Balanced Fund Report – June 2015

Caldwell North American Equity Strategy – Monthly Update June 30, 2015

Company Updates: A Few Highlights

CanElson Drilling (tsx:CDI)

CanElson announced it is being taken over by Trinidad Drilling, another Canadian contract drilling operator, for a combinaon of cash and stock. CanElson has been the por!olio’s most painful posion as the decline in the price of oil has caused the number of drilling rigs in operaon industry-wide to fall by 50%, pu’ng this decline amongst the most severe drops in rig count the industry has ever seen. While we rely on buying best-of-breed companies to protect our clients’ assets in mes of trouble, the strategy has not helped much in this case. Despite ulizaon, margins and debt levels that are much stronger than peers, CanElson’s stock price has seen no material difference from the group’s overall performance. Turning to Trinidad, while it is not a company that exhibits the characteriscs we try to buy for this strategy, we think a be,er exit point will present itself given: a) rig count looks to be stabilizing and recent commentary from industry players gives the sense that there is light at the end of the tunnel; and b) at the current share price, investors can buy all of the company’s assets at less than 50cents on the dollar.

Valuations & Interest Rates

Valuaons reflect the amount of fear or confidence in the market and are a significant driver of stock price performance. Looking at the largest public companies in the U.S., valuaons today are above where they were at the peak of the market in 2007. While this might suggest confidence in the market is at dangerous levels, a key difference is that interest rates today are half of what they were then. This supports valuaons well beyond prior peaks and is the reality of the environment central bankers have created with their zero interest rate policies. It is forcing investors to accept historically high valuaons, the inverse of which is lower future returns. Our strategy in this challenging environment is to focus on cash flow and a company’s ability to grow that cash flow over me. If a company is generang a 6% yield from cash earnings and that level of cash flow can grow, we view owning that stock as a be,er investment than owning a Canadian 10 year bond yielding 2.25% with no ability to grow. In terms of the risk of rates rising, Canada recently lowered their interest rate while the U.S. has been slow to start raising rates in order to prevent stalling an economic recovery. The strategy outside of North America is the same.

We appreciate your connued support. Feel free to reach out to us at any me. Best Regards,
Investment Management Team