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

March Recap:

For the month of March, the Caldwell U.S. Dividend Advantage Fund (“UDA” or “Fund”) gained 1.6% versus a gain of 3.1% for the S&P 500 Total Return Index (“Index”)¹. From a sector standpoint, Information Technology (“IT”), Communication Services and Utilities outperformed while Financials, Real Estate and Materials underperformed. Turmoil in the banking industry - including the failure of several large U.S. regional banks and Credit Suisse in Europe - led to contagion fears and a steep sell-off of bank stocks in the Financials sector. Real Estate underperformed on the anticipation of tighter lending standards (i.e. less abundant and higher-cost funding) as a result of the banking crisis, especially considering that U.S. regional banks are over-indexed to the commercial real estate market. In light of potential financial contagion and ripple effects of tighter lending standards on the economy, the Federal Reserve was swift in its efforts to contain the crisis leading investors to begin pricing-in the end of the rate hike cycle much sooner than just before the crisis. To that end, investors aggressively rotated into longer-duration sectors/stocks (i.e. stocks that benefit from lower interest rates), explaining the outperformance of the IT and Communication Services sectors. It should be noted that mega-caps drove a large portion of the Index’s performance for the month, as the return of the equally-weighted S&P 500 Index considerably trailed that of the regular Index.

Top performers in the month of March were Microsoft (“MSFT”, +14.9%), FedEx (”FDX”, +12.3%), and Broadcom (“AVGO”, +8.1%). While MSFT benefited from the hype surrounding its relationship with OpenAI’s ChatGPT (MSFT invested approximately $10B into OpenAI earlier in the year and recently launched ChatGPT integration into the premium version of its Office suite), we believe the forceful rotation back into higher growth and longer-duration technology names drove much of MSFT’s outperformance. That said, MSFT’s long-term prospects remain highly favourable and ChatGPT’s integration into the company’s products has the ability to drive strong upsell opportunities and growth acceleration in MSFT’s cloud computing business. FDX’s earnings results beat expectations, demonstrating that its cost-cutting measures are progressing well. An investor day early in April provided more specifics on additional efficiency measures over the medium term, which should help FDX shrink its margin gap versus UPS. AVGO also reported solid earnings and guidance that came in above expectations. The company continues to benefit from multiple secular tailwinds in its end markets (including ramping AI spending from leading hyper-scale cloud players) and is managing customer demand well, which has led to very consistent results over the last few quarters. Lastly, the stability of the company’s Infrastructure Software segment helps to offset higher volatility in the Semiconductor Solutions segment.

During the month of March, the Fund initiated positions in PulteGroup (“PHM”), Costco (“COST”), Inter Parfums (“IPAR”), Stryker (“SYK”), and Graphic Packaging (“GPK”). PHM is a leading U.S. homebuilder focused on made-to-order homes for mid-level and move-up homebuyers. PHM increased its inventory of ready-built homes during the pandemic and is seeing increased buyer interest as mortgage rates fall from their peak. When conditions normalize, we expect a return to its higher margin made-to-order strategy, however, we like PHM’s exposure to a higher-income consumer in a softer economic environment. Lastly, on the margin front, commodity and labour headwinds should flip to tailwinds over the next 12 months. The pandemic drove strong membership growth for COST and renewal rates are trending near all-time highs well into the post-COVID recovery. We believe this highlights COST’s value proposition to consumers, and should allow it to continue taking market share, especially in an inflationary environment. IPAR is a global manufacturer of premium fragrances. The company is benefiting from growing secular demand for fragrances, particularly in underpenetrated consumer categories and emerging market economies. The company should benefit from rebounding international travel and China’s reopening. Lastly, new product adjacencies increase its total addressable market and support topline growth. SYK is a leading medical device company that has consistently taken share over the last few years. Margin headwinds from higher input costs are expected to flip to tailwinds in 2023 and we believe they can maintain industry-leading growth as hospital procedure volumes continue to recover. GPK is the North American leader in compostable packaging, primarily serving the consumer packaged goods and food and beverage industry. The company should benefit from the continued shift away from single-use plastics and its new, higher-efficiency plants make GPK the lowest-cost producer in the industry.

For the first quarter of 2023 (“1Q23”), UDA declined -0.4% versus a gain of 7.4% for the Index. Comfort Systems (”FIX”, +26.8%), Quanta Services (“PWR”, +16.8%), and Broadcom (“AVGO”, +15.4%) were leading contributors to performance. FIX reported solid earnings results, with management noting a very strong bidding environment across all of its end markets. Notably, FIX saw approximately 75% growth in its total backlog and is essentially booked for the full year. Reshoring demand has been a key theme for FIX and should continue to be a tailwind for years to come, as U.S. companies look to improve supply chain resiliency. PWR also reported solid earnings results and significant growth in its backlog, similar to FIX. With federal stimulus funding expected to come online towards the end of 2023 and into 2024, PWR expects its backlog will remain robust for the foreseeable future, especially as supply chain issues in the renewables segment (i.e. solar) begin to ease. AVGO was discussed in the monthly section above.

The Fund held a 17.4% cash weighting at month-end. We continue to believe the path of Fed rate policy is the number one factor impacting investors’ decisions. The banking crisis highlighted how quickly investors are willing to rotate back into long-duration stocks if interest rates begin to fall. That said, the prospects of a recession have arguably strengthened and we expect elevated volatility going forward. 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 March 31, 2023:
Caldwell U.S. Dividend Advantage Fund (Series F): 1 Year: 3.6%, 3 year: 12.1%, 5 year: 9.6%, Since Inception (June 19, 2015): 8.3%.
S&P500 Total Return Index: 1 Year: 0.0%, 3 year: 16.6%, 5 year: 12.3%, Since Inception (June 19, 2015): 12.4%.

²Actual investments, first purchased: MSFT 2/2/2023, FDX 2/9/2023, AVGO 11/15/2022.
All data is as of March 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: April 20, 2023.