Markets continued to move higher in the third quarter (“Q3”) despite worsening supply chain issues, labour shortages and rising input costs. While second quarter earnings results were particularly strong (nearly 90% of companies in the S&P 500 index beat estimates on the top and bottom lines), some management teams provided cautious near term outlooks due to the above concerns. Additionally, some Federal Reserve members expressed interest in raising interest rates from their all-time lows sooner than expected which has been a long standing tailwind for equities as an asset class.
The Caldwell U.S. Dividend Advantage Fund Series F (“Fund”) gained 2.2% in Q3 compared to 2.9% for the S&P 500 Index (“Index”)1. Leading contributors to performance were holdings in the Industrials, Information Technology and Healthcare sectors while exposure to Consumer Discretionary, Consumer Staples and Materials detracted from performance.
Contributors to Performance
Tetra Tech (“TTEK”)2 was the leading contributor of performance, gaining 25.4% in Q3. Exposure to high priority investment areas such as water and environmental projects and greater certainty of funding at the State and Local government level led management to raise their medium-term market growth outlook. The company’s proprietary data analytics software, while still a small part of the overall business, continues to see strong demand and should help drive margin upside over time. Lastly, TTEK continues to execute on its acquisition strategy noting a strong pipeline of add-on opportunities that should be accretive to earnings.
Quest Diagnostics (“DGX”)2 gained 13.1% as second quarter results beat expectations on a quicker than expected recovery in the base business, which reported its
first quarter of growth since 2019. Base testing volumes through preferred payer networks are particularly strong, which should bode well as health system utilization returns. Lastly, the Delta variant led management to raise 2021 COVID-19 testing volume guidance.
Ryder System (“R”)2 gained 14.6% in Q3 as the company continues to benefit from strong demand for its outsourced logistics services, particularly as customers look for greater flexibility in the current supply chain environment. In combination with robust pricing in its rental business, management raised full year guidance while providing a positive medium term outlook.
Detractors from Performance
Magna International (“MGA”)2 was the leading detractor of performance, declining -16.4% in Q3. Second quarter results fell short of expectations as auto production volumes continue to be impacted by the global semiconductor shortage. Consequently, limited visibility towards more normalized production levels led to a host of downward earnings estimate revisions.
Despite near term weakness, MGA stands to benefit from multi-year growth in production volumes once semiconductor shortages ease. Additionally, a growing contract manufacturing platform positions Magna to capitalize on the proliferation of EVs from both auto incumbents and newer, pure play EV start-ups while its existing advanced driver-assistance system capabilities should drive increased content per vehicle over time.
MasTec, Inc. (MTZ)2 declined -16.8%% in Q3 as second quarter revenue growth missed expectations and full year revenue guidance was reduced due to project delays. Additionally, some project challenges and growing pains due to substantially increased headcount caused margin weakness in the Transmission and Clean energy segment. Despite these issues, MasTec is seeing strong backlog growth in nearly every end market and should continue to benefit from strong demand for grid optimization, clean energy and 5G infrastructure buildouts over time.
During the quarter, the fund initiated positions in Zoetis Inc. (“ZTS”), Insperity, Inc. (“NSP”), MasTec, Inc. (“MTZ”), Ryder System, Inc. (“R”), Verisk Analytics, Inc. (“VRSK”) and Crown Holdings, Inc. (“CCK”).
Zoetis (“ZTS”) is a global leader in medicines, vaccines and diagnostic products for companion animals and livestock. ZTS is benefitting from an increase in companion animal adoption during the pandemic which should drive above-market
growth. Recent launches in breakthrough products could also enjoy an extended period of exclusivity in the U.S., further contributing to strong growth. Lastly, streamlined operations from prior restructuring efforts should continue driving modest margin expansion over the next 3-5 years.
Insperity (“NSP”) provides outsourced HR solutions to small and medium sized businesses (“SMBs”) in the U.S. Exiting the pandemic, a meaningful recovery in hiring continues to drive strong near-term results with new client wins and retention of existing clients near all-time highs. In combination with robust pricing, management raised full year guidance. Longer term, Insperity stands to benefit from continued growth in the industry given increasing regulatory complexity and a greater willingness of SMBs to outsource non-core functions.
MasTec (“MTZ”) is an infrastructure construction company focused on projects in the communications, clean energy, oil and gas and electrical transmission end markets. The company is seeing strong demand from 5G infrastructure buildouts, clean energy infrastructure and electrical grid investments while the outlook in the oil and gas division has dramatically improved over the last 6-12 months on stronger commodity pricing.
Ryder System (“R”) is a leading logistics company providing supply chain, dedicated transportation and fleet management solutions, primarily across North America. E-commerce growth and supply chain outsourcing are long term secular tailwinds while robust pricing and a tight new
truck market continue to drive strong results in the near term. A strategy shift emphasizing less capital intensive segments should improve capital intensity and cost improvement initiatives support margin upside. The result should be an improving free cash flow and return profile over time.
Verisk Analytics (“VRSK”) is a leading provider of data and analytics solutions to the U.S. P&C insurance industry as well as financial services, energy and consumer-focused end markets. Mission criticality, regular product updates and a high portion of subscription-based contracts support strong pricing power and consistent high single digit revenue growth. Historically weaker segments continue their transition to a recurring revenue model which should provide incremental improvement to top line growth over time. Lastly, a strategic review and potential divestitures could improve the overall return profile through exiting underperforming assets.
Crown Holdings (“CCK”) is a leading global manufacturer of metal beverage, food, specialty, and aerosol packaging. An oligopolistic industry structure, exposure to the consumer staples sector and contractual price protections serve as strong defensive characteristics in challenging environments. The company also benefits as aluminum cans take share from glass bottles around the globe, especially in the alcoholic beverage market.
Third quarter earnings results will be a key catalyst for markets as companies lap tough comparisons while dealing with ongoing supply chain disruptions. Pricing power has generally remained strong across most industries but worsening lead times and rising input inflation may begin to affect demand and/or erode margins, increasing the risk of negative guidance revisions. That said, we believe the Caldwell U.S. Dividend Advantage Fund, with its unique momentum-driven investment approach and focus on well-managed, dividend growth companies, is well positioned to provide strong performance in this market environment. We expect that dividend growth investing, which has been foundational to the Fund’s investment approach, will continue to provide a means of generating attractive risk adjusted returns for our investors over the long-term.
1Standard performance as at September 30, 2021:
Caldwell U.S. Dividend Advantage Fund Series F: 1 Year: 15.1%, 3 year: 10.7%, 5 year: 9.7%, Since Inception (June 19, 2015): 9.4%.
S&P500 Total Return Index: 1 Year: 23.3%, 3 year: 15.22%, 5 year: 16.04%, Since Inception (June 19, 2015): 14.8%.
2Actual investments, first purchased: DGX 11/16/2018, MGA 3/30/2021, MTZ 7/7/2021, R 7/7/2021, TTEK - 9/25/2020.
All data is as of September 30, 2021 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: October 20, 2021.