September 2022 | Caldwell U.S. Dividend Advantage Fund Commentary

For the month of September, the Caldwell U.S. Dividend Advantage Fund (“UDA”) gained 0.3% versus a decline of 4.7% for the S&P 500 Total Return Index (“Index”)¹. Every sector within the Index reported negative returns; at the sector level, Health Care, Financials and Consumer Discretionary were relative outperformers while Real Estate, Communication Services and Information Technology were underperformers. Investors are grappling with persistent inflation, higher interest rates and increasing odds of a recession, which is driving positioning away from higher valuation growth/tech companies towards more defensive sectors. To that end, the Fund’s performance benefited from exposure to the Health Care sector, and Staples-like companies within the Consumer Discretionary sector during the month and third quarter of 2022 (“3Q22”), in addition to higher levels of cash.

Top performers in the month of September were Cheniere Energy (“LNG”, +8.7%), Dollar General (“DG”, +6.0%) and Northrop Grumman (“NOC”, +3.2%). Russia’s invasion of Ukraine has led to notable supply-demand imbalances and energy instability in Europe, particularly for natural gas ahead of the winter months. Given these imbalances and seasonal factors, global natural gas prices have surged and LNG - as the fourth largest global producer of liquefied natural gas - is expected to benefit from increased demand as Eurozone countries look to build energy stockpiles from alternate sources. DG is benefiting from higher demand as consumers pressured by inflation trade down to less expensive everyday goods and food items. NOC benefited from continued momentum in contract awards, robust spending on U.S. space endeavors and fund flows into defence names given the likelihood of protracted conflict in Ukraine.

For 3Q22, UDA gained 6.0% versus a gain of 1.3% for the Index. LNG was also a top performance contributor in 3Q22, in addition to Murphy USA (“MUSA”, +25.9%) and Cigna (“CI”, +12.6%). MUSA’s remodeling efforts and recently acquired know-how in non-fuel categories are helping drive merchandise margins higher, while fuel volumes should benefit from declining gas prices and a rebound in vehicle miles travelled. CI reported strong second quarter earnings and continues to benefit from pricing actions and improving medical cost trends, both of which should support improving margins over time. Leading detractors of performance in 3Q were L3 Harris (“LHX”, -7.9%), Home Depot (“HD”, +7.9%) and Church & Dwight (“CHD”, -17.6%). LHX reported weak earnings and lowered full year guidance to the bottom end of its prior range as visibility into the second half of 2022 deteriorated. Overall, the company’s supply chain recovery is taking longer than expected. Despite these issues, order momentum remains robust and we still believe LHX has some of the best exposure to high growth areas of the U.S. Defence budget which should support peer-leading top line growth over time. HD reported relatively in-line earnings results and top-line growth is trending above pre-COVID averages. Investors are concerned about rising mortgage rates and their impact on HD’s growth prospects as housing turnover is a key driver of repair and remodel demand. CHD reported mixed earnings results and lowered full year guidance on incremental cost headwinds. The Fund exited its positions in HD and CHD during 3Q22.

As of this publication, the S&P 500 is down more than 20% year-to-date (“YTD”), with every sector except energy recording negative returns. While part of the Fund’s YTD outperformance is attributable to its defensive positioning and elevated cash holdings, we also believe the results reflect its unique strategy of applying a momentum-driven investment approach focused on well-managed, dividend growth companies. Over the long run, 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 dividend growth investing, which has been foundational to the Fund’s investment approach, 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 fund returns are in respect of Series F.
Standard performance as at September 30, 2022:
Caldwell U.S. Dividend Advantage Fund Series F: 1 Year: 2.7%, 3 year: 8.8%, 5 year: 9.0%, Since Inception (June 19, 2015): 8.5%.
S&P500 Total Return Index: 1 Year: -8.3%, 3 year: 9.5%, 5 year: 11.3%, Since Inception (June 22, 2015): 11.3%.

²Actual investments, first purchased: NG 7/22/2022, DG 5/9/2022, NOC 5/9/2022, MUSA 10/14/2021, CI 11/14/2019, LHX 12/2/2015, HD 7/24/2015, CHD 9/25/2020.

All data is as of September 30, 2022 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 17, 2022.