CCVMF Commentary – December Full Year 2015 Update

Update on Caldwell Canadian Value Momentum Fund December/Full Year 2015

December Recap: The Fund declined -0.4% in December versus a loss of -3.1% for the TSX Total Return Index. Since the Fund’s inception in August 2011, there have been 23 instances where the TSX had a negative month. Of those 23 months, the Fund outperformed in 18 months (78% success ratio) and posted a positive return in 10 months, a testament to the strong downside protection of the strategy.

Top performers in December were Uni-Select (+10%) and New Flyer Industries (+8%). Uni-Select moved higher after it announced an agreement to acquire ColorMaster, which will add 15 locations and increases Uniselect’s location footprint by nearly 10%. New Flyer’s performance was a continuation of November’s results. Strength here was offset by declines in Rogers (-7.4%) and Clearwater Seafood (-6.8%). Rogers was off on the news of Shaw acquiring Wind Mobile while Clearwater sold off on a lack of news. No stocks were purchased this month. The Fund ended the year with a 16% cash position.

Full Year 2015 Recap: 2015 was the Fund’s most successful year in terms of out-performance over its benchmark. The Fund gained 7.8% in 2015 versus a loss of -8.3% for the TSX Total Return Index for out-performance of 16.1%. The Canadian market was full of hazards as Canada’s resource based economy felt the impact of a slowing China and over-capacity in the energy sector. The pain was felt across sectors with both direct (energy (-25%) and materials (-23% )) and indirect (industrials (-12%) financial services (-5%) and utilities (-8%)) exposure. Added to this was the spectacular rise and fall of Valeant, a company that became the third largest on the TSX by market value only to see its shares subsequently collapse 70%. In short, there were very few places a Canadian investor could hide.

The key to performing well in such a market is both the ability and willingness of a manager to actively manage a portfolio so as to look vastly different from the market. This is what the CCVMF does well. Success this year was a function of both sector allocation and stock selection. In sector allocation, the Fund was significantly underweight those sectors that caused investors the most pain (energy, materials and financial services) and significantly overweight the best performing sectors (consumer and technology). Stock selection also added significantly to performance with CCL, Uni-Select, New Flyer, Boyd Group and AGT Foods acting as the leading contributors. Additionally, risk management protected the downside as significant cash balances were raised going into market sell-offs.

A new measure of active management called active share was introduced in 2009. Funds with high active share look very different from their respective benchmark indices in terms of the stocks they own, and these funds were shown to perform better than their low active share (i.e. closet index) peers. Recent articles have highlighted Canada in particular as a market full of closet-indexers, which is harmful to investors as these funds charge out-sized fees relative to the amount of active decisions being made. These funds also have no ability to protect investors from harsh markets, such as the one we saw this past year. We conducted our own search for active funds in Canada and found a consistent conclusion. Screening the Morningstar Canadian fund universe for characteristics of high active share (focused portfolios of less than 30 equity holdings and nimbleness with assets under management of less than $800 million), we found that very few funds meet these characteristics. The CCVMF, on the other hand, has a very high (and rare) active share of 96%, which is key to performing well in a challenging market. Looking forward, we continue to believe investors will be best served in high active share portfolios. As such, we continue in our mission to identify stocks with the ability to unlock value, regardless of the market’s underlying performance.

Wishing you and all of our investors continued success,
The CCVMF Team