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December 2018 | Caldwell Canadian Value Momentum Fund Commentary

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Update on the Caldwell Canadian Value Momentum Fund

December Recap 

 

The Fund declined 4.6% in December versus a loss of 5.4% for the S&P/TSX Composite Total Return Index ("Index”). It was another month of broad-based weakness with only the gold sector posting a positive return. This is now the 7th consecutive month in which the CCVMF out-performed a declining Index. Since inception (August 2011), the fund has outperformed the Index in 27 of 34 down months for a 79% success ratio. 

 

Three stocks were added to the portfolio in December: Badger Daylighting ("BAD"), Alimentation Couche-Tard ("ATD.B") and Metro Inc. ("MRU"). Badger provides non-destructive excavating and related services in Canada and the U.S and owns the largest hydrovac excavation fleet in North America. Business momentum is strong while new segment disclosures illustrate decreased exposure to oil & gas, which should re-rate the multiple higher. BAD has a 17%, 10-year, organic revenue growth rate and management believes they have only scratched the surface on growth opportunity, given low penetration of non-destructive excavation and expansion runway into new geographies.

 

Revenue and EBITDA are at record highs while the stock still trades meaningfully below its all-time high. While MRU and ATD.B are likely benefiting from the market's shift to defensive stocks, both companies also have company-specific catalysts to drive share prices higher. Metro operates grocery and pharmacy stores across Canada. It is benefiting from a positive inflection in grocery inflation, lower-than-expected headwinds from minimum wage hikes and synergies from the Jean Coutu pharmacy acquisition. Alimentation Couche-Tard is one of the largest convenience store operators and fuel retailers in North America. ATD.B was a very successful holding for the CCVMF between October 2014 and March 2016. We are back in this company after a sideways trading consolidation period which saw the forward Enterprise Value/EBITDA multiple contract from 11.9x to 10.0x. Same store sales growth has inflected positively on the back of food and beverage initiatives while the company continues to see a healthy, multi-year acquisition pipeline.

 

Full Year 2018 Recap 

 

The Fund declined 6.0% in 2018 versus a loss of 8.9% for the Index. Despite the Fund ending the year with a loss, we are pleased to have once again significantly out-performed the Index. Over the past 5 years, the Fund holds a category-best downside capture ratio of 38.1% and ranks in the top 2% of all Canadian Equity funds for the 3-year period, and top 5% for the 5-year period, ending December 31, 2018. 

 

The Fund held a 54.7% cash weighting at the end of December. There has been strong 'risk off' sentiment to the market these last three months with investors focusing more on macro issues (trade/global growth and interest rates) over company-specific drivers. During more challenging markets, it is important to remember the fundamental reasons for owning an investment. Specific to the CCVMF, the fund has generated substantial value to investors over its long-term history, driven by the combination of strong company-specific catalysts and a concentrated portfolio. We continue to look forward to strong results as we progress through 2019 and beyond.

 

We thank you for your continued support. 

 

The CCVMF Team

CCVMF - Caldwell Canadian Value Momentum vs Canadian Small/Mid Cap Equity vs Canadian Equity

The Fund was not a reporting issuer offering its securities privately from August 8, 2011 until July 20, 2017, at which time it became a reporting issuer and subject to additional regulatory requirements and expenses associated therewith.

 

Unless otherwise specified, market and issuer data sourced from Capital IQ.

 

As the constituents in the Canadian Equity category largely focus on securities of a larger capitalization and CCVMF considers, and is invested, in all categories, including smaller and micro-cap securities, we have also shown how CCVMF ranks against constituents focused in the smaller cap category. The above list represents 5 of a total of 363 constituents in the Canadian Equity category and 6 of a total of 114 constituents in the Canadian Small/Mid Equity category.

 

The information contained herein provides general information about the Fund at a point in time. Investors are strongly encouraged to consult with a financial advisor and review the Simplified Prospectus and Fund Facts documents carefully prior to making investment decisions about the Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Rates of returns, unless otherwise indicated, are the historical annual compounded 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 unitholder that would have reduced returns. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. Principal distributor: Caldwell Securities Ltd. Publication date: January 11, 2019.

