The Caldwell U.S. Dividend Advantage Fund Series F (“UDA”) and the S&P 500 total return index (“Index”) returned -1.1%1 in the month of May. The cyclical recovery trade remained well under way during the month as Energy (+3.9%), Materials (+3.3%) and Financials (+2.9%) materially outperformed on the back of ramping global trade, rising commodity prices and robust capital market activity. Additionally, easy year over year comparisons supported a strong earnings season with at least 80% of companies across these sectors beating expectations. When combined with positive management outlooks, investors continue to gain comfort shifting into these sectors.
On the flip side, 2020’s winners such as Consumer Discretionary (-5.5%), Information Technology (-2.7%) and Communication Services (-1.9%) were among the weakest performers. While the majority of companies in these sectors also delivered strong earnings beats, investors appear to be less comfortable with valuation levels of COVID-19 winners and question how durable COVID-related tailwinds will be once stimulus effects wear off.
Top contributors to UDA performance in May were Motorola Solutions (“MSI”; +7.1%), Alimentation Couche-Tard Inc. (“ATD.B”; +4.6%) and L3Harris Technologies (“LHX”; +2.8%)2.
MSI is a leading provider of land mobile radios, security cameras, and mission-critical command center software primarily used by first responder/law enforcement, hospitality & entertainment and education end markets. The business is recovering with the economic reopening, particularly as the sales cycle gets back to normal. More importantly, the latest U.S. stimulus plan (which includes roughly $350 billion to State and Local governments) provides a multi-year growth tailwind as governments embark on a product refresh cycle. The blacklisting of two Chinese firms from the U.S. and other Western democratic nations is providing a tailwind to the fixed video security business. Lastly, the company announced a $2 billion top up to its existing share repurchase program.
ATD.B is one of the largest convenience store and fuel retailers in North America with over 16,000 locations. Recent data suggests U.S. fuel demand has recovered to roughly 95% of pre-pandemic levels and fuel volumes should see further upside given expectations for a strong domestic travel season in North America. ATD.B also successfully completed the first phase rollout of its Fresh Food, Fast initiative which helps drive increased traffic and basket sizes relative to in-market stores without the program. The company aims to double the size of the program to 3,000 stores over the coming months but will continue to expand into 2022 and beyond.
LHX, the 6th largest U.S. defence contractor, specializes in high-tech systems for major defense platforms as well as other products like tactical radios and aerospace-related equipment. The company’s first quarter results beat estimates and strong margin performance led to a full year guidance raise. LHX is making progress on a potential $7 billion revenue pipeline over the next three years, winning 8 new awards in 2021 to date worth roughly $400 million. Other key growth drivers such as tactical radio modernization programs at the U.S. Department of Defence and internationally continue to ramp which provides a steady growth tailwind over the next 3 years. Lastly, LHX trades at a roughly 25% valuation discount to the Index which could narrow over time if the growth to value rotation trade persists.
1Standard performance as at May 31, 2021:
Caldwell U.S. Dividend Advantage Fund Series F: 1 Year: 12.1%, 3 year: 10.2%, 5 year: 10.8%, Since Inception (June 19, 2015): 9.0%.
S&P500 Total Return Index: 1 Year: 22.6%, 3 year: 15.2%, 5 year: 15.3%, Since Inception (June 19, 2015): 14.2%.
2Actual investments, first purchased: MSI - 1/28/2019, ATD.B - 9/3/2020, LHX - 10/29/2019.
All data is as of May 31, 2021 sourced from Morningstar Direct, unless otherwise indicated. Fund returns are from Fundata. 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: June 11, 2021.