Balanced Fund Report

Q4 2019 | Caldwell Balanced Fund Commentary

Macro Commentary

2019 was a very strong year for markets. The S&P 500 had its strongest year since 2013, while the TSX had its strongest year since 2009. Strength across both markets was broad-based with only the Canadian Health Care sector (-11.4%) posting a negative return, driven by cannabis names (Canopy Growth (“WEED”: -25.4%) and Aurora Cannabis (“ACB”: -58.8%)). Technology was the strongest sector in both countries (U.S. IT: +48%; Canadian IT: +63.5%). The U.S. market once again out-performed Canada, resulting in 8 years of out-performance over the last decade.

Portfolio Commentary

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.

Top contributors to portfolio performance in 2019 were Tyson Foods (“TSN-us”), Keysight Technologies (“KEYS-us”) and Ansys (“ANSS-us”).

TSN is the largest protein company in the U.S., operating under brands such as Tyson, Jimmy Dean and Hillshire Farm. The company has been successfully growing its value-add product portfolio, which comes with higher margins and lower earnings volatility versus its more commoditized businesses. African Swine Fever, estimated to have wiped out 30-50% of China’s pork supply, provides upside optionality, given the disease’s impact on global supply/demand balances across all proteins.

KEYS is a top contributor for the second consecutive year. It 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.

Ansys is the global leader in engineering simulation software. If you’ve ever seen a rocket launch, flown on an airplane, driven a car, used a computer, touched a mobile device, or crossed a bridge, most likely Ansys software played a critical role in this product creation. The company has seen meaningful revenue acceleration from a new management team that has come on board to re-energize the organization and help make simulation software more pervasive.

Leading detractors from portfolio performance were Enerflex (Sold), Delphi (Sold) and ShawCor.

We continue to see significant upside in Shawcor: despite a record level of bid+budget+backlog (a leading indicator of future revenue), the stock trades at only 20% of its all-time high; however, the timing of project wins will ultimately determine share price performance.

One stock was added to the portfolio in Q4: Motorola Solutions (“MSI-us”).

MSI is the leader in Land Mobile Radio (“LMR”), which is the push-to-talk two-way communication between radio transceivers used by police, firefighters and security personnel. This is a very steady business given its mission-critical nature: as an example, the Director of Public Safety for Lake County, Florida was quoted, “During Hurricane Irma, there were no sites down, no outages and all [radio] communications worked flawlessly.” MSI provides 43 of the 46 state & provincial LMR’s and has used this dominant position to more than double its addressable market by making investments into related offerings, such as video and command center software. These investments have started to pay off, with MSI recently recording a record backlog. Margins have also moved meaningfully higher as these new areas carry a higher margin profile. The growth runway is significant with $8B in revenue versus $39B in market opportunity, and end-market demand is strong given heightened demand for security and public safety, and antiquated command center offerings. MSI is in a strong competitive position given its 90-year relationships with key public-safety leaders, unique end-to-end solutions, and growing distrust of Chinese product. As such, we expect revenue and margin growth to continue. Free cash flow should also move higher as little capital is required to drive growth. MSI targets 30% of operating cash flow towards dividend payments.

Looking forward

Low interest rates have been a key factor for markets this year as low rates increase the value of all asset classes. Central banks remain accommodative and markets seem to be pricing in ‘lower for longer’ rates. The gap between the market’s ‘haves’ and ‘have nots’ continued to widen in Q4 with growth indices continuing to out-perform value indices. Opportunities to make money in the market have historically been driven by mean-reversion, however, that dynamic has been elusive. Passive ownership through ETFs is also a growing driver of markets. Using KEYS as an example, Vanguard, BlockRock (iShares) and State Street (SPDRs), collectively own 24.4% of the company. It is estimated that the percentage of trading volumes from passive players is even higher. ETFs and passive investing are a relatively new phenomenon, which means that their impact on markets is still to-be-determined.

Lastly, we have talked about market volatility increasing in past notes. While our investment principles are designed to protect and grow our investors’ capital, we are not immune to the market’s volatility. As such, cash planning becomes important and we advise investors to speak with their Investment Advisors to plan for any cash needs over the next 1-2 years.


All data is as of December 31, 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. Publication date: January 20, 2020.

