2021 | Caldwell North American Fund (formerly Caldwell Balanced Fund) Annual Commentary

Market Commentary

Similar to 2020, volatility was a key theme in 2021. The year started on a positive note with declining case counts and rising vaccinations, giving investors comfort that a “return to normal” would soon follow. Accommodative monetary policy and additional stimulus also supported a constructive view of the future. However, new variants of the virus began to surface mid-year which had a ripple effect throughout the economy. COVID-induced labour shortages at major ports caused logistics delays for nearly everything including key raw materials. Overseas factory closures and material shortages caused production delays, particularly for semiconductors which are a key input in nearly every industry. Shipping delays and material/labour shortages forced companies to pay higher prices for shipping and components which were then passed through and ultimately led to multi-decade high inflation. To end the year, the Federal Reserve signaled that it would move its rate hike timeline forward to combat inflation thus removing a major tailwind for equities as an asset class.

It is reasonable to assume these conditions would lead to poor performance but to the contrary, U.S. and Canadian markets both ended the year over 20% higher. Performance varied widely by sector however Real Estate, Energy and Financials were top performers in both markets following significant underperformance in 2020 and greater leverage to the economic reopening as borrowing, travel and return to work come back. In the U.S., Information Technology (“IT”) was also a top performing sector primarily driven by mega cap names with outsized influence. Utilities, Consumer Staples and Industrials we’re relative underperformers however it’s important to put “relative” into context as every sector in the U.S. reported double digit gains. In Canada, Healthcare, Gold and Materials were relative underperformers. A sell-off in richly valued marijuana names impacted the Healthcare sector. Gold price weakness weighed on the Gold and Materials sectors.

Portfolio Commentary

The Caldwell North American Fund (“CNAF”)* gained 23.8% in 2021.

CNAF’s top performers for the year were Tricon (“TCN”), Stantec (“STN”) and Motorola Solutions (“MSI”). A robust U.S. housing market is creating a highly favourable rental pricing environment for TCN and an influx of investor capital into the single family rental space should drive strong growth in the company’s asset management business. STN’s strong standing in key markets such as water, environmental and infrastructure consulting position the company to benefit over a multi-year period from the new $1 trillion infrastructure spending package in the U.S. The company’s backlog is near record levels and recent acquisitions should further add to STN’s growth profile. MSI’s business is recovering with the economic reopening, particularly as the sales cycle gets back to normal. The latest U.S. stimulus plan, which includes roughly $350 billion to State and Local governments, provides a multi-year growth tailwind as governments embark on a product refresh cycle.

Leading detractors from the Fund’s performance were IPG Photonics (“IPGP”), Parkland (“PKI”) and Visa (“V”). While IPG remains the dominant player in the Chinese higher power laser cutting market, aggressive price competition from local players led to share losses at the lower end. PKI’s performance suffered as a result of its vertically integrated business model. While refining in-house has its advantages from a supply chain and availability perspective, higher crude prices could put pressure on retail fuel margins. Lastly, Visa declined as re-imposed lockdowns and border closings put pressure on the company’s cross border payments business.

Looking Forward

Two somewhat opposing dynamics are at play as we enter 2022. First, in an effort to combat inflation, the Federal Reserve appears ready to raise interest rates faster than expected just a few months ago. Higher interest rates are negative for stock valuations as future cash flows discounted at a higher rate are worth less today. Second, economies around the world are shifting their thinking towards learning to live with COVID-19. This means loosening or lifting entirely the remaining restrictions which would expand capacity limits, open borders, etc. While rising rates are a risk, we remind investors that one of the Fund’s investment principles is to protect capital by seeking reasonable valuations. To that end, we think the Fund’s value tilt positions it well going into a rising rate environment, particularly as investors continue to shift away from growth names. A full reopening is beneficial for more economically exposed sectors which also tend to reside in the value camp. Nonetheless, we believe markets will remain volatile for the foreseeable future and therefore stress the importance of having conversations with Investment Advisors around cash planning. History has taught us that crisis creates new opportunities and for those investors with multi-year investment horizons, we will continue to manage portfolios based on our investment principles of protecting and growing our investors' capital through discounted valuations, strong balance sheets, good management teams and attractive business environments.

1 Current investments:

first purchased: TCN 6/8/2016, MSI 12/20/2019, STN 1/16/2018.
first acquired: KKR 7/2/2018 (formerly held Hyperion).

All data is as of December 31, 2021 sourced from Capital IQ, unless otherwise specified.

Effective 11/16/2020, the fund no longer allocates fixed income as part of the investment strategy. Refer to the amendment #1
to the Simplified Prospectus dated 10/13/2020.

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: February 25, 2022

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