U.S. Dividend Advantage Fund Reports

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.

Outlook

  • 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.

Q1 2019 | Caldwell U.S. Dividend Advantage Fund Commentary

Market Overview

    In the first quarter of 2019, U.S. Equities recovered remarkably following the worst quarterly performance seen in more than seven years. The S&P 500 closed the quarter up 13% as the U.S. Federal reserve (“the Fed”) took a more dovish stance in March by announcing that interest rate hikes were essentially off the table for the remainder of 2019. Markets were further driven higher as concerns around trade tensions eased as President Trump communicated positive outcomes from negotiations with China and therefore, delayed increasing tariffs.

Performance Summary

  • Over the first quarter of 2019, the U.S. Dividend Advantage Fund, Series F returned 8.6%* compared with the 10.93% return of the S&P 500 index.**
  • The underperformance relative to its benchmark during the quarter was largely a result of cash drag and an overweight allocation to Health Care and Consumer Discretionary sectors.

Contributors to Performance

  • Key contributors to the fund’s performance relative to the benchmark were allocations to Consumer Staples and Information Technology.
  • The outperformance in the Consumer Staples sector was mainly attributable to our overweight position in Tyson Foods Inc. which was our largest holding given its low valuation and improving fundamentals. Tyson returned 30% in the quarter, outperforming the S&P 500 by an incredible 17%. Tyson’s valuation had been impacted by the trade war as pork inventories had risen significantly in the U.S., hurting their pork margins. The chicken market had also been under pressure but showing signs of improvement. In Q1 Tyson mentioned that there could be significant upside to pork prices as China has been battling African Swine Fever, which is spreading throughout the country. If this continues and is unable to be controlled, there could be a global shortage of pork, as China is the largest producer and consumer of pork globally. This could also have an impact on other protein prices as consumers substitute to chicken and beef. Management believes this could provide significant upside to their business as they are one of the largest protein processors in the world.
  • The outperformance in Information Technology was mainly attributable to an overweight in Broadcom Inc. and Motorola Solutions Inc.
  • Broadcom returned over 18% in the quarter and outperformed the S&P 500 by over 5%. Broadcom’s valuation had been impacted by its acquisition of CA Technologies in July 2018 as the market had not expected the company to announce any large acquisitions. There were also concerns regarding the strategic fit of CA Technologies as they are a software company and Broadcom is known as a hardware provider. Shares have since recovered as management communicated the strategic rationale for the acquisition and gave synergy and growth targets which were above investor’s expectations.
  • Motorola Solutions returned 22% in the quarter, resulting in 9% outperformance. Motorola reported a strong Q4 and gave very strong 2019 guidance which resulted in the shares being up 14% on the day. Motorola is one of few providers that can offer a true end-to-end solution for Public Safety customers within a highly mission critical environment. Motorola is positioned for strong long-term growth.

Detractors from Performance

  • Key detractors of fund performance were allocation to cash and stock selection in the Consumer Discretionary and Healthcare sector.
  • The largest detractor from fund performance was the cash allocation in Q1. The fund did a good job protecting the downside during the Q4 2018 sell-off, however the cash balance was a 1.5% drag to performance in Q1 2019. 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.
  • Individual detractors were Booking Holdings Inc., which is an Online Travel Agency (“OTA”) that provides consumers with airline and accommodation reservations. Booking experienced company specific issues regarding increased marketing spend and weakness tied to their European business which is currently their largest market.
  • In the healthcare sector, CVS Health Corp, an integrated healthcare company, experienced poor performance due to challenges around reimbursement rates for drugs, uncertainty around new government policy proposals, and execution risks around the company’s transformation from a traditional pharmacy to an integrated healthcare company. We believe CVS is positioned to be a leader in the integrated care delivery space and will disrupt the primary care market as they roll out new store formats focusing on consumer healthcare.

