August 2022 | Caldwell U.S. Dividend Advantage Fund Commentary

For the month of August, the Caldwell U.S. Dividend Advantage Fund (“UDA”) gained +2.3% versus a decline of -2.0% for the S&P 500 Total Return Index (“Index”) ¹. At the sector level, Energy and Utilities were relative outperformers while Information Technology (“IT”), Health Care and Real Estate lagged. Year-to-date (“YTD”), Energy is still the top performing sector by a wide margin, however, falling crude oil prices have narrowed the gap in recent months. Utilities benefited from higher power prices and robust domestic power demand driven by droughts and record temperatures. Within the IT sector, a softening demand outlook weighed on both software and hardware companies as consumers and businesses reassess spending needs. Health Care saw weaker performance from major pharmaceutical and medical tools companies while the Real Estate sector’s weakness was widespread across multiple sub-industries.

Top performers in the month of August were Devon Energy (“DVN”, +14.8%), Cheniere Energy (“LNG”,+9.7%) and EOG Resources (“EOG”, +11.5%). As noted above, the Energy sector remains the best YTD performer within the Index despite falling crude oil prices. Relative to the start of the year, the supply-demand picture for oil has worsened; A weakening global macro environment and rolling lockdowns in China have negatively impacted the demand outlook; on the supply side, Russian output has been more resilient than expected despite sanctions. Natural gas (“nat gas”) has been a bright spot within the sector as Russia’s decision to stop flowing nat gas into Europe has led to a surge in prices ahead of the winter heating season. As a net exporter of nat gas, U.S. producers are expected to see much higher prices and export volumes for the foreseeable future, which has helped Energy stocks with nat gas exposure (including August’s top performers). Outside of commodity price dynamics, all three top performers have company-specific catalysts that are helping drive shares higher. DVN continues to selectively add cashflow-accretive assets through acquisition while raising its dividend and deleveraging its balance sheet, all of which are funded with strong operational cashflows. Cheniere is the largest producer and exporter of liquefied natural gas (“LNG”) in the U.S. In addition to strong earnings results, a guidance raise and accelerated debt repayment, the company hinted at further expansion plans at its Corpus Christi Stage 3 terminal with significant contract volumes already signed. Lastly, EOG continues to demonstrate it is one of the best operators in the industry, maintaining its capital spending outlook despite industry-wide inflation, and announced another special dividend in its most recent results.

During August, the Fund initiated a position in Tractor Supply Co (“TSCO”). TSCO is the largest rural lifestyle retailer in the U.S. serving ranchers, contractors and full and part-time hobby farmers, among others. Industry leading sales growth is supported by urban to suburban/rural migration, disproportionate exposure to higher-income consumers and a product mix skewed toward “need-to-have” versus “nice-to-have” products. A loyalty program developed under the company’s new CEO has gained significant traction in a short period of time, with strong retention rates and higher spend from members vs. non-members. Adding garden centres to existing stores expands TSCO’s total addressable market and should support growth rates over time. Lastly, investments in “big and bulky” distribution capabilities further distance TSCO from smaller peers that cannot offer bulk quantities, same day delivery, etc., which should drive market share gains over time.

Investors remain intently focused on how aggressive the U.S. Federal Reserve will be in raising interest rates. A deceleration in the annual inflation rate in August led to predictions that the Fed would slow its pace of hikes and lower rates in 2023. However, those predictions were quickly squashed following public commentary suggesting rates would rise and remain elevated (off historical lows, at least) for the foreseeable future which contributed to the reversal of an earlier equity market rally. While we remain mindful of the macro environment, the Fund employs a bottom-up investment approach designed to seek out attractive investment opportunities in any market. Over the long run, given its unique momentum-driven investment approach and focus on well-managed, dividend growth companies, we believe UDA is well positioned to provide strong performance by way of both attractive regular monthly distributions and long-term capital appreciation potential. We expect that dividend growth investing, which has been foundational to the Fund’s investment approach, should continue to provide a means of generating compelling risk-adjusted returns for our investors over the long term.

¹Standard performance as at August 31, 2022:
Caldwell U.S. Dividend Advantage Fund Series F: 1 Year: -1.3%, 3 year: 8.3%, 5 year: 9.5%, Since Inception (June 19, 2015): 8.5%.
S&P500 Total Return Index: 1 Year: -8.0%, 3 year: 11.6%, 5 year: 12.8%, Since Inception (June 22, 2015): 12.2%.

²Actual investments, first purchased: DVN 10/25/2021, LNG 7/22/2022, EOG 3/2/2022.
All data is as of August 31, 2022 sourced from Morningstar Direct or S&P Capital IQ, unless otherwise indicated. Fund returns are from FundData. UDA, Index total return numbers, sector returns and individual stocks returns are in CAD terms. The Fund was first offered to the public as a closed-end investment since May 28, 2015. Effective November 15, 2018 the Fund was converted into an open-end mutual fund such that all units held were redesignated as Series F units. Performance prior to the conversion date would have differed had the Fund been subject to the same investment restrictions and practices of the current open-end mutual fund.

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. The payment of distributions should not be confused with a fund’s performance, rate of return or yield. If distributions paid are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a fund, and income and dividends earned by a fund, are taxable in your hands in the year they are paid. Your adjusted cost base (“ACB”) will be reduced by the amount of any returns of capital and should your ACB fall below zero, you will have to pay capital gains tax on the amount below zero.

Publication date: September 13, 2022.