Q3 2019 | Caldwell Balanced Fund Commentary

Macro Commentary

Markets continued to grind higher in Q3. Canada’s market was relatively stable throughout the quarter, while U.S. markets saw intra-quarter volatility driven by trade and other political uncertainty. Looking back at Q2 earnings season (which reported during Q3), it was the second straight quarter of year-over-year declines in earnings for the S&P 500. Tariffs remained the main question on earnings calls and continue to create uncertainty for businesses, especially in the Industrials and Consumer Discretionary sectors. Trade impact can be seen within the Transportation industry, with declines in cargo volumes and pressure on trucking spot rates.

However, this weakness has so far been isolated to only certain parts of the economy. For example, Paychex, a leading provider of payroll and HR services to small-mid companies in the U.S., reported in early October that their business sentiment surveys are more positive today than they were 6-9 months ago, that wages are increasing as companies struggle to hire enough people to meet demand, and that they’re seeing no signs of economic weakness through payroll activity. With Q3 earnings having started reporting more recently, airlines have reported strong travel demand – including leisure travel – and bank earnings have been solid, with strong credit performance.

It seems that a Goldilocks scenario, where the economy is neither too hot or too cold, can continue to support markets given ultra-accommodative interest rate policies. But be aware that these are bizarre times. There is over $16 trillion of debt globally that is trading at negative yields. It really is hard to fathom: just imagine taking a time machine back to the early 1980s, when U.S. 30-year mortgage rates were in the high teens, and telling someone that, in the not-too-distant future, lenders will actually be paying borrowers to take out a loan [a Danish bank was the first to offer negative interest rate mortgages this summer – the bank is paying borrowers 0.5% annually on their loans].

Portfolio Commentary

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, high quality management teams and attractive business environments. Top performers in Q3 were Keysight Technologies (“KEYS” +8.3%), Ansys (“ANSS” +8.1%), and S&P Global (“SPGI” +7.5%). KEYS had a strong earnings report driven largely by continued strength in 5G deployments. The strong results suggest that the impact from the Huawei ban was less than feared. Ansys responded favorably to a ‘beat and raise’ quarter and greater detail on their large and growing addressable market, which will provide the company with significant growth runway for years to come. SPGI also had a strong earnings result, with operating margins expanding 220 basis points despite a relatively soft debt issuance environment.

Offsetting these were declines in Berry Global (“BERY” -25.0%), Shawcor (“SCL” -16.7%) and Middleby (“MIDD” -13.9%). We have recently added to our positions in BERY and MIDD as headwinds seem temporary and valuations look compelling, while Shawcor continues to trade meaningfully below its all-time highs despite pointing to a record level of bid+budget+backlog (a leading indicator of future revenue).

Two stocks were added to the portfolio in Q3: Anthem (“ANTM-us”) and Johnson & Johnson (“JNJ-us”). Both companies are in the U.S. Health Care sector.

Anthem is one of the largest health benefit companies in terms of medical membership, serving 40 million medical members in 50 states. As one of the largest health insurers in the U.S., Anthem has a strong competitive moat driven by scale, regulation, and complexity. An aging demographic provides a secular tailwind to the industry and despite political rhetoric, the health insurers will likely continue benefiting from the move towards value-based care as they are in a position to improve outcomes while driving costs lower. Anthem also has strong company-specific growth drivers, including in-sourcing their pharmacy benefit manager and increasing market share in government insurance, where they are under-penetrated.

Johnson & Johnson is a health care juggernaut with 135,000 employees conducting business in virtually all countries of the world. It operates in 3 segments – Pharmaceutical, Medical Device, and Consumer Products – and has 26 products/platforms generating over $1 billion in sales. Its brands include Johnson’s, Tylenol, Aveeno, Band-Aid, Listerine, Neutrogena, Benadryl, Zertec and Pepcid. While the company is a poster-child for consistent performance (35 consecutive years of adjusted operating earnings growth and 57 consecutive years of dividend increases), recent operational challenges and litigation uncertainty have created a compelling entry point, in our view. Operational performance has already started to improve, driven by a multi-year pipeline of innovation, and we expect the litigation overhang, which appears to be overly punitive, to dissipate over time.