Portfolio Activity

  • During the quarter, the fund initiated a position in Medtronic PLC and Motorola Solutions Inc.
  • Medtronic is one of the largest medical device companies in the world with a focus on heart disease which is the number one cause of death globally. With their recent acquisition of Covidien (another large global medical supply company), Medtronic has increased their importance in the global medical device supply chain as the industry continues to consolidate. Growth is expected to accelerate as key product launches begin to contribute and as access to healthcare improves around the world. The company generates significant free cash flow and has a strong history of dividend increases with a 5-year compounded annual growth rate (“CAGR”) of over 12%.
  • Motorola Solutions Inc. is an end-to-end solutions provider in the public safety safe. They offer a full range of mission critical products and services from first responder radios to full command centre communications in one aggregated and auditable system. Motorola’s software solutions are shifting to an “as a service” model which provides the company with more recurring revenues and increases customer switching costs given the heavy integration required and the high cost of failure. The company’s strong balance sheet and cash flows support future business growth, dividend growth (13% CAGR over the past 5 years), and share repurchases (10% CAGR over the past 7 years).

Outlook

  • Looking forward into Q2, 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 March 31, 2019: 1 Year: 10.0%, 3 year: 8.3%, Since Inception: 7.1% (Fund launched on July 19, 2015, see disclaimer).
** Canadian Dollar Returns

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: June 24, 2019.

December 2017 | Caldwell U.S. Dividend Advantage Fund Report

Management Update TMX: UDA.UN December 2017

Dear Investor,

Equity markets in the United States (S&P500) rose 2.8% to finish November. Canada was nearly flat with gains of 0.3% (S&P/TSX Composite Index) even as oil (“WTI”) continued its march upward of 5.6%. Europe (Euro Stoxx 50) lost 2.8% while Japan (Nikkei 225) added 3.2%.

There is an old Chinese proverb that translates roughly to English as “May you live in interesting times”. The adage is typically used with a degree of irony as “interesting” can also mean a lack of stability, possibly crisis, but in the case of 2017 it has been both interesting and profitable.

2017 will be tough to leave. This has been one of the greatest years for the U.S. equity markets ever. The good news is that there is reason to believe that the good times will continue into the first half of 2018. The Federal Reserve (“The Fed”) painted a very rosy picture of the U.S. economic growth in their December meeting which gives us great optimism for 2018. General Domestic Product (“GDP”) appears to be growing at a very healthy pace as Real GDP has grown by over 3.0% in the last two quarters as measured by the U.S. Bureaus of Economic Analysis (chart below).

UDAComm-real-gdp

Three things should help keep U.S. GDP above the 3% level for the next two quarters. The first is that energy prices have strengthened globally. 2015 had major headwinds from energy prices collapsing and lead to widespread bankruptcy and job losses. S&P 500 earnings per share (“EPS”) were also dinged as energy companies booked large asset write downs along with poor revenues. Now, U.S. energy firms are as strong as ever. Thanks in part to increased technological efficiencies in shale drilling and the ability of American energy firms to now export oil to foreign markets. This will be a major source of job growth in 2018 for the American labour market and a significant boost to S&P 500 EPS. 

UDAComm-operating-share

Source: Yardini and Associates

The second is that inflation, as measured by Personal Consumer Expenditures (“PCE”), remained below 2% in October, lower than levels early in the year. While energy and housing should accelerate inflation data in the back half of 2018, for now it appears to be muted. This will temper investors’ fears that the Fed will act aggressive and raise rates more than their forecasted three interest rate increases in 2018. Currently, survey based measures of longer run inflation have changed little on balance. We believe inflation is underestimated by the market but in the near term it should be fine. Once PCE and wage growth remain above 2% in tandem for two consecutive quarters then the market should adjust and the yield curve might invert. Until then, party on!

Third, the job market is booming south of the border. Total nonfarm payroll employment increased strongly in October and November. The national unemployment rate fell to 4.1%, one of the lowest levels in the past thirty years! A strong labour force is absolutely essential to a U.S. economy. As two-thirds of the U.S. economy is consumption, having a strong labour force should cause this segment of the economy to rise. Americans have spent the last decade deleveraging from the housing mania that gripped the country before the great financial crisis. Now, America is near full employment, their banks are willing to lend after passing all the Fed’s stress tests for the first time since 2009, and their citizens are beginning to buy homes again. Housing prices and new homes sales will continue to rise in 2018 thanks to the labour market. Wage gains still remain modest as average hourly wages rose 2.5% but as companies begin to compete for workers, this number should rise.

