Peer Comparsions

Top CCVMF performers in August were Premium Brand Holdings. (+9.5%) and Martinrea. (+8.2%). Premium Brands had a very strong quarter driven by organic growth and better than expected margins. The outlook continues to be positive given strong demand and the new sandwich facility tracking ahead of schedule. The strong result prompted analysts to increase the Consensus 2018 EPS estimate by 8%. Martinrea also reported a very strong result with continued progress on margins and new contract awards. The company's progress is leading to increased investor confidence in the company's margin targets, which should help move the valuation higher. 

 

No stocks were added to the portfolio in August. 

 

The Fund held a 14% cash weighting at month end. 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. Principal Distributor: Caldwell Securities Ltd.