 

FundGrade ratings are to be used for information purposes only and are not intended to provide financial, tax, accounting, legal or investment advice. You should not rely FundGrade ratings in any way. If you need information about a specific financial, tax, accounting, legal or investment issue, you should consult an appropriately-qualified professional adviser. Fundata does not make any recommendations regarding the advisability of investing in any particular security or securities generally. You agree that these ratings or any other information made available through Fundata are not a substitute for the exercise of independent judgment and expertise.

 
*  Categories defined by Canadian Investment Funds Standards Committee ("CIFSC")

 

December 2018 | Caldwell Balanced Fund Commentary

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The market’s behavior in the 4th quarter (“Q4”) of 2018 was downright ugly. The S&P 500 in the U.S. was down 13.7% in Q4 (with a peak to trough decline of ~20%) for a full year return of -6.2%. This was the S&P 500’s worst quarterly decline since Q3 2011 and only 8 of the 72 quarters since the turn of the century have experienced greater losses. In Canada, the S&P/TSX Composite was down 10.9% in Q4 (with a peak to trough decline of ~16 %) for a full year return of -11.6%.

 

The investment industry spends a lot of time attempting to explain “what happened.” Trump, trade, interest rates, central bank balance sheets, credit spreads, Brexit, global debt levels, recession risks, etc. But why now?

 

To be clear, corporate earnings were very strong in 2018. S&P 500 revenue growth was 9% while earnings grew 20%, partly aided by tax cuts. Economic growth continues to be strong with the following comments coming from CEOs of some of the companies closest to main street:

 

Delta Airlines (the largest airline in the US), Q3 Earnings Call: October 11, 2018
“The revenue environment is the best we’ve seen in years…”

 

JP Morgan (the largest diversified bank in the US), Q3 Earnings Call: October 12, 2018
” I would say that as we look at the economy, we don’t see it slowing down. It seems to be continuing to grow pretty solidly.”

 

Robert Half (a leading U.S. staffing agency): Q3 Earnings Call: October 23, 2018
“I’d say, so far, the sentiment does remain quite strong, as does confidence. Trade issues and higher rates have not yet trickled into the conversations we have with clients or their buying habits. So, so far, so good. There’s no question, given our results, given our data, the underlying U.S. economy is quite strong, particularly for small to middle-size businesses.”

 

As you can see, these comments were made not that long ago. So, what happened? As Howard Marks points out in his timely book, “Mastering the Market Cycle,” nothing in the economy changes that dramatically in only 3 months. And while corporate probability has greater ebbs and flows than the economic cycle, even corporate fundamentals don’t change that quickly. That brings us to the market cycle, which is the most volatile because it is driven by human emotion.

 

Sure, some of these, like trade, have escalated recently. Trade frictions have eroded confidence in China which has slowed growth there. The fear, it seems, is that slower growth will permeate across borders and into the U.S. and globally. There is also the concern that, given economies are built on confidence, the market’s decline in anticipation of a global economic slowdown will become a self-fulfilling prophecy: businesses and consumers both rein in spending due to the heightened ‘uncertainty.’  However, it seems to us that trade tensions can get resolved just as quickly as they escalated. Central banks will adjust their strategies so as not to jeopardize a recovery. As we have previously discussed, the big headwind to global growth going forward is debt levels. That is why we believe a targeted investment strategy makes the most sense in this environment – investors will no longer be able to fall back on broad based economic or market growth.

 

Taking it down to the portfolio level, our core investment principles have not changed: protect and grow our investors’ capital through discounted valuations, strong balance sheets, good management teams and attractive business environments. Please see Table I for how our portfolio stacks up against our screening universe on key metrics that reflect this strategy. We did well to have more invested in the U.S. over Canada. Canada has now under-performed the U.S. market in 7 of the last 8 years. Canada lacks meaningful exposure to the more relevant Technology and Health Care sectors (Table II) while having over 50% exposure to Energy and Financials. Oil prices were down ~25% in 2018 with heavy discounts on Canadian oil adding to the pain.