Looking forward

What does safety mean to you? This is an interesting question today. The market is currently operating under a framework of ‘haves’ and ‘have nots.’ The ‘haves’ come in two camps: companies whose businesses are resilient to economic recessions (who wouldn’t want that safety in the face of today’s economic uncertainty?), and those who appear to have significant growth runway (which provides safety via the ability to outgrow a recession). In each case, however, the perceived safety is focused solely on earnings, but earnings are only one input into a stock’s price. The other input is the valuation multiple, and when we look at the ‘haves’ from that perspective, they don’t actually look very safe at all. In fact, investors’ rush to safety has pushed their valuation multiples to record highs and, in many cases, substantially above historical levels so that one might consider them to be rather dangerous.

The ‘have nots’, on the other hand, are companies whose businesses are quite sensitive to economic conditions (so that earnings will fall significantly in a recession) or where the earnings growth outlook appears underwhelming. In the name of fleeing danger, investors have sold the ‘have nots’ to the point where their valuation multiples are near record lows. From that perspective, they don’t look so dangerous after all.

The problem with this dynamic has been timing. The expensive ‘haves’ have continued to get more expensive while the cheap ‘have nots’ have continued to get even cheaper. We expect that, at some point, this dynamic will flip. As a Bernstein analyst put it: “Could this finally be the quarter where the lofty expectations for defensives versus the low bar set for cyclicals leads to a rotation?”  We are slightly tilted today towards the ‘have nots’ and are well positioned should that rotation occur.


All data is as of September 30, 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. Publication date: October 22, 2019.

Q2 2019 | Caldwell Balanced Fund Commentary

Markets in Q2 continued to add to the strong gains seen in Q1 2019. While trade related concerns and the feared impact on global growth have not changed from when markets were significantly lower in Q4, the big change in investor sentiment is driven by the changed attitudes of central banks and governments globally. It seems they, too, are now concerned with slowing global growth and have shifted from tightening to easing policies. In the U.S. FED’s case, the reversal in rate intentions has been significant: after raising the funds rate by 100 basis points in 2018, the FED is now talking about lower rates, with the market now pricing in over 75 basis points of rate cuts over the next twelve months. We are currently living in a bizarre environment where weaker economic news is greeted by a stronger stock market as it means central banks will remain accommodative. It seems that a Goldilocks scenario, where the economy is neither too hot nor too cold, can continue to support markets; in this environment, however, we believe it is more important than ever to invest in high quality management teams that can successfully navigate the uncertainty. As our long-time readers know, management is one of the four key pillars on which we assess an investment opportunity.

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, high quality management teams and attractive business environments. We did well in Q2 to have more exposure to the U.S. market as it once again out-paced Canadian returns and continued to do well having our largest weighting in Technology. Security selection in Consumer Staples contributed favourably, driven by Tyson Foods and Premium Brands. This was offset by unfavourable security selection in the Industrials and Materials, driven by Bird Construction and Berry Global.

The portfolio showed strength in Q2 with 62% of its holdings out-performing the TSX Index return. Top performers were Broadridge Financial Solutions (“BR-us” +23.1%), TE Connectivity (“TEL-us” +18.6%) and Tyson Foods (“TSN” +16.3%). Broadridge released a solid Q1 earnings report as it continues to leverage its leading positions in proxy voting and post-trade management and sees significant growth opportunity to expand service offerings in the wealth management industry. We like Broadridge’s business as it is mission-critical, resulting in a sticky customer base and strong competitive moat. TE Connectivity is a world leader in highly engineered connectivity and sensor solutions. Its Q1 results were better than feared with management raising full-year guidance as it delivered strong content gains in a cyclically challenged auto market. Despite near term headwinds from auto, the company will continue to benefit from secular electrification and connectivity trends within the transportation, industrial, medical and communications industries. Tyson is benefiting from strong protein prices stemming from the African Swine Fever that has wiped out a significant amount of China’s pork supply. The company is also lapping higher input costs from 2018, which is allowing investors’ focus to shift back to the company’s ongoing transformation from a commodity to value-add producer.

Three stocks were added to the portfolio in Q2: Quest Diagnostics (“DGX-us”), Premium Brand Holdings (“PBH-t”) and Raytheon (“RTN-us”).