UDAComm-civilian

Source: Federal Reserve of St. Louis

The Canadian economy has also enjoyed a fabulous 2017. GDP for Canada is on pace for 3% growth for the year which would be the strongest among the Group of Seven (“G7”) economies. Incredibly, as of November 2017, 350,000 jobs have been created in Canada so far this year (this is the same as 3.5 Million jobs in the U.S. – an absolutely staggering number!). Canada is now starting to see signs of life in business investment thanks to a strong recovery in oil and mining. Precious and Industrial metals such as copper, zinc, iron ore, and gold have all had strong years that have helped rebound a long suffering sector of the Canadian economy. High house prices and household debt still remain concerns. More than 80% of household debt is comprised of mortgages and home equity lines of credit (“HELOCs”). HELOCs have been convenient for households to access increasing net worth tied to rising home values but increase vulnerability in the financial system in case of a housing shock. The Bank of Canada (“BoC”) has taken measures to increase lending standards and strengthen the financial system. It will be interesting to see in 2018 how the housing market responds to these new standards and how the Canadian economy holds up to them.

UDAComm-world-oil

Source: International Energy Agency

In energy markets, the Organization of Petroleum Exporting Countries (“OPEC”) and Russia have surprised the markets with the success of their alliance. Oil continues to rise to price levels not seen since 2014, but should bring some challenges with it in 2018. U.S. production will continue to rise as energy prices increase which will grow American market share. This will most likely cause discontent among OPEC and Russian companies as they see American firms bring in record profits and production. It is unlikely production cuts will continue in the second half of 2018, however, even this may not be enough to stem the rise of energy prices. Large scale energy projects take as long as a decade to come into production and current OPEC nations have greatly underfunded capital investment in current projects. Global demand is up over 4 million barrels a day in the last three years, with huge consumption gains in both China and India that do not appear to be dissipating any time soon. 2018 should be an interesting year indeed for the energy markets.

We believe that 2018 will be another strong year for investors but will not be free of challenges. We believe U.S. dividend-paying equity securities that possess a combination of low volatility and high profitability will significantly and disproportionately benefit from the continued U.S. economic expansion.

Unitholders are reminded that the Caldwell U.S. Dividend Advantage Fund offers a Distribution Reinvestment Plan (“DRIP”) which provides Unitholders with the ability to automatically reinvest distributions and realize the benefits of compounded growth. Unitholders can enroll in the DRIP program by contacting their Investment Advisor.

 

20180109_UDAComm

November 2017 | Caldwell US Dividend Advantage Fund Report

 November 2017 Caldwell Management Update 

TMX: UDA.UN 

 From Caldwell Investment Management Desk:

Dear Investor, 

Equity markets in the United States (S&P500) rose 2.2% to end October. Canada was up 2.5% (S&P/TSX Composite Index) as oil (“WTI”) ascended 5.2%. Europe (Euro Stoxx 50) gained 2.2% while Japan (Nikkei 225) added 8.1%. 

It has now been one year since the election of President Trump and what a long, strange trip it has been. To say that the performance of financial assets over the last twelve months has exceeded expectations would be a gross understatement. The S&P500 has added close to 450 points and well over $2 trillion of market value to its underlying companies. Markets initially soared after the election on hopes of tax reform but have been propelled by excellent corporate earnings from synchronized global growth. The market has shrugged off the political uncertainty of populism in Washington and focused on the backdrop of low inflation, cheap money and strong profits. 

UDA_Commentary-Thousand-persons

21Source: Federal Reserve of St. Louis

Low U.S. inflation has given the Federal Reserve (“The Fed”) the ability to keep interest rates low and lower unemployment. The Fed has surprised itself at the duration of prolonged low rates. Over the last few years, Fed members have made predictions on the future path of interest rates and have been way off. Luckily, this current Fed has been data dependent and has opted to keep rates low than stubbornly follow through on its forecasts. 