 

 

Top performers in the portfolio in 2018 were Keysight Technologies, Mitel Networks and Parkland Fuel. Keysight is the world’s largest electronic measurement company with solutions that enable customers to design, test, and manufacture electronic products. Keysight is benefiting from several secular growth drivers such as the 5G upgrade cycle, the electrification of autos, and the connected vehicle. Mitel Networks is a global provider of business communication services. The stock performed well as they reaped synergies from a large acquisition and continued their transformation to the cloud, with the stock subsequently being acquired by private equity firm Searchlight Capital. Parkland Fuel is Canada’s largest independent marketer and distributor of fuels and petroleum products in Canada. Parkland performed well on the back of two very large and accretive acquisitions. The company continues its consolidation strategy which will further expand its scale advantage.

 

On the other end of the spectrum, the portfolio struggled with companies exposed to the factors listed above – specifically, trade tensions and higher interest rates. Delphi Technologies and LCI Industries were particularly hard hit. Delphi, a tier one powertrain parts supplier, was affected by a worsening auto situation in China and growing pains on the back of strong order bookings as they now need to invest heavily to meet demand. LCI Industries, a supplier to the RV industry, was affected by inventory reductions at the dealer level given the uncertainty around how higher financing rates might impact RV demand.

 

While the quickness and intensity of the market downturn create uneasy feelings for investors, we note that many stocks in our portfolio are trading at all-time low valuations. This suggests that much of the uncertainty is already priced into these stocks. Using history as a guide, the longer one’s time in the market, the better one’s odds of earning a positive return. It is also true that the risk/return profile facing investors today is much more attractive than it was 3 months ago.

 

As always, we appreciate our investors’ support, particularly during these times of market uncertainty.

 

Please feel free to reach out to us at any time.

Best Regards,
Portfolio Management Team

All data is as of January 8, 2019 unless otherwise indicated. The information contained herein provides general information about the Fund at a point in time. Investors are strongly encouraged to consult with a financial advisor and review the Simplified Prospectus and Fund Facts documents carefully prior to making investment decisions about the Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Rates of returns, unless otherwise indicated, are the historical annual compounded 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 unitholder that would have reduced returns.  Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. Principal distributor: Caldwell Securities Ltd. Publication date: January 8, 2019.

November 2018 | Caldwell Canadian Value Momentum Fund Commentary

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Update on the Caldwell Canadian Value Momentum Fund

November Recap 

 

The Fund declined 1.7% in November versus a gain of 1.4% for the S&P/TSX Composite Total Return Index ("Index”). The Index was driven by strength in defensive sectors, with Consumer Staples (+7.6%), Telecom (+7%) and Gold Sub-Industry (+5%) leading the way. Weakness in Energy continued (-3.0% in November; -15.4% year-to-date) while Health Care (-5.8%) was dragged down by a reduced appetite for cannabis stocks. 

 

Canopy Growth ("WEED": -6.8%), Aurora Cannabis ("ACB": -15.0%) and Aphria ("APHA": -33.1%) now account for 3 of the 5 largest companies in Canada's Health Care sector. Collectively, these 3 companies generated negative $417 million in cash from operations and spent another $916 million in capital expenditures for a cash burn of $1.3 billion over the last 12 months. At the time of writing, the market cap of these companies was $23.3 billion, down from approximately $43 billion at their peak in mid-October. This is a great example of how the CCVMF is different from pure momentum strategies; because the CCVMF combines value and momentum, these companies did not screen as buy candidates despite strong momentum going into their peaks. This strategy protected our investors from substantial losses.

 

The Top Performer in November was CGI Group ("GIB.A": +4.6%). The company reported another strong earnings result, creating a positive set-up for 2019 as client spend on IT continues. 

 

No stocks were added to the portfolio in November.

 

The Fund held a 41.1% cash weighting at month end and is over 50% cash at the time of this writing. There has been strong 'risk off' sentiment to the market these last two months with investors focusing more on macro issues (trade/global growth and interest rates) over company-specific drivers. During more challenging markets, it is important to remember the fundamental reasons for owning an investment. Specific to the CCVMF, the fund has generated substantial value to investors over its long-term history. The Fund's performance ranks in the top 1% of all Canadian equity funds over the past three years, and top decile over all annualized periods up to and including the past five years.

 

We thank you for your continued support. 

 

The CCVMF Team

CCVMF - Caldwell Canadian Value Momentum vs Canadian Small/Mid Cap Equity vs Canadian Equity

The Fund was not a reporting issuer offering its securities privately from August 8, 2011 until July 20, 2017, at which time it became a reporting issuer and subject to additional regulatory requirements and expenses associated therewith.

