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

For the month of July, the Caldwell U.S. Dividend Advantage Fund (“UDA”) gained 3.3% versus a gain of 8.5% for the S&P 500 Total Return Index (“Index”)¹. At the sector level, Consumer Discretionary, Information Technology (“IT”) and Energy were relative outperformers while Consumer Staples, Health Care and Communication Services lagged. Pent up travel demand and a shift in spending from goods to experiences benefited travel, hospitality and gaming stocks within the Consumer Discretionary sector. A rebound in hard hit semiconductor names contributed to the IT sector’s strong performance. Lastly, while energy prices have come down, they remain elevated to historical levels over the last five years and many companies within the sector reported strong earnings and outlooks for the remainder of the year. Earnings and outlooks from household product companies within the Consumer Staples sector were disappointing, thus weighing on the sector’s overall performance. A recently passed bill in the U.S. Senate seeks to allow large government health insurance payers to negotiate discounts directly with drug manufacturers would presumably pressure revenues/profits at major pharmaceutical companies, thus weighing on the Health Care sector. Sell-offs in cable and telecommunications companies weighed the Communication Services sector.

Top performers in the month of July were Murphy USA (“MUSA”, +21.3%), Amphenol Corp (“APH”, +19.0%) and Quanta Services (“PWR”, +9.9%). MUSA reported strong second quarter earnings, leveraging its position as a low cost leader to take market share while maintaining strong fuel margins. The company is also seeing notable uptake of its loyalty program which helps drive customers inside the store, enticing additional purchases of more profitable convenience merchandise. APH also posted robust second quarter results with strong demand continuing in nearly every end market. Orders in long-cycle end markets such as military, commercial air and automotive accelerated. After a period slight margin pressure, the company noted its pricing actions are finally starting to offset inflation. PWR is benefiting from strong demand for its services as Utility customers focus on modernizing the existing grid while making investments in renewable energy generation capabilities for the future. PWR also signed a large multi- year service agreement to provide engineering and construction services for a new nationwide electric vehicle charging network with work expected to start in late 2022.

During July, the Fund initiated positions in Costco (“COST”), Mckesson (“MCK”), and LKQ corp (“LKQ). COST is a leading operator of supercenter retail warehouses and the third largest global retailer. Revenue growth and foot traffic numbers show COST continues to take market share, and membership renewal rates for first time members are trending well ahead of pre-COVID levels, suggesting demand may have moved sustainably higher. COST is a price leader but not highly exposed to the lower income consumer, an enviable position heading into a potentially weaker economic environment. Lastly, initiatives such as grocery delivery, travel, optical and pharmacy services drive customer stickiness while on premise gas sales drive customers to visit the main warehouse. In all, we view the company as a strong retailer getting stronger. Mckesson is one of the largest distributors of prescription medicines in the U.S. and should benefit from rebounding prescription volumes as more people resume routine doctor visits. The company recently exited the majority of its margin-dilutive international business which should improve profitability over time. Lastly, sale proceeds could also be used for organic growth initiatives, such as biopharma services, which is a small portion of revenue today, but growing 2-3 times the core distribution business. LKQ corp is the largest distributor of aftermarket (AM) auto parts in North America (NA) and Europe. Volumes for collision parts should rebound along with miles driven as people travel more, return to work, etc. A large U.S. insurer is slowly increasing its penetration of AM parts in collision repairs which should also benefit volumes over time. Lastly, an ongoing turnaround of its European business should sustainably improve the business’ overall margin profile.

In an attempt to predict how aggressive the U.S. Federal Reserve will be in raising interest rates, investors are heavily focused on macro-economic news releases. Along with “peak inflation” predictions, market participants interpreted recent commentary by the Chair of the Fed as “dovish” (or leaning towards less aggressive), and to that end, we believe sector level performance in the month of July partially reflected a shift back into cyclical/growth stocks and away from more defensive/value stocks. 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 July 31, 2022:
Caldwell U.S. Dividend Advantage Fund Series F: 1 Year: -1.4%, 3 year: 8.0%, 5 year: 9.2%, Since Inception (June 22, 2015): 8.3%.
S&P500 Total Return Index: 1 Year: -2.1%, 3 year: 12.4%, 5 year: 13.4%, Since Inception (June 22, 2015): 12.7%.
²Actual investments, first purchased: MUSA 10/14/2021, APH 7/27/2020, PWR 3/9/2022.
All data is as of July 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: August 12, 2022.