Historically inflation tends to be a lagging indicator, often not peaking until well into a recession. Currently housing and energy prices (as represented by the S&P/Case Schiller National Home Price Index and the Consumer Price Index for All Urban Consumers: Energy) are up 6.1% and 6.4% respectively in the last twelve months. These should both work their way into inflation numbers giving the Fed ammunition to raise interest rates in 2018. The Fed will most likely be cautious and wait for U.S. inflation to be above 2.0% for a sustained period of time before acting. However, it appears inflation is coming nonetheless. Until then, the U.S. economy is healthy, growing and on a footing of accommodative monetary policy. The managers of the Fund still favour cyclical sectors of the economy over defensive in this environment, but are monitoring inflation as a bellwether for global equity markets. 

UDA_Commentary-rolling

Source: Federal Reserve of St. Louis

The North American Free Trade Agreement (“NAFTA”) is in the process of being renegotiated by all three parties with little progress being made. The White House is pushing hard for reforms to NAFTA in manufacturing, especially auto production . The U.S. is asking for automobiles to have 85% North American parts in every North American made car, up from 62.5%. The White House also wants 50% of all cars produced under NAFTA built in the U.S. Both of these demands align with President Trump’s voter base in Midwestern states. The U.S. wants to reverse the trend of high tech Asian parts (and jobs) making their way into North American auto production. This congress between Mexico, Canada and the U.S. is far from over. Ultimately, NAFTA has been a real winner for all three nations but certain regions have been economically hurt. Concessions from Mexico and Canada should come to maintain the agreement. Until then expect to see heightened volatility in the Canadian Dollar, since the U.S. is by far Canada’s largest trading partner and any disruption on trade will be initially viewed as negative. This sell-off will most likely be temporary as Canada is a net importer of manufacturing and a major exporter of energy to the U.S. which should stabilize the exchange rate. 

The Organization of the Petroleum Exporting Countries (“OPEC”) and Russia are set to meet at the end of the month. The organization is set to discuss extending the current production cuts for another nine months. Saudi Arabia appears to be in favour of this extension as it prepares to sell off a part of its national oil company, Saudi Aramco. The Saudi Kingdom wants to use the proceeds from the sale to invest in public infrastructure to help diversify its economy away from oil production. The wild card is Russia. They are viewed to be in no rush to extend cuts, rather see how current cuts play out. Recent Saudi-Russia relations indicate that the Russians will support their Saudi friends but is not official. 

Managers of the Fund at Caldwell Investment Management believe that the energy sector will be a strong performer in 2018. WTI prices holding firmly above $50 is a major turning point for the financial health of exploration and production companies. One company in particular that will benefit from this increase in WTI is Occidental Petroleum (NYSE:OXY). Occidental is U.S. based exploration and production company. OXY is the largest operator in the Permian Basin, producing over 300,000 barrels of oil equivalent (“boe”) in the region (OXY produced 633,000 boe in Q3 2017). OXY is set to increase the number of wells it has in the Permian Basin to 44 from 28 in Q4 2017. These wells are in some of the best strategic zones of the Basin and expected to yield 20-30% more boe than peers. OXY has been laser focused on costs, driving down operating expenses per boe to $8.14 a barrel which is a decrease of 37% since 2014. 

UDA_Commentary-pathway

Source: Occidental Investor Relations

Coming through the last three years of pain in the oil sector has made OXY into an incredibly efficient operator. Currently OXY is well on its way to being cash flow neutral at $40 a barrel (dividend with flat production). At $50 a barrel, management expects that production can grow between 5-8%. Now that the U.S. has allowed for the exportation of domestic oil, OXY is one of the few companies in the U.S. with a clear path to growing production with internally generated cash flow. 

We believe that energy stocks such as OXY will be a strong performer in 2017 and 2018. We believe U.S. dividend-paying equity securities that possess a combination of low volatility and high profitability will significantly and disproportionately benefit from the continued U.S. economic expansion. 

