Balanced Fund Report – March 2015

Caldwell North American Equity Strategy – Monthly Update March 31st, 2015

Portfolio Additions

Omnicom Group (OMC-us)

About the Company: Omnicom is the largest advertising and communications agency holding company in the US and second largest in the world. Omnicom’s agencies provide advertising, strategic media planning and buying, digital and interactive marketing, direct and promotional marketing, public relations and other communications services to more than 5,000 clients in over 100 countries.

Investment Thesis: We believe shares of Omnicom are attractive for several reasons. 1) Marketing is undergoing tremendous change, with big data facilitating new insights into consumer behavior and social media increasing the number of consumer touch points. However, data and touch points alone are not enough. Omnicom provides the talent to turn data into actionable consumer insights and create campaigns that effectively communicate the desired message to elicit consumer response. 2) Increasing complexity is driving customers to consolidate to multi-disciplinary providers such as Omnicom. 3) Customer relationships have historically been fairly sticky given integration with clients’ internal marketing teams. Complexity will likely increase this stickiness. 4) Omnicom’s global network of agencies is valuable to multi-national companies, which have increasingly looked to consolidate different areas of operations. 5) Management does a great job of allocating investor capital through investments in its portfolio of agencies (10 year average return on capital of 13.5%; ROE of 24%). 6) High variable costs allow management to quickly adjust to changing demand environments. This allowed the company to maintain strong profitability during the recession. 7) The valuation (11.2x ebit) and free cash flow (5%+) are attractive.

Portfolio Deletions

WestJet (WJA-t)

Reasons We Sold the Stock: We began selling WestJet at the end of March. We were expecting the stock to perform better given upside on growth drivers and benefits from lower jet fuel prices. However, we had the stock on a tight leash as WestJet and other airlines started reporting over-capacity in certain markets in Q4. Given overcapacity is what kills airlines, we did not want to gamble on owning an airline through the cycle. We sold the remaining position following WestJet’s March traffic report, which showed the weakest traffic growth and load factor (capacity utilization) results in over a year.

Company Updates: A Few Highlights

U.S. companies have started to report Q1 earnings. Recent weakness in economic data and a strong U.S. dollar tempered growth expectations going into the quarter. CSX Rail, Citigroup and W.W. Grainger are holdings that have reported thus far. In all cases, the companies are executing well in challenging operating environments. We will highlight specific companies in next month’s note.

We appreciate your continued support. Please feel free to contact us at any time.

Best Regards,
Investment Management Team.