Second Quarter 2023 Commentary | Caldwell North American Fund Annual Commentary

Market Commentary

For the second quarter of 2023, the Caldwell North American Fund (“CNA” or “Fund”) gained +3.1% versus a gain of +3.7% for the Fund’s benchmark, which comprises an equal blend of the S&P 500 Total Return Index and the S&P/TSX Composite Total Return Index. In the U.S., the market performance exhibited more breadth in the month of June with most of the sectors posting meaningfully positive returns. This was dissimilar to the rest of this year prior to June, where the Technology giants were responsible for most of the gains generated by the equity markets. In Canada, this year began with economists forecasting a slowing economy and a high likelihood of a recession. Earnings estimates were being revised downward across the board as investors anticipated a considerable drop in consumer and industrial spending as the effects of the significant rate hikes infiltrate the economy. However, as we continued to see good employment numbers as well as robust GDP trends, the Consumer Discretionary and Industrials sectors reflected the current economic resilience by posting the strongest returns in June out of all sectors in the Index.

Portfolio Commentary

Top contributors to the Fund’s performance in the second quarter of 2023 were Amazon (“AMZN”, +23.4%), Microsoft (“MSFT”, +15.7%), and Element Fleet Management (“EFN”, +14.3%).
AMZN rerated higher as its web services business is poised to benefit from heightened demand for cloud computing fuelled by the rising of generative AI (Artificial Intelligence). MSFT performed well as the market continued to appreciate that MSFT is the leading and the most logical foundation for others to build their new AI applications on, which should cement its favourable positioning to benefit from the generative AI boom. EFN exceeded its quarterly earnings expectations and raised its 2023 guidance by 4% as a result of robust client demand. Its healthy backlog of $3 billion should persist well into 2024, which is also indicative of a robust demand environment for the company.

Looking Forward

Inflation, interest rates, and the risk of recession continue to be the most prevalent themes in 2023. Macroeconomic forces are still the most dominant factors driving the markets. If inflation moderates to a manageable level, central banks may be able to orchestrate a soft landing for the economy, avoiding a typical recession. However, if inflation persists at undesirable levels, a hard landing may be necessary where interest rates strain consumer spending, investments, and corporate profits, ultimately resulting in a classic recession with increased unemployment. While economic uncertainty is a predominant risk in the markets today, 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 for the uncertain environment. 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.