For the month of December, the Caldwell U.S. Dividend Advantage Fund (“UDA” or “Fund”) gained +1.8% versus a gain of +1.7% for the S&P 500 Total Return Index (“Index”)1. From a sector standpoint, Real Estate, Industrials, and Consumer Discretionary were relative outperformers, whereas, Energy, Utilities, and Consumer Staples underperformed.
Top performers in the month of December were Broadcom (“AVGO”), Federal Agricultural Mortgage (“AGM”), and Costco (“COST”). AVGO performed well following its earnings release, which demonstrated that the growth in Artificial Intelligence (“AI”) is limiting the impact of a slowdown in semiconductors. The tailwind is likely to continue as the company’s AI sales are on track to potentially double in 2024. AGM rerated higher as investors’ expectations of a lower interest rate environment going forward grew, which should reduce the loan volume headwinds that the company had been facing amidst higher interest rates. COST delivered strong quarterly earnings driven by membership fee growth as well as increasing membership renewals. Additionally, strong holiday sales and an increased level of spending on discretionary items by consumers fared well for the company.
During the month of December, the Fund initiated positions in Dollar General (“DG”), Quanta Services (“PWR”), PulteGroup (“PHM”), Entegris (“ENTG”), ESAB Corp. (“ESAB”), FTAI Aviation (“FTAI”), Parker-Hannifin (“PH”), and Advanced Drainage Systems (“WMS”).
DG specializes in reduced-price distribution of mass-consumption products, operating over 19,000 stores across the U.S. The company is starting to show improvements in its operating margin and same-store customer traffic, which is a positive sign that the operational issues that the company has been dealing with, such as shrinkage and inventory mismanagement, may be behind it now. This positions the company well to continue demonstrating progress over the next few quarters, which should lead to the stock rerating higher.
PWR is a provider of specialty contracting services, focusing on infrastructure solutions for the electric grid, communications networks, pipelines, and other industrial markets. Its end markets are benefitting from strong secular tailwinds, which has allowed the company to maintain a robust backlog that is continuing to grow.
PHM is one of the largest homebuilders in the U.S. with operations in 24 states. Over the last couple of years, the rising interest rates were adversely impacting orders and cancellation rates across the sector. However, the outlook for lower interest rates going forward, which is allowing the housing demand to regain its footing, paired with the limited existing housing inventory should provide the company with an improving backdrop going forward.
ENTG provides advanced materials and process solutions for semiconductors, life sciences, and various other technology end markets. It benefits from secular growth in the semiconductor industry driven by the electrification of everything, advances in consumer electronics, automotive safety, etc. The company is poised to deliver strong earnings driven by secular tailwinds as a result of a semiconductor sector recovery that is expected across 2024 and 2025.
ESAB is a global fabrication company focused on developing, manufacturing, and supplying consumable products and equipment for use in cutting, joining and automated welding. A global shortage of skilled welders should cause growth to accelerate in higher-margin automation products. Increased exposure to high-growth product markets, accretive mergers and acquisitions, product line simplification, and internal cost reductions and pricing initiatives should help ESAB close its margin gap with peers over time.
FTAI is an aviation company focused on aircraft and engine leasing as well as aftermarket servicing and part sales to airlines, lessors and maintenance shops. Robust air travel demand and technical issues with newer generation aircraft engines have driven rates higher in its core leasing business. Technical issues have also driven strong demand for FTAI's growing aftermarket parts business given the extended useful lives of customers’ existing aircraft. We believe these trends can continue as airlines look to capitalize on the post-pandemic travel resurgence.
PH is a diversified manufacturer of motion control, flight control, and a wide variety of hydraulic, fuel, fluid, conveyance, and engine systems and components. The company is focused on transitioning its revenue mix toward longer cycle aftermarket and secular growth markets. This should support higher growth and lower earnings cyclicality going forward.
WMS is a leading manufacturer of water management solutions in the stormwater and septic wastewater industries, providing drainage solutions for use in the construction, residential, non-residential, infrastructure, and agriculture end markets. The company is benefiting from strong demand in the southern states following increased natural disaster frequency over the last few years. This should continue as climate change stresses the need for more robust storm drainage systems. A renewed focus on cost controls and automation investments is expected to drive margin expansion in the coming quarters. Lastly, a rebound in new and existing residential housing activity should help with increased fixed‑cost absorption, also supporting a margin recovery.
For the fourth quarter of 2023, UDA gained 2.0% versus a gain of 8.9% for the Index. Top contributors to the performance were Broadcom (“AVGO”), Costco (“COST”), and Microsoft (“MSFT”). AVGO and COST were discussed in the monthly section above. MSFT re-rated higher following strong quarterly earnings that were driven by its dominant position in the global cloud computing market. It is the only company seeing a material growth benefit from AI adoption among the three major hyper-scale cloud players.
The Fund held a 6.4% cash weighting at month-end. 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 our approach to dividend growth investing should continue to provide a means of generating compelling risk-adjusted returns for our investors over the long term.
1All returns (for the fund, individual stocks and sectors) are in total return, Canadian dollar terms. All stock returns represent performance for the full period noted. All fund returns are in respect of Series F.
Standard performance as at December 31, 2023:
Caldwell U.S. Dividend Advantage Fund (Series F): 1 Year: 1 Year: 0.9%, 3 year: 5.6%, 5 year: 9.1%, Since Inception (June 19, 2015): 7.4%.
S&P500 Total Return Index: 1 Year: 22.9%, 3 year: 11.3%, 5 year: 14.9%, Since Inception (June 19, 2015): 13.0%.
2Actual investments, first purchased: AVGO 11/15/2022, AGM 8/18/2023, COST 7/22/2022.
All data is as of December 31, 2023 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: January 17, 2024.