Unitholders are reminded that the Caldwell U.S. Dividend Advantage Fund offers a Distribution Reinvestment Plan (“DRIP”) which provides Unitholders with the ability to automatically reinvest distributions and realize the benefits of compounded growth. Unitholders can enroll in the DRIP program by contacting their Investment Advisor. 

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice. The author makes every effort to ensure that the contents herein have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. However, the author makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to the author, which is not reflected herein. This report is for information and discussion purposes only and must not be construed as an offer to sell, or solicitation for, or an offer to buy, any securities. This report should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented herein, is obtained from sources we believe reliable, but we assume no responsibility for information provided to US from third parties. Caldwell Investment Management Ltd. and Caldwell Securities Ltd. are wholly-owned subsidiaries of Caldwell Financial Ltd. Officers, Directors and employees of Caldwell Financial Ltd. and its subsidiaries may have positions in the securities mentioned herein and may make purchases and/or sales from time to time. 

You will usually pay brokerage fees to your dealer if you purchase or sell units of the Fund on the Toronto Stock Exchange (TSX). If the units are purchased or sold on the TSX, investors may pay more than the current net asset value when buying units of the Fund and may receive less than the current net asset value when selling them. 

There are ongoing fees and expenses associated with owning units of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the Fund in these documents. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. 

Certain statements herein are forward-looking statements, including those identified by the expressions “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend”, “feel” and similar expressions to the extent they relate to the Fund. Forward-looking statements are not historical facts but reflect the current expectations of the author regarding future results or events. Such forward-looking statements reflect the author’s current beliefs and are based on information currently available to it. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results, distributions, or events to differ materially from current expectations. Some of these risks, uncertainties and other factors are described in the Fund’s prospectus. Although the forward-looking statements contained herein are based upon assumptions that the authors believe to be reasonable, the authors cannot provide assurances that actual results will be consistent with these forward-looking statements. The forward-looking statements contained herein were prepared for information and discussion purposes only and may not be appropriate for other purposes. The Caldwell Investment Management Ltd. assumes no obligation to update or revise them to reflect new events or circumstances, except as required by law. 

The Fund may or may not continue to own the securities referenced herein and, if such securities are owned, no representation is being made that such securities will continue to be held. Investing in the Fund is subject to risks as further described in the Fund’s public disclosure documents, including the Fund’s prospectus. No part of this material may be reproduced in any form, or referred to in any other publication, without the author’s express written permission. 

20171124_UDA_Commentary

October 2017 | Caldwell US Dividend Advantage Fund Report

Management Update TMX: UDA.UN October 2017

Dear Investor,

Equity markets in the United States (S&P500) rose 1.9% in September. Canada was up 2.8% (S&P/TSX Composite Index) on the back of an impressive 9.4% increase in the price of West Texas Intermediate oil (“WTI”). Europe (Euro Stoxx 50) and Japan’s (Nikkei 225) equity markets were also quite impressive, rising 5.1% and 3.6% respectively.

U.S. markets continue to hit fresh all-time highs. Equity investors brushed off the downward adjustment in third quarter earnings estimates partly due to Hurricanes Harvey and Irma. Investors are looking past the near term effects of the recent hurricane season and towards President Trump’s tax plan. The tax plan cleared a key hurdle in Congress this month and tax cuts would certainly give the market a boost if they passed.

The Federal Reserve (“The Fed”) released their Beige Book this month and it revealed a well anchored economy despite lost ground from weather related disruptions in September. The data compiled in the last Beige Book showed a strong economy underpinned by a strong labour market, increased business capital spending, and a steady upswing in housing. All this data supports the Fed raising interest rates in December. Markets are now pricing in a near 100% chance of 25 basis point interest rate hike at its December meeting. Consensus now is that President Trump will choose John Taylor as the next Fed Chair, replacing current chair Janet Yellen. Many view Mr. Taylor as a hawk in the same camp as Ms. Yellen. He will most likely stay the course of the four more rate hikes between now and the end of 2018. This has caused bond yields to rise in the United States and edged the U.S. dollar higher against most world currencies. The market is currently pricing in around two interest rate hikes by December 2018. The appointment of Mr. Taylor should increase that expectation and cause the U.S. Dollar to appreciate.