Quest is the world’s largest provider of diagnostic testing, providing services from routine blood tests to complex gene-based and molecular testing. 100% of revenue comes from the U.S. The company’s services are ubiquitous within U.S. healthcare as it serves 50% of all U.S. hospital systems, 50% of U.S. physicians and touches 1/3 of all U.S. adults annually. While a changing U.S. healthcare landscape is creating uncertainty, especially as U.S. elections ramp up, the shift to value-based care plays well into DGX’s significantly lower price points and service capability, both of which are driven by the company’s scale. This should accelerate DGX’s market share gains, which currently sit at only 10% of the total market, as evidenced by recent wins with large national payer networks. We initiated a position when the stock was off nearly 20% from its high and trading at an attractive free cash flow yield. We also like the stock’s defensive qualities as the business is largely recession-proof.

Premium Brands owns a portfolio of specialty food manufacturing and food distribution businesses with a focus on specialty products in protein and seafood. 73% of revenue comes from Canada and 27% from the U.S. The company is benefiting from 3 secular changes in consumer behaviour: the shift to more protein in the diet, clean-label eating (no unknown ingredients) and on-the-go eating (Fun Fact: Premium Brands supplies sandwiches to Starbucks to help it offset labour cost inflation). Over the last 5 years, the company has generated 20% annualized revenue growth and nearly 40% annualized EPS growth. Significant growth runway remains both organically and through M&A (which is a big part of the strategy) given only $3B in revenue today. The 5-year plan is to grow to $6B in revenue, most of which will come from the U.S. We initiated a position when the stock was off nearly 40% from its high. Subsequent to our purchase, the company announced a $200 million strategic investment by the Canada Pension Plan Investment Board which leaves the company well funded to execute on its strong pipeline of growth opportunities. We also expect this position to exhibit defensive qualities through an economic downturn.

Raytheon is a defence contractor that helps countries protect their borders and national interests through its missile & missile defence systems, radars, optical sensors and communications systems. The U.S. government is the largest customer, representing 68% of direct sales; however, much of the company’s growth is coming internationally with countries like Japan and Switzerland on multi-year programs to ramp up their threat defences. With the move towards populist governments and policies around the world, coupled with anemic global growth and high debt levels, it seems reasonable to expect that geo-political uncertainty will remain heightened.  Subsequent to our purchase, Raytheon announced a mega-merger with United Technologies, a leading player in the aerospace market. While this merger will take time to play through – and will likely cause some volatility in the stock – we believe the underlying fundamentals of both businesses are attractive.

Looking forward

We have talked about market volatility increasing in past notes and investors have certainly experienced this in recent months. While our investment principles are designed to protect and grow our investors’ capital, we are not immune to the market’s volatility. As such, cash planning becomes important. The reason we avoid companies with weak balance sheets is because they have a higher risk of being forced into actions that destroy shareholder value. Similarly, investors that know they need cash in the next year or two should probably avoid having that money invested in equity markets – you don’t want to be forced to sell stocks should the market become depressed. This is where communication between investors and their Investment Advisors is critical.


All data is as of June 30, 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. Publication date: July 15, 2019.

Q1 2019 | Caldwell Balanced Fund Commentary

How quickly things can change! After severe drops in global asset prices in Q4 2018, markets recovered just as sharply in Q1 2019. Given the market’s performance to date, it seems that fears over global economic growth have eased. The Fed seems to have pulled back on plans for balance sheet reductions and interest rate hikes, China has responded to tariff risks with additional stimulus efforts and corporate earnings in Q4 turned out to be better than feared. Despite another round of ‘kicking the can down the road’, with respect to central bank policy, Canadian and U.S. market indices have rallied back and now sit close to previous highs. Companies start reporting Q1 earnings in mid-April which will give investors additional guide posts on the strength of demand, inflationary pressures, trade disruptions and capital allocation plans.

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. We did well in Q1 to have more exposure to the U.S. market as it once again out-paced Canadian returns. We also did well to have our largest weighting in Technology, which was the best-performing sector in the United States Health Care was the best performing sector in Canada, driven by Cannabis stocks which rallied back strongly after sharp declines in Q4.

