Balanced Fund Report July 2014

Caldwell North American Equity Strategy – Monthly Update July 31st, 2014

Portfolio Additions

Amdocs (DOX-us)

About the Company: Amdocs is the leading global provider of billing and customer care solutions to telecom, internet, cable and satellite providers. Approximately 25% of the company’s revenue is generated outside of North America.

Investment Thesis: The expansion of communication networks, the growth of mobile device categories and an increasing amount of content has created an explosion in the number of billing strategies available to service providers. While the industry has already started using creative pricing to differentiate their service offerings (family bundles, paying for movie downloads, per hour rates for faster downloads, for example), we see these as just the tip of the iceberg. Amdocs is a valued partner to service providers and benefits from this trend as they are a leading enabler of differentiated billing.

Valuation: Amdocs trades at an attractive cash flow yield and significant discount to the market on an earnings basis after accounting for the cash on its balance sheet. Long term contracts provide Amdocs with stable cash flow, even during recessions, and the balance sheet is very strong with over $1B in cash and zero debt.

Expectations: We expect Amdocs to provide stability and growth to the portfolio over time. We also see the opportunity for greater contributions from markets outside of North America, especially emerging economies. Finally, it is estimated that approximately 50% of Amdocs’ market is performed by service providers in-house. The growing complexity of billing may prompt some service providers to outsource these functions, providing an additional growth opportunity for Amdocs.

Company Updates: A Few Highlights

The 2nd quarterly earnings season of 2014 has ended for most U.S. and Canadian companies. In general, companies are cautiously optimistic about an improving demand environment and continue to focus on costs (something they can control). North America has seen the strongest demand while Europe and many emerging companies, including China, continue to struggle. Here are some highlights from the companies we own in the portfolio.

VeriSign (VRSN-us): The stock had been weak coming into earnings on concerns that growth in the number of .com registrations was slowing (Verisign gets paid an annual fee for every .com website in the world). While management guided to better .com growth in the 2nd half of the year, the big news was that the company took advantage of their large cash balance and low share price to buy back a significant amount of stock. This reduced their share count by almost 5% in the quarter and 13% since last year. Our investment strategy has us buy companies that are facing temporary business challenges, so long as the company has a strong business model, management team and balance sheet. This is a great example of the benefits of favoring companies with strong balance sheets, as they have the flexibility to create shareholder value even in tough times. VeriSign was the portfolio’s top performer in July (+10.7% versus –1.5% for the S&P 500).

Qualcomm (QCOM-us): The company had a very strong report in its chip segment as it continues to dominate mobile chip technology. However, the company disclosed challenges in its royalty business, stating that it is having a hard time collecting 3G royalties from Chinese vendors (Qualcomm collects a royalty on every 3G/4G enabled device in the world). While management sounded confident that these issues would be resolved (Qualcomm has successfully resolved royalty disputes in the past), investors fear that, given the size of the Chinese market, this time may be different. While the stock sold off 8% on the uncertainty, it seems reasonable that the issues get resolved given Chinese companies’ goals to increase sales outside of China, which carry stricter compliance conditions.

WestJet (WJA-t): Airline demand continues to be strong and WestJet specifically is seeing good success from several business initiatives, including the regional airline, Encore, which was launched in August of last year.

KKR (KKR-us): Private equity companies like KKR make a lot of money when they sell companies they invested in years ago, as these sales lock in performance bonus profits. A large chunk of these profits are paid to shareholders in the form of distribution, and while distributions have been strong over the last few quarters, management indicated that performance bonuses are “starting to increase rapidly.” The company also began disclosing how much of the distribution was driven by profits that are recurring/stable from quarter to quarter versus more volatile profit sources (like performance bonuses). It’s encouraging to note that the stable profit streams alone provide investors with a 3% yield. This should act as a strong support for shares when performance bonus realizations are not as strong as they are today.

As always, feel free to contact us with any questions.
Jennifer Radman │ VP & Portfolio Manager │ jradman@caldwellinvestment.com