UDACommentary-Trade-US

Source: Federal Reserve of St. Louis

Global energy markets are strengthening. WTI has steadied above $52 a barrel as U.S. crude oil inventories have declined 46 million barrels since mid-September. The large outage of refineries in the gulf coast due to hurricane damage has impacted gasoline and distillates. In the third week of October gasoline and distillate inventories dropped by 5.5 and 5.2 million barrels respectively. This outage in refinery capacity in combination with steady increases in total miles driven has helped energy inventories back towards levels pre-2014. WTI prices should also get a boost as Saudi Arabian Crown Prince Mohammed bin Salman backed the extension of Organization of the Petroleum Exporting Countries (“OPEC”) production cuts beyond March 2018, making it all but certain that the cartel and its allies will rollover curbs when OPEC meets next month.

It has been two years since the U.S. federal government ended a decades old restriction on crude oil exports. Now the U.S., long the world’s largest oil consumer, is on track to surpass Nigeria and Venezuela to become one of the world’s ten largest oil exporters. Helped by OPEC production cuts, the abundance of shale oil from western Texas paved the way for a surge in U.S. exports. Shipments are likely to reach a record 2 million barrels a day (“MM b/d”) this quarter while U.S. oil production will reach 9.9 MM b/d in 2018, also the highest in history. Output from the Permian basin in Texas alone is expected to reach 2.7 MM b/d in November, up more than half a million barrels from a year before.

The U.S. is relying less and less on OPEC for its energy needs and is now becoming a direct competitor for market share. U.S. foreign policy in the Middle East has evolved from explicitly benevolent to implicitly threatening from Saudi Arabia’s perspective. The U.S., until recently, has been a major supporter of the Saudi Kingdom. From an American geopolitical perspective, the relationship made sense: Saudi Arabia gave the U.S. a dependable energy supply and in return U.S. would supply them with state-of-the-art armaments and U.S. military would maintain an active presence in Middle East. This stance has changed in the last decade. The U.S. has been deleveraging from the Middle East since 2008. Back then troop levels peaked at 250,000 and have now dropped to below 50,000. American withdrawal in the Middle East have given the Saudi’s reason to pivot towards an alliance with the Russians. Russia and Saudi Arabia both fear American expansion into the oil market and with their new alliance, the Saudi’s have replaced their American military alliance with Russia. This is important because previously Russian involvement with OPEC cuts were met with healthy skepticism; Russia never complied with previous OPEC and non-OPEC production cuts. This skepticism has diminished as Russian production has come down by 300,000 b/d from Q4 2016. Now it appears that the Saudi-Russian relationship is deepening to include military and economic partnerships. This foray into the world energy markets by the U.S. could have much deeper geopolitical meaning. The U.S. is slowly releasing its military hegemony with the rise of China and strengthening of Russia. Leaving the Middle East could be the first of many changes to come in the global economy.

The Bank of Canada (“BoC”) kept interest rates unchanged at their meeting in October. The BoC cited low inflation from a strong Canadian Dollar (“CAD”) and North American Free Trade Agreement (“NAFTA”) uncertainty. The appreciation of CAD was featured prominently in the policy statement. The BoC is concerned that a strong CAD will slow inflation and hurt export growth. The BoC still cites concerns about Canadian personal debt levels and is still waiting to see how the two previous rate hikes permeate through the economy. Before the BoC decides to move again, there will have to be some clarity regarding NAFTA and its associated trade policies. One external factor that could change the BoC is a strengthening oil market. This will greatly help out the struggling province of Alberta and should cause our dollar to appreciate. If CAD appreciates for this reason, the BoC might continue to hold back on rate hikes for the time being.