The portfolio showed broad-based strength in Q1 with 78% of its holdings out-performing the TSX index return. Top performers were Keysight Technologies (KEYS-us: +40.5%), Delphi Technologies (DLPH-us:+34.5%) and IPG Photonics (IPGP-us:+34.0%).

Keysight, a leader in wireless testing technology, continues to build on strong momentum in 2018. The company is increasingly being recognized as one of the best ways to play the upcoming 5G cycle, which is still in its infancy and expected to see larger overall spend than the previous 4G cycle. KEYS also benefits from the increasing penetration of electric vehicles, also in the early stages of a long growth runway.

Delphi has rebounded from extremely low valuation levels that were driven by a perfect storm of negative, but temporary, factors. The sell-off seemed severe in the face of the company recording $9.8B of lifetime bookings in 2018 (for context, DLPH’s total revenue in 2018 was $5.1B). A new CEO that brings a solid reputation of operational excellence, easing trade tensions and Chinese stimulus plans have helped fuel the rebound.

Lastly, IPG Photonics, a fiber laser manufacturer, is also rebounding from a less pessimistic outlook on China. Macro concerns in Q4 shifted investor attention away from the long growth runway for IPGP driven by continued fiber laser adoption in manufacturing and other processes. IPGP’s growth potential, strong competitive advantages, and pristine balance sheet should drive continued share price increases going forward.

Two stocks were added to the portfolio in Q1: Middleby (MIDD-us) and 3M (MMM-us).

Middleby is a leading manufacturer of hot-side commercial cooking and food preparation equipment, industrial food processors and premium residential equipment. This is a high quality company with a long track record of consistent results. Middleby is known for strong customer relationships and innovation: close relationships drive an innovation funnel focused on helping customers achieve their goals. Today, that means finding solutions to address labour shortages and rising wages, reduce food waste, electricity and water costs, allow for menu flexibility, and reconfigure kitchens to facilitate takeout and delivery. We initiated a position into a depressed valuation as the company was coming off of a period of temporary softness in restaurant capital expenditure. We expect growth and margins to inflect positively going forward and with a revenue base of $2.7B, there is a significant growth runway given a $25B addressable market.

3M is a diversified industrials company that serves a broad set of end markets.  It, too, is a high quality company with a long track record of consistent results. When we think about a company’s ability to grow in value, competitive positioning is a key consideration. Much like Aesop’s Fables, where a bundle of sticks is indestructible but one stick alone can easily be broken, a company’s competitive advantage is stronger the more elements that are involved. 3Ms technology, manufacturing know-how, global capabilities and brand are powerful on their own but are that much more formidable when combined, especially while also leveraging intellectual property (“IP”) – 1/3 of 3Ms IP is in its manufacturing processes. The unique value proposition this business model creates for clients is evidenced by a powerful statistic: ~70% of 3Ms revenue is either designed in, specified or regulated at the end-use customer. We see significant runway for 3M to leverage this model into new growth areas and took the opportunity to initiate a position into fears of slowing Chinese and global growth.

Looking forward

We have talked about market volatility increasing in past notes and investors have certainly experienced this in recent months. While our investment principles are designed to protect and grow investors’ capital, we are not immune to the market’s volatility. As such, cash planning becomes critical. The reason we avoid companies with weak balance sheets is because they have a higher risk of being forced into actions that destroy shareholder value. Similarly, investors that know they need cash in the next year or two should probably avoid having that money invested in equity markets – you don’t want to be forced to sell stocks in the event of a depressed market. This is where working with an Investment Advisor is highly valuable.

We look forward to tracking the progress of the portfolio’s holdings and appreciate your continued support.

All data is as of March 31, 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. Publication date: April 11, 2019.

December 2018 | Caldwell Balanced Fund Commentary

< Back

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.

September 2018 | Caldwell Balanced Fund Commentary

Portfolio Additions

S&P Global (SPGI-us)

About the Company: S&P Global provides ratings, benchmarks, analytics and data to the capital and commodity markets worldwide. It has 20,000 employees in 31 countries, over 200 billion data points and serves 97 of the Fortune Global 100 companies. The company generates over $6 Billion in annual revenue and operates across four business segments: Ratings, Market Intelligence, Indices and Platts. Demand for SPGI's services is driven by growing debt levels, data-driven investment and corporate strategies, the growth of passive/index investing and derivatives & commodity trading. SPGI's geographic split: 60% U.S., 25% Europe, 10% Asia, 5% Rest of World.

