June 2023 | Caldwell U.S. Dividend Advantage Fund Commentary

June Recap:
For the month of June, the Caldwell U.S. Dividend Advantage Fund (“UDA” or “Fund”) gained 2.7% versus a gain of 3.8% for the S&P 500 Total Return Index (“Index”)¹. From a sector standpoint, Consumer Discretionary, Industrials, and Materials were relative outperformers whereas, Utilities, Communication Services, and Consumer Staples underperformed. Dissimilar to the rest of this year prior to June, where the Technology giants were responsible for most of the gains generated by the equity markets, the market performance in June exhibited greater breadth with most of the sectors posting meaningfully positive returns.

Top performers in the month of June were FedEx (“FDX”, +11.3%), Murphy USA (“MUSA”, +9.6%), and Quanta Services (“PWR”, +7.7%). FDX rerated higher for the month as the company continued to demonstrate good progress on its cost-cutting and restructuring plans. It has been able to maintain its operating margin despite the unfavourable demand backdrop. MUSA continues to benefit from sticky customer behaviour as their everyday low-price strategy continues to resonate with new customers that initially came to MUSA seeking lower prices when inflation was rising rapidly. This has continued to result in share gains and stronger margins in the recent quarter. PWR rerated higher as the U.S. debt ceiling deal should accelerate the permitting processes for some energy projects, additionally, the company continues to see strong demand for its infrastructure solutions for the energy transition.

During the month of June, the Fund initiated positions in Vulcan Materials (“VMC”), Tetra Tech (“TTEK”), PulteGroup (“PHM”), Entegris (“ENTG”), ESAB Corporation (“ESAB”), Badger Meter (“BMI”), and Rockwell Automation (“ROK”). VMC is the largest producer of construction aggregates in the U.S. as well as a major producer of aggregates-based construction materials. A strong pricing environment paired with decelerating cost inflation should allow the company to expand its margins going forward. TTEK is a leading global provider of engineering consulting and services. In addition to seeing significant growth across all of its business segments, the company is focused on paying down its debt, which is expected to drive double-digit earnings per share accretion in the next couple of years. PHM is one of the largest homebuilders in the U.S. with operations in 24 states. Limited existing housing inventory and housing demand that is regaining its footing, after the rising interest rates adversely impacted orders and cancellation rates across the sector, 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. With new capacity coming online near the beginning of next year, the company should be well poised for a rebound in the semiconductor industry given the robust demand environment aided by the recent generative AI (Artificial Intelligence) boom. ESAB is a global fabrication technology company that focuses on developing, manufacturing and supplying consumable products and equipment for use in cutting, joining, and automated welding. The company is making progress on its cost reduction and pricing initiatives, largely through product line simplification and manufacturing footprint consolidation. This should enable the company to narrow its margin gap relative to its peers. BMI designs, manufactures, and sells water meters, valves, and related technologies to municipal water utilities as well as industrial users. The company is experiencing a strong demand for its products driven by the replacement of standard water meters with smart water meters as utility companies and industrial clients are increasingly interested in data collection and analytics to better manage critical resources. ROK provides hardware, software, and services for automating factories and process facilities, focusing on the control aspect. The company is well positioned to benefit from the megatrends in electric vehicle and battery manufacturing, new drug therapies requiring added pharmaceutical manufacturing capacity, as well as the transition toward clean energy.

For the second quarter of 2023, UDA gained 1.1% versus a gain of 6.3% for the Index. Broadcom (“AVGO”, +32.9%), Microsoft (“MSFT”, +15.7%), and Quanta Services (“PWR”, +15.4%) were leading contributors to performance. AVGO’s share price appreciated against a positive backdrop for a subset of semiconductor companies that are set to benefit from the increased AI-related spending. MSFT performed well as the market continued to appreciate that MSFT is the leading and the most logical foundation for others to build their new AI applications on, which should cement its favourable positioning to benefit from the generative AI boom. PWR was discussed in the monthly section above.

The Fund held a 10.8% 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 June 30, 2023:
Caldwell U.S. Dividend Advantage Fund (Series F): 1 Year: 10.1%, 3 year: 8.8%, 5 year: 8.3%, Since Inception (June 19, 2015): 8.2%.
S&P500 Total Return Index: 1 Year: 22.7%, 3 year: 13.5%, 5 year: 12.4%, Since Inception (June 19, 2015): 12.9%.

²Actual investments, first purchased: AVGO 11/1/2018, MSFT 7/20/2016, PWR 3/9/2022.
All data is as of June 30, 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: July 17, 2023.