The Information Technology sector has been the best performing sector in the S&P 500 year to date (“YTD”). At the end of September, the U.S. Dividend Advantage Fund (“the Fund”) had 14.7% of Net Assets in this sector. One of the strongest performers within this sector for the Fund has been Microsoft (NASDAQ: MSFT). MSFT reported fiscal first quarter earnings this week and beat market expectations by a hefty margin. MSFT is now a major player in the cloud computing business. Cloud Revenue has increased 55% Yearover-Year (“YoY”) to eclipse the lofty $20 Billion USD goal set by management in 2015. Cloud gross margins increased dramatically from 52% to 57% due to high operating leverage within the business. It is possible that Microsoft could double its cloud revenue within the next three years and from its economies of scale, greatly increase margins. Windows and Office revenues should stay flat for MSFT but remain healthy cash cows for years to come. Free cash flow for the quarter (”FCF”) grew 10% YoY and was over $10 billion for the quarter. Microsoft returned $4.8 billion to shareholder in the form of dividends and share repurchases while still leaving them with a healthy source of funds to reinvest in its business. MSFT also is seeing the benefits of their LinkedIn acquisition with the division contributing $1.1 billion of revenue this quarter. LinkedIn gives MSFT the potential to take on Salesforce.com’s dominance in the cloud Client Relationship Management market and improve MSFT’s market share. This goes along with MSFT moving from selling hardware towards recurring revenue business lines. MSFT has reshaped its business from cloud computing, artificial intelligence, and edge computing.

UDACommentary-Intelligent-cloud

Source: Microsoft Investor Relations

We believe that technology stocks such as MSFT will be a strong performer in 2017 and beyond. We believe U.S. dividend-paying equity securities that possess a combination of low volatility and high profitability will significantly and disproportionately benefit from the continued U.S. economic expansion.

Unitholders are reminded that the Caldwell U.S. Dividend Advantage Fund offers a Distribution Reinvestment Plan (“DRIP”) which provides Unitholders with the ability to automatically reinvest distributions and realize the benefits of compounded growth. Unitholders can enroll in the DRIP program by contacting their Investment Advisor.

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September 2017 | Caldwell US Dividend Advantage Fund Report

Management Update TMX: UDA.UN September 2017

Dear Investor, Equity markets in the United States (S&P500) were mostly unchanged at the end of August, moving up 0.1%. Canada (S&P/TSX Composite Index) gained 0.45%. Europe (Euro Stoxx 50) fell 0.8% and Japan (Nikkei 225) fell 1.4%. Crude oil (“WTI”) moved 5.9% downwards.

The Federal Reserve (“The Fed”) released its Beige Book earlier in the month. The United States (“U.S.”) economy continues to improve as economic activity expanded at a moderate pace across all districts in July and August. The report painted a good picture of U.S. economic health, as consumer spending increased in most districts, with the only dark spot being retail auto sales which has slowed. Residential real estate, weighed by low inventories of homes, continues to improve. The mix of low unemployment and low interest rates should keep this sector improving even into the fall and winter which typically slow down for the sector. The Fed views the labour market as tight, with reports of worker shortages in manufacturing and construction. This is especially good for the middle class who get the majority of their income from wages and create strong support for domestic consumption which accounts for 70% of U.S. Gross Domestic Product (“GDP”). Stronger growth in a tight economy is inflationary and monetary dynamics confirm this risk. The U.S. velocity of money has picked up meaningfully and should help inflation gather steam later in the year. Hurricane Harvey caused broad disruptions to Atlanta and Dallas districts along the coast and caused many firms to close due to flooding. Due to the effects of Harvey, a fifth of oil and natural gas production is temporarily offline. A shutdown in production will help reduce oil and gasoline inventories that have weighed on energy prices for the past two years. Overall the U.S. economy is doing well and should provide strong enough economic conditions for the Fed to continue its desired four rate hikes by the end of 2018.

China’s Communist Party will hold its 19th National Party Congress on October 18th-25th , 2017. The five-year congress serves to rotate personnel according to promotion and retirement of communist party officials. This is a critical leadership reshuffle in the high ranks of the Chinese Communist Party and government, and will also mark the half way point of General Secretary Xi Jinping’ terms in office. Investors around the globe will watch intently as slight changes in the political trajectory of the world’s second largest economy can have major implications for markets. It is expected that Xi Jinping is attempting to promote many of his supporters into important positions after having spent the last five years consolidating his position so that he can now advance and implement his political agendas further. This is important because China is pivoting from an export led economy to a consumption led one. In order to maintain social order, Xi has focused on reducing pollution, social and physical infrastructure, and strengthening the military.