Investment Thesis:
  1. A Great Business Model: Over 70% of revenue is subscription based with high renewals. SPGI's products are highly ingrained into customers' processes, creating stickiness in revenue and strong pricing power (annual price increases of 3-4% annually across most business lines). This translates into strong margins (70% gross and 48% ebitda).

  2. Favourable Demand Drivers: SPGI has multiple growth drivers in each business line and targets a mid-to-high single digit revenue growth rate. In Ratings, over $100 trillion in debt is set to mature over the next 5 years, all of which will require an updated rating. In Market Intelligence, SPGI is increasing user adoption by recently moving from a single-user to a corporate license model, which should translate into higher revenue over time. In Indices, the number of index/passive products continues to grow, with penetration outside of the U.S. still very low. Lastly, in Platts, growth will come from new commodities like LNG, where Platts expects to soon be named the benchmark for pricing.

  3. Technology Increasing Barriers: SPGI is increasingly using technology (AI) to increase efficiency in its Ratings business and improve insights from its 200 billion data points in the Market Intelligence business. Given the company's scale, this makes it increasingly hard for smaller companies to compete.

  4. Attractive Free Cash Flow Generation and Capital Allocation Policy: SPGI is a capital light business which means it does not need to invest a lot of cash in order to generate incremental revenue. This creates a strong cash flow stream, 75% of which gets returned to shareholders in the form of dividends and buybacks.

 

Ansys (ANSS-us)

About the Company:  Ansys is a global leader in engineering simulation software that is widely used by designers, engineers and researchers across a broad spectrum of industries. Simulation allows for the virtual testing of products using the fundamental principles of modeling, physics, mathematics and computer science. With simulation, customers are able to get instant feedback on new product design and functionality without having to build a physical prototype, which allows products to come to market faster and cheaper. Ansys’ geographic split: 40% North America, 30% Asia Pacific, 30% Europe.

Investment Thesis:
  1. Strong Competitive Position: ANSS holds the #1 market share (~25%) and is considered the gold standard of simulation. The software platform has high barriers given its complexity and unparalleled physics capabilities, which should become increasingly valuable as product complexity increases.

  2. A Great Business Model: 75% of revenue is recurring with 98% renewal rates. This translates into strong margins (90% gross and 40% ebitda).

  3. Favourable Demand Drivers: The market is growing 8-10% annually with 70% of R&D budgets still being spent on physical testing. Adoption should become widespread as technology is a race-to-the bottom tool: if your competitor starts coming to market faster and with better product, you don’t have much choice than to follow their lead.

  4. New Management with a Growth Focus: A new CEO has injected a growth focus and the runway appears long with additional applications for simulation software beyond a product's design and testing phase.

 

IPG Photonics (IPGP-us)

About the Company:  IPGP is the global leader in fiber laser technology. Lasers, alongside vision and robotics, are experiencing strong secular growth driven by the trend toward factory automation. Manufacturers have been replacing conventional technologies in cutting, welding and other material processing applications with fiber lasers given their higher speed, flexibility, precision, reliability, quality and cost attributes. IPG’s geographic split: 44% China, 20% Europe (ex Germany), 12% North America, 8% Germany.

Investment Thesis:
  1. Strong Competitive Position: IPG is the pioneer of fiber lasers and holds the #1 market share (~65%). The company invented the technology and its technological know-how, continual innovation, vertical integration and scale are high barriers for competitors. Their leadership position is evident in peer-leading margins and high/stable return on equity.

  2. Favourable Demand Drivers: Market dynamics are favourable with fiber laser adoption <20% in most applications. 2017 was seen as an inflection point for adoption with the fiber laser industry growing 56% and estimates are for the industry to grow at a 15% CAGR over the next 5 years. Drivers include the displacement of conventional technologies (laser cutting and welding is typically 5-10x faster, and operating costs 20-50% lower, than conventional methods), increasing affordability with 10-20% annual price deflation (akin to the accelerated adoption of semiconductors as prices decreased), and integration of laser with other automation technologies (plays into miniaturization and materials processing trends).

