2022 Year-End Commentary | Caldwell North American Fund Annual Commentary

Market Commentary

The markets had a tough act to follow in 2022 after the stellar returns generated in 2021. The year 2021 ended strongly with the post-COVID economic recovery gaining momentum and supply chain issues easing, which had led the markets to all-time highs. However, after an eventful and volatile year, investors were ultimately left disappointed in 2022 as inflation, interest rates, and Russia’s invasion of Ukraine took their toll.

The decline in the markets was underpinned by macroeconomic uncertainty, geopolitical instability, and the central banks taking a sharp hawkish stance following over a decade of dovishness in a resolute move to cool persistently high inflation. These factors paired together rationalize the increased volatility and the underlying weakness experienced in the markets throughout the year. Energy was by far the strongest-performing sector, in both the U.S. and Canada, as a result of elevated energy prices, which were a direct consequence of the energy crisis inflicted by Russia’s invasion of Ukraine. In contrast to their performance in 2021, high-growth, richly valued sectors were most negatively impacted by rapidly rising rates and posted the worst returns. Among these were Communication Services, Consumer Discretionary, and Information Technology.

Portfolio Commentary

The year 2022 proved to be yet another strong year for the Caldwell North American Fund (“CNA” or “Fund”). The Fund declined -4.6% for the full year, vastly outperforming the decline of -9.0% 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, both of which declined -12.2% and -5.8%, respectively.

The top performers for the year were Northrop Grumman (“NOC”, +53.1%), Element Fleet Management (“EFN”, +45.8%), and Suncor Energy (“SU”, +41.6%). As a major U.S. defence contractor, NOC was favoured by investors since the onset of the Russian invasion of Ukraine. As a result of the war, defence budgets around the world are expected to increase over the next few years, which should improve the prospects for NOC. EFN has been a net beneficiary of inflation as it is a cost pass-through business whose revenue benefits from higher input costs. Additionally, increased vehicle prices also benefitted its spread income. SU benefitted from the sustained constructive economics of the energy business as a result of elevated energy prices due to the disruptions caused by Russia’s invasion of Ukraine.

Looking Forward

As we enter 2023, inflation, interest rates, and geopolitical tensions continue to be the most prevalent themes. Macroeconomic forces are still the most dominant factors that are driving markets. If inflation moderates to a manageable level, central banks may be able to cease their hawkish stance and successfully 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, particularly as investors continue to shift away from growth names. 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.