2022 | Caldwell North American Fund Annual Commentary

Market Commentary

For the second quarter of 2022 (“Q2”), the Caldwell North American Fund (“CNAF” or “the Fund”)1 declined 5.3% versus a decline of 13.2% and 13.4% for the S&P/TSX Composite Total Return Index (“TSX”) and S&P 500 Total Return Index (“S&P 500”), respectively. Russia’s invasion of Ukraine continues to support elevated prices and volatility in global commodity markets. China’s “zero COVID” policy forced lockdowns in major port cities, further exacerbating global supply chain challenges. Lastly, persistently high inflation may force the Federal Reserve (and other central banks globally) to increase interest rates at a quicker than expected pace. Given the dynamics above, it was a challenging environment for both the U.S. and Canada, with every sector in both markets declining in Q2.

In Canada, Energy, Utilities and Consumer Staples were top performing sectors while Health Care, Information Technology (“IT”) and Materials lagged. Higher oil and gas prices led the Energy sector’s relative outperformance (after gaining 28.7% in the first quarter (“Q1”)) while a rotation into more defensive sectors helped Utilities and Consumer Staples. The continued selloff in cannabis names weighed on the Health Care sector’s performance. Shopify, a 30% weight in the IT sector, weighed on its performance as shares were down 52% in Q2. Lastly, the Materials sector underperformed along with a selloff in precious metals prices. In the U.S., Consumer Staples, Utilities and Energy were top performing sectors (for much of the same reasons as Canada) while Consumer Discretionary, Communication Services and IT were relative laggards. Multiple rounds of consumer stimulus during the pandemic led to significantly increased demand for many companies in the Consumer Discretionary sector. Now that stimulus tailwinds have faded and inflation pressures spending in other categories, investors are reassessing the robustness of discretionary spending and whether demand pull forward will weigh on growth rates over the next few years. Many companies in the Communication Services sector also benefited from elevated demand as consumers spent more on entertainment inside the home during lockdowns. With spending shifting to other services (such as dining out, travel, etc.) and a slowdown in ad spending, investors are similarly reassessing the growth prospects for companies in the sector over the next few years. Lastly, in addition to demand pull forward, the IT sector is home to some of the highest valuation stocks in the market. Higher interest rates lower the present value of cash flows that are further out, thus causing the multiples on many names within the sector to rapidly de-rate.


Portfolio Commentary

Top contributors to CNAF’s performance in Q2 were Suncor Energy (“SU”, +12.1%), Element Fleet Management (“EFN”, +11.5%) and Northrop Grumman (“NOC”, +10.9%). In addition to higher energy prices, SU benefited from strong earnings results and news of activist investor involvement. During Q2, management outlined turnaround plans to: divest non-core assets; implement new management in the oil sands division to improve operating performance; reduce leverage and; increase free cash flow and shareholder returns over the next three years. EFN benefited from a strong earnings report, and increased 2022 guidance which suggests the lingering overhang of limited new automobile supply may be fading at the same time servicing revenue is benefiting from new customer wins and wallet share gains. NOC (and the defence industry in general) continue to benefit from investors’ rotating into more defensive sectors and pledges for higher defence spending globally as a result of Russia’s invasion of Ukraine. For NOC specifically, the company’s medium term growth outlook is tracking above peers supported by a strong backlog and attractive exposure to high growth verticals such as space.

Leading detractors of the Fund’s performance in Q2 were Tricon (“TCN”, -33.9%), Boston Scientific (“BSX”, -13.1%) and JP Morgan (“JPM”, -13.9%). Despite strong demand for single family rentals in the U.S. and solid Q1 results, higher interest/mortgage rates could pressure TCN’s ability to earn an appropriate return on its portfolio of single family rentals. Given the company’s growth ambitions, future property purchases may not share the same economics as homes purchased over the past two years at near rock bottom rates. BSX reported a solid Q1 and organic growth continues to recover as surgical procedure volumes return to hospitals. We believe the weakness resulted from potential near term procedure volume pressure in China and/or a selloff in the med tech industry more broadly. Consumer credit metrics continue to hold up well and commercial loan growth is showing signs of returning. However, both areas would likely come under pressure in a recessionary environment while JPM’s capital markets business is already experiencing a material slowdown from 2021’s elevated activity levels as market participants delay IPOs, equity and debt issuance, etc.


Looking Forward

Inflation and rising interest rates continue to dominate the market narrative. The Federal Reserve appears increasingly willing to tolerate a recession in an attempt to tame the former while rising rates pose a risk to higher multiple stocks that have an outsized weighting in major market benchmarks. 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 orientation positions it well going into a rising rate environment, particularly as investors continue to shift away from growth names. 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.



1Series F, total return CAD terms

2First purchased: SU 12/3/2013, EFN 1/15/2020, NOC 2/15/2022.

All data is as of June 30, 2021 sourced from Capital IQ, unless otherwise specified.

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: August 12, 2022


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