  3. Compelling Entry Point: The stock is off nearly 40% from its recent high on cycle (China/trade) and competitive concerns. While it is possible that we are early in our timing, we ultimately believe that IPGs competitive position is stronger than what the market is giving it credit for and that any slowing in adoption due to trade concerns is merely a pause in demand rather than lost demand. The last recession is a great example of this where operating income dropped 80% in 2009 only to rebound by 800% in 2010 to surpass its 2008 high by 40%. IPGP [at the time of writing] trades at 12x on an ev/ebit basis versus 18.6x for the S&P 500, which seems compelling given the company’s strong secular drivers and deep competitive moat. Looking at IPGs automation peers, at 19.5x earnings, the stock is trading at a ~27% discount. Two analysts recently upgraded IPG to a ‘strong buy’. Additionally, IPG has $1 Billion of cash on the balance sheet (~45% of assets) with minimal offsetting debt and the management team owns 30% of the company.

Portfolio Deletions

Whirlpool (WHR-us), Stantec (STN), SunOpta (SOY)

All three of these companies have been under-performing our expectations. In WHR’s case, there have been several issues: margins are well below target in Europe and Asia; Latin America continues to experience challenges; and the bright spot, volume in North America, seems to be reversing. We have given this name a long leash given what they accomplished with the Maytag acquisition but the competitive environment has become too dire and it seems there is no end in sight. Stantec is in the process of selling its construction business which has produced significant operating losses since we purchased the name, causing management to change its tune (originally management stated it was committed to construction given customer’s shifting preference to integrated providers). Our strategy for the portfolio is to barbell into higher quality names such as those stocks that we have purchased recently (IPG, SPGI, ANSS), hold onto names that seem overly beat up (CLS, ABC, TSN, DLPH, LCII) or are in early cycle recoveries (EFX, BDT, SCL) and remove stocks sitting in the middle. STN is one of those in the middle. SunOpta’s management team tells a good story. Unfortunately, improved financial performance has failed to materialize (it has actually gotten worse). This was a turnaround story and while results are expected to improve starting this upcoming quarter, there seems to be too much that is outside of management’s control.

Commentary

Trade: This is the biggest fear in markets today and is a big overhang on those companies most exposed. We have done well historically to buy into political uncertainty and while nobody knows how trade will ultimately play out (the recent NAFTA deal is a positive step), our focus on quality management teams should work well as these are most likely to be successful in navigating uncertain times.

Cost Inflation: Input cost inflation is pressuring many stocks. LCI Industries (LCII-us), for example, is down 28% in 2018 through August, despite revenue growth of 30% over the last twelve months. The ability of companies to pass through higher costs will determine how strong their competitive positioning is within their respective markets.

Canadian Energy: An interesting note from Peyto CEO, Darren Gee. He sees the ruling on the TMX pipeline as “just another in a long list of reasons why Alberta should be seriously considering whether it should remain part of Canada. If we were Quebec, we’d have had a national referendum long ago.” Canadian energy is seeing renewed pressure, with lack of offtake capacity continuing to challenge price differentials. Suncor, (SU-T), is largely immune from high differentials given its integrated business model.

Investor Sentiment: Stock market cycles tend to come with emotional footprints. Market bottoms are consumed by fear while market tops come with extreme enthusiasm. We are often in contact with individual investors and have noticed a shift in sentiment over the last several months: questions of "How long will this market last?" (fear of loss) have shifted to "Why don't we own the 'hot' stocks?" (fear of missing out). Chasing returns, throwing in the towel in waiting for a correction to deploy cash, taking money from fixed income allocations (which have produced tiny returns) to stocks - these are all signs that enthusiasm is starting to win over fear. This is not a call on a market top - we would not be so bold to do that - but an indication that this current market cycle continues to mature and investors should prepare for lower returns going forward than what has been achieved in recent years.

We appreciate your continued support.

Best Regards,
Portfolio Management Team

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 Caldwell Balanced Fund’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 Caldwell Balanced Fund is a publicly offered mutual fund that offers its securities pursuant to a simplified prospectus dated July 20, 2017. Inception Date: Series A - March 1, 1990, Series F – July 4, 2014, Series M – July 15, 2016. Principal distributor: Caldwell Securities Ltd.