Balanced Fund Report – September 2014

Caldwell North American Equity Strategy – Monthly Update September 30th, 2014

Portfolio Additions

We did not add any new positions to the portfolio this month.

Portfolio Deletions

Oracle (ORCL-us)

We sold our position in Oracle following their earnings report. Our expectation was that results would begin improving on the back of new products and changes/investments the company had been making to its sale force. Instead, the company saw slowing growth, weaker margins and gave uninspiring guidance. While valuation remains attractive, we prefer to be out of the position at this time.

Company Updates: A Few Highlights

Parkland Fuel (PKI-t)

Parkland announced the acquisition of Pioneer gas stations in late September. This is a highly accretive acquisition that adds 25% growth to Parkland’s 2015 operating income with additional cost savings starting in 2015. Scale creates significant advantages in gas distribution and this is a major step in Parkland’s goal to grow scale through consolidating the industry. We attended the company’s live conference call to discuss the deal and came away with much confidence in management’s ability to execute the company’s growth plans. It is clearly a superlative management team with a keen focus on making prudent investments to drive growth.

Market Volatility

While our investors have seen steady gains in their portfolios all year, Canadian and U.S. markets are down 10.2% and 6.3%, respectively, from the beginning of September through October 14th. While the thought of a loss is uncomfortable to anyone (it’s human nature), we outline the reasons we believe our investors are well positioned both today and going forward.

Starting with Perspective—We Buy Companies

The great thing about the stock market is it gives individuals the ability to own real life companies. Through ownership, individuals benefit from the earnings these companies produce, which are reflected in stock prices over time. This perspective of owning companies (versus stocks) is powerful as it quells emotions during the ups and downs of stock markets. This is the main reason we write these monthlies with a focus on our process for choosing the companies we own for our clients and the progress being made by those companies.

Our Investment Process—Focus on Capital Protection

This means that we are focused on : a) finding companies that are well positioned to continue generating earnings; and b) underpaying for those future earnings. While this will not insulate portfolios from the ups and downs of markets, the combination creates a strong foundation for portfolio growth over time.

Valuation—The Main Driver

Valuation, or the price investors must pay to own companies, is a significant driver of returns. While valuations have moved higher since the market lows in 2009, we see valuations in general as more fair than overvalued, and are still finding compelling valuations across select segments of the market. The current pullback in the market is creating a good opportunity for new funds to be put to use.

25 Stock Portfolios

There are many investment products with over-diversified portfolios (40+ stocks). This has the negative effect of limiting the positive impact of strong performers and ultimately generates index-like returns. By owning 25 companies, our portfolios own only the best investment opportunities identified by our process.

The Importance of U.S. Exposure

We noted in last month’s commentary that Canadian investors are likely over-exposed to energy. This has been particularly harmful over the past six weeks; while most sectors have moved lower, energy and materials have been hit hard, with 20% and 14% declines, respectively. This has created significantly worse results in Canada as the Canadian market is much more concentrated in these two sectors. Our ability to move money to and from the U.S. is one of the advantages of our investment strategy.

Performance & Going Forward

We are pleased with how our portfolios are performing in this market, with many accounts having significantly lower declines than the index. The Caldwell Balanced Fund is also faring well, out-pacing its Morningstar Global Balanced category by over 2.5 percentage points year to date through October 15th, with over 1.1 percentage points of out-performance coming in the past 30 days. Earnings season is upon us and the two companies we own that have reported thus far, Citigroup and CSX Rail, have shown strong results. While we cannot predict the path of stock prices, we do believe that investors will see continued growth in their portfolios and that this is a good time to put new money to work.

Best Regards,
Investment Management Team