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

For the month of June, the Caldwell U.S. Dividend Advantage Fund (“UDA”) declined 2.5% versus a decline of 6.4% for the S&P 500 Total Return Index (“Index”)¹. At the sector level, Health Care and Consumer Staples were relative outperformers while Energy, Materials and Financials lagged. Energy’s underperformance was notable considering its leading performance so far this year; despite continued capital discipline in the sector and rebounding global car/air travel, investors are beginning to worry high energy prices will ultimately lead to demand destruction in the latter. Combine that with broad-based inflation, a more aggressive Fed (and central banks generally) and increasing odds of a recession, and investors’ positioning has understandably become more defensive. To that end, the Fund’s performance in the month of June was aided by its cash holdings and companies in areas such as discount retail and health care.

Top performers in the month of June were Dollar General ("DG", +13.6%), Booz Allen Hamilton (“BAH”, +7.8%) and UnitedHealth ("UNH", +5.8%). Given elevated inflation and the potential for lower consumer spending, we’ve become increasingly interested in companies levered to “trade down” spending, or in other words a shift in consumer spending from preferred brands/locations to less expensive substitutes in order to save money. DG is exceptionally well positioned in this regard given its locational strategy - 16,000 stores located within five miles of 75% of the U.S. population - and low price points – the majority of their products are under $10. The locational advantage should help drive share gains as higher gas prices push consumers to shop closer to home. A greater skew towards rural areas (which tend to be lower income) and maintaining the $1 price point may also help take share from competitors who chose to raise prices earlier in the year. Lastly, internal cost saving measures should help protect against margin compression. The rotation into defense sectors helped BAH in the month of June however company-specific catalysts were also at play. The approval of the U.S. defense budget earlier in the year removed an overhang on the stock and an uptick in hiring suggests organic growth is likely to accelerate as award activity picks up. The company is also well protected from inflation as ~80% of its contracts are structured with cost pass-throughs. UNH continued to benefit from its business model of integrating all areas of patient care under one roof to drive sustainably growing profitability. Additionally, the transition to value-based care is still early stage, underpinning a solid growth runway over mid to long term.

For the second quarter of 2022 (“Q2”), the Caldwell U.S. Dividend Advantage Fund (“UDA”) declined 4.9% versus a decline of 13.4% for the Index. BAH (+6.7%) and UNH (+4.3%) were also among the top contributors for the quarter, as well as Northrop Grumman (“NOC”, +10.9%), which benefited from fund flows into defense sectors and a string of sizable contract awards. Leading detractors of performance for Q2 were Martin Marietta (“MLM, 19.5%), Broadcom (“AVGO”, 19.6%) and Microsoft (“MSFT”, 13.8%). While still early stage, MLM’s non-residential end markets would likely suffer from lower shipment volumes if projects were stalled or cancelled during a recession. In the residential sector, new housing demand has already started to slow. Aggregate shipments between these two end markets account for over 50% of total shipments which would not be enough to offset strength in the Infrastructure end market. Semiconductor stocks sold off broadly on concerns of significant demand pull forward in sectors that benefited from the pandemic. For AVGO specifically, a weakening outlook in the smartphone and PC market, especially in China, likely contributed to weak performance. MSFT similarly pulled back on demand pull forward concerns given the company’s meaningful exposure to the global PC market. The fund exited its positions in MLM and AVGO.

During the month of June, the Fund initiated a position in Murphy USA (“MUSA”) and Cigna Corporation (“CI”). Murphy markets refined fuel products to wholesale customers and consumers through a network of retail stores. Extensive remodeling efforts are expected to drive organic growth while a recent acquisition is expected to improve the merchandise mix, and ultimately margins over time. In the current inflationary environment, MUSA is leveraging its industry-leading cost structure, partially afforded by its owned real estate portfolio and lower retail fuel breakeven levels vs. the industry, to drive market share gains while expanding fuel margins. CI is the fourth largest managed care company in the U.S. Pricing actions, a greater focus on margins and normalization of medical costs post-COVID should drive accelerated earnings growth in the near-term. Growth in the pharmacy management segment is expected to accelerate driven by growth in specialty meds, care services and cross sell opportunities with existing clients. Lastly, CI recently exited its international business to sharpen the focus on its core U.S. operations, and initiated its first ever dividend in 2021, highlighting management’s confidence in the future cash flow generation of the business.

The Fund employs a bottom-up investment approach designed to seek out attractive investment opportunities in any market. In the case where such opportunities are not plentiful, our preference is to remain partially invested, temporarily holding a higher cash allocation until better opportunities present themselves. We find ourselves in such a position today with nearly 27% cash, and believe this complements our high quality holdings until more opportunities present themselves. 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, will continue to provide a means of generating compelling risk-adjusted returns for our investors over the long term.

¹Standard performance as at June 30, 2022:
Caldwell U.S. Dividend Advantage Fund Series F: 1 Year: -2.5%, 3 year: 7.6%, 5 year: 7.7%, Since Inception (June 19, 2015): 7.9%.
S&P500 Total Return Index: 1 Year: -6.9%, 3 year: 10.1%, 5 year: 11.2%, Since Inception (June 19, 2015): 11.5%.

²Actual investments, first purchased: BAH 2/28/2022, DG 7/27/2020, UNH 12/2/2015.
All data is as of June 30, 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 Serie s 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 provids 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: July 13, 2022.