Q2 2019 | Caldwell U.S. Dividend Advantage Fund Commentary

Market Overview

In the second quarter of 2019, U.S. equities posted lower returns compared to the first quarter. The S&P 500 closed the quarter up 2.2% as the yield curve remained inverted and the equity markets increased their expectations for U.S. Federal Reserve rate cuts.

Performance Summary

  • Over the second quarter of 2019, the U.S. Dividend Advantage Fund, Series F returned 3.6%* compared with the 2.2% return of the S&P 500 index.**
  • The outperformance relative to its benchmark during the quarter was largely a result of allocations to Health Care, Consumer Staples and Information Technology.

Contributors to Performance

  • Outperformance in the Consumer Staples sector was mainly attributed to our position in Tyson Foods Inc. (“Tyson”) which was our largest holding. Tyson returned 14.0% in the quarter, outperforming the S&P 500 this quarter by 12.3%. We remained overweight on Tyson given its low valuation and improving fundamentals. Tyson had been impacted by the trade war as pork inventories had risen significantly in the U.S. which hurt their margins. Tyson is expected to benefit from pork price increases as China continues to battle with African Swine Fever.
  • Outperformance in the Healthcare sector was mainly attributed to a position in Cooper Companies Inc. (“Cooper”) given its strong growth in the contact lens market and their ability to grow market share. Cooper returned 11.2% in the quarter, resulting in a 9.6% outperformance. Cooper reported a strong 2nd quarter and paid down debt significantly. Cooper is positioned for strong long-term growth from its acquisition of PARAGARD and also its brands in the Cooper Vision segment.
  • A key contributor to the outperformance of the Information Technology sector was Motorola Solutions Inc. (“Motorola”), an end-to-end solutions provider in the public safety space. Motorola was initiated into the fund last quarter and continues to be one of our top performers. It returned 16.2% in the quarter, resulting in a 14.6% outperformance. Motorola reported a strong Q1 with record first-quarter revenues, key contract wins in all segments and strong backlog. Motorola is positioned for long-term growth as it continues to shift towards an “as a service” model.

Detractors from Performance

  • Key detractors of fund performance were allocation to cash and stock selection in the Industrials and Information Technology sector.
  • A key detractor from fund performance was the cash allocation. The cash balance provided downside protection in the Q4 2018 sell-off, however like Q1, it was also a drag in Q2 performance. We believe the cash balance helps preserve capital in a volatile market, and provides us with the ability to deploy capital when high quality companies present attractive valuations.
  • In the industrial segment A.O. Smith Corp. experienced a slowdown in growth as China’s economy displayed signs of weakness. Furthermore, A.O. Smith also faced negative sentiment after J Capital Research Co. Ltd., a short-seller, released a report claiming that the business operations in China were misleading and inaccurate. This caused the stock to decline more than 8% on the news.
  • In the Information Technology sector Broadcom Inc. experienced poor performance after the company reported lower-than-expected revenue and decreased its revenue guidance. Geopolitical uncertainties, broad-based slowdown in smartphone demand, and issues with sales to Huawei Technologies Co. Ltd. were causes for this poor performance.

Portfolio Activity

  • During the quarter, the fund initiated a position in Xylem Inc. (“Xylem”), the world’s largest pure-play provider of water technology. They offer a wide range of end-to-end technology solutions to serve the needs of customers in the water industry including water utilities, industrial, commercial and residential markets. Xylem was formed from the 2011 split of ITT Corporation into a stand-alone publicly traded company. Xylem is growing their Measurement and Control Solutions business which provides software to integrate with their technology products with an “as a service” model. This provides the company with more recurring revenues and increases customer switching costs. The water industry is in need for repair and replacement in North America due to its aging infrastructure. New infrastructure is being built in emerging countries such as India and China, where Xylem is well-positioned to be a beneficiary of long-term secular growth.


  • Looking forward into Q3, the fund has a strong cash balance and is well positioned to take advantage of market volatility while protecting unitholder’s capital.
  • With rates now likely to remain lower for the foreseeable future, we believe that dividend strategies could be some of the biggest beneficiaries in this type of environment. Dividend growth investing has been the foundation of our investment approach for the U.S. Dividend Advantage Fund, as these stocks typically provide an attractive risk and reward profile over the long-term. Given the lower interest rate backdrop along with attractive valuations of dividend growth stocks, we believe this is an opportune time for investors to increase their exposure to dividend funds.

* Caldwell U.S. Dividend Advantage Fund returns as at June 30, 2019: 1 Year: 6.2%, 3 year: 9.1%, Since Inception: 7.5% (Fund launched on July 19, 2015, see disclaimer)

** Fund performance is reported on a Canadian dollar, total return basis

Stock performance is reported on a Canadian dollar, price return basis.

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. Management fees have not changed and expenses will be capped such that the Management Expense Ration of the Fund will not exceed 2.45%.

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. Caldwell Investment Management Ltd makes no representations or warranties on the accuracy and completeness of the information included and sourced externally. 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 13, 2019.

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