Q3 2022 | Caldwell North American Fund Annual Commentary

Market Commentary

For the third quarter of 2022 (“Q3”), the Caldwell North American Fund (“the Fund”) gained 0.6%1 versus a decline of 1.4% the S&P/TSX Composite Total Return Index (“TSX”) and a gain of 1.3% for S&P 500 Total Return Index (“S&P 500”). Persistent inflation over the last 12 months has forced North American central banks to aggressively raise interest rates, which has three negative effects on the stock market: 1) equities become less attractive relative to bonds; 2) bank lending slows, capital projects are scrapped and consumer spending moderates and; 3) higher valuation stocks become less valuable as future profits are worth less today. Additionally (and related to point #3), as higher rates increase the odds of a recession, investor positioning shifts away from higher valuation growth/tech companies towards more defensive sectors. Given that tech held such a large weighting in many major indices, a shift out of these names is exacerbating the magnitude of the sell-off. In sum, it was a challenging environment in Q3 and we expect elevated volatility to remain a key theme going forward.

In Canada, Industrials, Consumer Discretionary and Consumer Staples were top performing sectors while Communication Services, Real Estate and Health Care lagged. Engineering and construction firms helped drive the Industrial sector’s outperformance due to a robust non-residential construction spending environment. Solid earnings results and a shift in investor positioning to more defensive sectors benefited companies catering to lower-income consumers in the Consumer Discretionary and Consumer Staples sectors. Canadian telecom companies, which share similar investment characteristics to Utilities, look less attractive in a higher interest rate environment, weighing on the Communication Services sector. Real Estate and Health Care sector performance was impacted by increased recessionary concerns and a continued sell off in Cannabis names, respectively. In the U.S, Consumer Discretionary and Energy were top performing sectors while Communication Services, Real Estate and Materials lagged. Similar to Canada, the Consumer Discretionary sector was buoyed by companies skewed toward the lower income consumer. Higher natural gas prices provided some offset to falling crude prices in the Energy sector. Weakness was broad-based across the Communication Services. Also similar to Canada, the Real Estate and Materials sectors suffered from heightened recessionary concerns and more cyclical business models.

Portfolio Commentary

Top detractors of the Fund’s performance were Magna International (“MG”, -6.5%), Suncor Energy (“SU”, -12.8%) and Algonquin Power (“AQN”, -11.3%). The energy crisis in Europe poses a potential risk to global auto production in what has already been a challenging 18-24 months, weighing on shares of MG. SU continues to make progress on streamlining its portfolio and improving operational performance, however, we believe shares were dragged lower along with falling oil prices. Weakness in shares of AQN has been driven by an unexpected CFO departure and uncertainty regarding the closing date of its acquisition of Kentucky power. Note investors recently got more clarity on an expected close date.

Looking Forward

We believe the environment will remain challenging going forward, however, market sell-offs can provide opportunities to invest in quality companies at attractive valuations – one of the Fund’s key investment principles. To that end, we remain vigilant in looking for opportunities to high grade the portfolio amidst the current volatility. As always, we 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
Standard performance as at September 30, 2022:
Caldwell North American Fund Series F: 1 Year: -2.7%, 3 year: 6.8%, 5 year: 5.0%,
Since Inception (August 8, 2014): 5.3%.
S&P500 Total Return Index: 1 Year: -5.4%, 3 year: 6.6%, 5 year: 6.5%,
Since Inception (August 8, 2014): 13.0%.
S&P/TSX Total Return Index: 1 Year: -8.3%, 3 year: 9.5%, 5 year: 11.3%,
Since Inception (August 8, 2014): 5.5%.
All data is as of September 30, 2022 sourced from Capital IQ, unless otherwise specified.

2First purchased: EFN 1/15/2020, KEYS 5/9/2022, MSI 5/9/2013, MG 8/11/2022,
SU 12/3/2013, AQN 11/4/2021.
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 13, 2022

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