 

Unless otherwise specified, market and issuer data sourced from Capital IQ.

 

As the constituents in the Canadian Equity category largely focus on securities of a larger capitalization and CCVMF considers, and is invested, in all categories, including smaller and micro-cap securities, we have also shown how CCVMF ranks against constituents focused in the smaller cap category. The above list represents 5 of a total of 374 constituents in the Canadian Equity category and 6 of a total of 114 constituents in the Canadian Small/Mid Equity category.

 

The information contained herein provides general information about the Fund at a point in time. Investors are strongly encouraged to consult with a financial advisor and review the Simplified Prospectus and Fund Facts documents carefully prior to making investment decisions about the Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Rates of returns, unless otherwise indicated, are the historical annual compounded 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 unitholder that would have reduced returns. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. Principal distributor: Caldwell Securities Ltd. Publication date: December 17, 2018.

 

FundGrade ratings are to be used for information purposes only and are not intended to provide financial, tax, accounting, legal or investment advice. You should not rely FundGrade ratings in any way. If you need information about a specific financial, tax, accounting, legal or investment issue, you should consult an appropriately-qualified professional adviser. Fundata does not make any recommendations regarding the advisability of investing in any particular security or securities generally. You agree that these ratings or any other information made available through Fundata are not a substitute for the exercise of independent judgment and expertise.

 
*  Categories defined by Canadian Investment Funds Standards Committee ("CIFSC")

 

October 2018 | Caldwell Canadian Value Momentum Fund Commentary

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Update on the Caldwell Canadian Value Momentum Fund

October Recap: 

 

The Fund declined 5.5% in October versus a loss of 6.3% for the S&P/TSX Composite Total Return Index ("Index”). This was the worst monthly decline for the Index since the 8.7% drop in September 2011. All sectors in the market experienced declines with Health Care (-17.7%), Energy (-9.2%) and Technology (-8.1%) faring the worst. The only place investors found shelter was in the Gold Sub-Sector (+3.7%), although there was likely some recovery off of oversold levels, as the Gold Sub-Sector remains down 19.1% year-to-date. 

 

Of the 247 stocks in the Index, only 47 (19%) posted a positive return in October. Excluding gold, this number drops to 33 or 13%. It was clearly a broad-based risk-off market and the CCVMF's holdings were not immune. What drove the CCVMF's out-performance in October was the fund's substantial cash weighting, a product of the strategy's embedded sell discipline. This led to the 6th consecutive time that the CCVMF out-performed the Index in a down month. Since inception (August 2011), the fund has outperformed the Index in 26 of 33 down months for a 79% success ratio. Year-to-date, the CCVMF ranks in the top 1% of all Funds within the Canadian Equity category.

 
TSX -number of Positive Performers in October by Sector

Top Performers in October were North American Construction Group ("NOA": +11.3%) and Parkland Fuel ("PKI": +1.8%). NOA's strong performance comes on the back of another strong earnings report where EBITDA beat analyst expectations by over 50%. We see several positive catalysts for the stock going forward and the stock remains attractively valued, trading at <9x their 2019 EPS guidance. PKI announced the acquisition of Sol Investments in October. Sol is the largest fuel distributor in the Caribbean and this move significantly expands PKI's supply footprint.

 

Three stocks were added to the portfolio in October: Element Financial ("EFN"), Aecon Group ("ARE") and Aritzia ("ATZ"). Element is the largest publicly traded fleet management company in North America. A new CEO has been appointed to execute a turnaround strategy with internal initiatives driving material earnings improvement over the next few years. Companies that have the ability to unlock value through actions that are within management's control are particularly attractive in today's market. Aecon is a leading Canadian construction company that has secured a record $7B backlog as construction markets have shifted towards the company's wheelhouse (light rail, hydro-electric power, to name a few). We expect an increasing margin profile going forward as well as a higher percentage of recurring revenue through master service agreements in utilities, telecom and contract mining. Aritzia is a fashion retailer of women's apparel and accessories that is seeing strong brand adoption, particularly in the U.S. where there is a long growth runway. The company has only 24 stores in the U.S. today, versus 66 in Canada. Aritzia is targeting a niche area of the market, providing higher quality than fast fashion, but greater affordability than the top fashion design houses. Same-store-sales grew to 11.5% last quarter with 40% revenue growth in the U.S. 