The One Belt One Road Initiative by the Xi government has focused building infrastructure throughout the northern and western provinces along with Chinese trading partners. The Belt and Road Initiative is expected to bridge the ‘infrastructure gap’ and thus accelerate economic growth across the Asia Pacific area and Central and Eastern Europe. This will strengthen China’s economic power in Asia and reduce American military power in the region. Due to this, China is by far the most important consumer of commodities in the world as seen in the chart below. Outcomes from the 19th party congress will have long term effects on raw material markets which we will monitor closely.

Commentary-chinese-consumption

Source: World Economic Forum

Global oil demand is climbing in 2017. The International Energy Agency (“IEA”), which advises most G-20 economies on energy policy, recently raised its forecast that global oil consumption will rise by 1.6 million barrels per day. Global energy markets continue to rebalance with OPEC supplies falling for the first time in five months and inventories of refined fuels in developed nations falling toward average levels. Combined with the effects of Hurricane Harvey this should provide a strong environment for energy in the back half of 2017.

In Canada, the Federal government has proposed changes to taxes for Canadian controlled private corporations (“CCPC’s”) titled “Tax Fairness for the Middle Class”. The concern is that many upper middle and upper class Canadians are not paying enough in taxes through loopholes and “income sprinkling” (a process where the corporation pays out money to family members taxed at a lower marginal rate). These measures have been met with considerable push back as CCPC’s far eclipse the bourgeoisie of the Canadian population. CCPC’s the favoured tax entity of small business within Canada and provides safety nets (e.g. maternity, sick leave, pensions) for people taking risk in the economy and provide a tax advantaged shelter to save funds earned in the business to use for expansion. Simply put, small business is the backbone of the Canadian economy and changing the CCPC could have far reaching consequences. Specifically, these will negatively incentive citizens to take risk and work in the private sector. This will lead to lower economic growth as both labour and capital move to lower taxed jurisdictions, lower fixed capital investment, lower job creation, and lower taxes paid. This comes at a time when the largest province in Canada, Ontario, has moved its marginal tax rate from 48% to 54% in the last decade and electricity prices are poised to increase dramatically over the next five years. The Trudeau government is debating these changes and will give more clarity in early to mid-November 2017. There is still time for this government to walk back these proposals.

The managers added a new position to the Fund, Automatic Data Processing (NASDAQ:ADP). ADP provides business outsourcing solutions including payroll, benefits administration, human resource management, and compliance to name a few. ADP is a high quality business with predictable cash flow and growth. ADP has seen revenue growth of 6.0 % in 2017 which should improve as U.S. economics and labour force participation improve.

UDA_Commentary-Fiscal2017

Source: ADP Investor Presentation

ADP is currently improving the company competitive positioning by investing heavily in research and development to broaden their platform for clients. This gives the company considerable runway to expand current business with existing clients and provide a platform to newer, more tech savvy businesses. ADP has a very sticky client base because of how engrained they are in firm’s payroll and benefits management functions. New firms are less likely to invest in finance operations and prefer to outsource until they hit significant scale to warrant it. ADP’s upgrade of strategic platforms is bridging the gap between older bricks-and-mortar business and virtual office of the 21st century. This has been working as seen in operational margins that have increased by 600 basis points since ADP began to branch out towards a more progressive system.

We believe that technology stocks such as ADP will be a strong performer in 2017 and beyond. Fundamentals continue to support the view that the U.S. labour market continues to improve in the U.S. Economy. We believe U.S. dividend-paying equity securities that possess a combination of low volatility and high profitability will significantly and disproportionately benefit from the continued U.S. economic expansion.

Unitholders are reminded that the Caldwell U.S. Dividend Advantage Fund offers a Distribution Reinvestment Plan (“DRIP”) which provides Unitholders with the ability to automatically reinvest distributions and realize the benefits of compounded growth. Unitholders can enroll in the DRIP program by contacting their Investment Advisor.

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