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.