 

The Fund held a 40% cash weighting at month end. Our priority in this market is to remain disciplined in our decision-making, continuing to focus on companies that have strong catalysts to drive their share prices higher.

 

We thank you for your continued support. 

 

The CCVMF Team

CCVMF - Caldwell Canadian Value Momentum vs Canadian Small/Mid Cap Equity vs Canadian Equity

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.

 

FundGrade ratings are to be used for information purposes only and are not intended to provide financial, tax, accounting, legal or investment advice. You should not rely FundGrade ratings in any way. If you need information about a specific financial, tax, accounting, legal or investment issue, you should consult an appropriately-qualified professional adviser. Fundata does not make any recommendations regarding the advisability of investing in any particular security or securities generally. You agree that these ratings or any other information made available through Fundata are not a substitute for the exercise of independent judgment and expertise.

 
*  Categories defined by Canadian Investment Funds Standards Committee ("CIFSC")

 

September 2018 | Caldwell Canadian Value Momentum Fund Commentary

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Update on the Caldwell Canadian Value Momentum Fund

September Recap: 

 

The Fund gained 1.5% in September versus a loss of 0.9% for the S&P/TSX Composite Total Return Index ("Index”). The Index was driven by Consumer Discretionary (-4.6%, driven by Dollarama (“DOL”: -17.5%)) and Energy (-3.6%). Health Care (+12.1%) and Technology (+0.1%) were the only positive sectors.

 

This is the 5th consecutive time the CCVMF outperformed the Index in a down market. Since inception (August 2011), the fund has outperformed the Index in 25 of 32 down months for a 78% success ratio. The CCVMF's down capture in September was actually negative (a good thing) given the Fund posted a positive return in a negative market. The fund held 10 stocks that posted a positive return in a down month. Over the last 3 years, the CCVMF has a negative down capture (-26.9%) alongside a strong up-capture (95.9%).

 

Top CCVMF performers in September were North American Energy (“NOA”: +26.5%) and Cargojet (“CJT”: +10.6%). Note that these stocks were also top performers in August on the back of strong earnings reports. NOA has also been busy on the M&A front, expanding its services in Northern Canada through a 49% stake in Nuna Logistics. Additionally, subsequent to month end, NOA announced the acquisition of Aecon's heavy construction fleet. This is a significant acquisition with NOA stating 2019 EPS could exceed $1.60 per share (versus Street estimates of $0.99 per share at the time). While the stock has performed very strongly year-to-date, there appears to be a significant amount of upside remaining.

 

One stock was added to the portfolio in September: Parkland Fuel (“PKI”). The company is an independent fuel marketer and distributor in Canada and the U.S. and is building a scale advantage through an acquisition strategy. PKI recently raised their annual synergy target on their CCL acquisition from $80M to $180M and the runway of growth opportunities remains robust, including U.S. expansion, convenience store sales and commercial fuel growth. Subsequent to month end, PKI made another transformative acquisition, expanding into the Caribbean market and establishing a new Gulf Coast focused supply platform. The deal is expected to be immediately accretive to distributable cash flow per share by 17%.

 

The Fund held a 29.5% cash weighting at month end. Cash balances have been slow to move lower; while we have added new stocks, others have fallen out of the portfolio. We will continue to be disciplined in what we own in the portfolio and expect cash balances to move lower over time. In the meantime, we look forward to tracking the progress of the portfolio’s current 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

CCVMF - Caldwell Canadian Value Momentum vs Canadian Small/Mid Cap Equity vs Canadian Equity

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.

 

FundGrade ratings are to be used for information purposes only and are not intended to provide financial, tax, accounting, legal or investment advice. You should not rely FundGrade ratings in any way. If you need information about a specific financial, tax, accounting, legal or investment issue, you should consult an appropriately-qualified professional adviser. Fundata does not make any recommendations regarding the advisability of investing in any particular security or securities generally. You agree that these ratings or any other information made available through Fundata are not a substitute for the exercise of independent judgment and expertise.

 
*  Categories defined by Canadian Investment Funds Standards Committee ("CIFSC")