Author: Cole Heideman

Performance Summary

From a return perspective, US Equity Strategy portfolio underperformed the S&P 500 Total Return Index during the quarter. Our Canadian Equity Strategy outperformed the S&P/TSX Composite Total Return Index in the quarter. Both the US and Canadian Equity Strategies continued to outpace their respective benchmarks in terms of dividend growth. For a more detailed discussion on performance see each Strategy’s respective section below.

Portfolio Dividend Growth – Trailing and consensus forward 12 months.

Note: Last 12 months (“LTM”) Dividend Growth is the median of the actual trailing 12-month dividend growth of the individual stocks held by Strategies or Index constituents as reported by Bloomberg as at June 30, 2023. Forward 12 months (“FTM”) Dividend Growth is the median of the Bristol Gate Model’s forward 12-month prediction for the individual stocks held by the Strategies and the median of consensus estimates for the constituents of the Indices as of quarter end. Companies without a consensus dividend forecast were excluded. Return commentary based on gross returns.

Source: Bloomberg, FactSet, Bristol Gate Capital Partners.

         

Commentary

The macro environment remains perplexing. Will aggressive Fed policy lead to higher for longer rates, a tightening credit backdrop, weakening consumer spending and declining earnings, or are we set for a soft landing, with falling inflation, a resilient housing market, rising real wages and troughing earnings growth? The truth is we don’t know. In our last quarterly note, we discussed the importance of building a diversified portfolio, recognizing the myriad of possible outcomes we face. However, on its own, a diversified portfolio is not always enough to stay invested during uncertain times. To remain invested through turbulent times you need to have confidence in a sound investment thesis based on proven, timeless investment concepts like those we have developed at Bristol Gate.

Our conviction remains that the income stream an asset produces and its value are inherently linked over time. So, we attempt to discover great businesses that will grow their dividends at well above market rates for long periods of time before others do. We do this by combining art and science. Our process of combining artificial intelligence in the form of a machine learning prediction model with deep-rooted fundamental analysis ensures that we own high-quality companies that are growing their dividends at high rates. The result should lead to a growing income stream for our investors and the capital appreciation that typically comes along with that.

Long time clients know that we often liken our investment approach to real estate investing, comparing our portfolio of 22 holdings to a building with a fixed number of rental units. Just as the value of a building rises along with the growth in its rents, so can a company’s value with the growth in its dividends.

Positioning yourself in the right area of the market can do wonders for your wealth. Real estate investing is often about location, location, location, and we think the same applies to equity investing. By operating in North America, we benefit from having our companies protected by of the rule of law and by participating in well developed, deep liquid markets. Within those markets, there are plenty of high-quality companies, which provide many potential candidates for our portfolio.

We have been successful at finding companies that grow their dividends by a lot each year. It’s like housing tenants that can afford annual rental increases in the mid-teens or better. We know these companies have proven to provide attractive long-term returns when compared to other parts of the market, offering the safety of a dividend yield, along with the opportunities that come with growth. Our metaphorical building also has the benefit of no rental controls, so whenever it appears that one of our tenants cannot meet our annual rent hike, we can easily fill that unit with another company that meets our high standards.

One of the benefits of our real estate analogy is that it keeps us, and our investors focused on what we believe drives long term value creation: the growing income stream and the underlying free cash flow that drives it, not the daily price movements that can swing wildly.

If we can consistently find tenants like the ones described above and focus on the things we believe drive long term value, we think we will be able to provide attractive returns that are very competitive with the benchmarks we evaluate ourselves against over time. However, that doesn’t mean we will beat the benchmark every year.

This year is a perfect example of that. A small group of tech and tech related companies have dominated US market returns as investors have been captivated with the possibilities of Artificial Intelligence (“AI”). Unfortunately for us, many of these companies do not pay a dividend, or if they do, they do not grow it fast enough to meet our objectives and are therefore not in our investable universe. In fact, the last three years has seen a macro-driven market, impacted by COVID, tighter monetary policy and predictions of pending recession. Combined, these factors have made it difficult to achieve the price performance we would have liked.

But, over the last three years, our companies have performed very well from a fundamental perspective, especially when compared to the average company in the market.

Exhibit 1: Bristol Gate US Equity Strategy Median 3 Year Operating Metrics vs S&P 500

Source: Bristol Gate Capital Partners, Bloomberg. As at June 30, 2023

Our portfolio companies have delivered earnings growth and free cash flow margins significantly greater than that of the average company in the S&P 500. In terms of free cash flow per share, the average company in the S&P 500 has delivered less than half the free cash flow growth relative to the businesses we own. And we are delivering more dividend growth than the rest of the dividend paying stocks in the market. Eventually, we firmly believe these fundamentals will be rewarded.

While it is understandable that many investors focus on price returns, our focus will always be on what we own, because ultimately it is their fundamentals that drive price over time. From that perspective, we are confident that our investors will be rewarded for their patience.

US Equity Strategy (all returns USD)

After a strong first quarter, expectations were muted going into Q2 as concerns over a possible recession remained. However, the S&P 500 once again surprised rising over 8%, despite the average S&P 500 company reporting a decline in earnings during the first quarter of 2023 and consensus expectations for further declines in Q2. 

Exhibit 2: Impact of select stocks on Q2 2023 total market return.

Source: Bloomberg, Bristol Gate Capital Partners. As at June 30, 2023.

The market pushed higher on the back of AI-related euphoria, as a group of stocks being dubbed the “Magnificent Seven” were once again responsible for the bulk of the rally. Apple, Microsoft, Nvidia, Tesla, Amazon, Meta and Alphabet accounted for two-thirds of the index’s return for the quarter, and other than Microsoft, which we own, none of the others pay a dividend or meet our criteria for high dividend growth. Market breadth remains narrow.

Dividend paying stocks underperformed non-dividend paying stocks on average by 5.2 percentage points in the second quarter and by 17.50 percentage points year-to-date. The difference is even wider on a market capitalization basis. 

The US Equity strategy continued to outperform the dividend paying component of the Index but underperformed the S&P 500 during the quarter. Stock selection in the Consumer Discretionary sector, as well as both allocation and selection effects in Communication Services and Financials were the primary drivers of underperformance. This was partially offset by having no exposure to either Energy or Utilities, as well as stock selection in the Industrials sector. 

On an absolute basis, Broadcom, Microsoft and Applied Materials were among the largest contributors during the quarter benefiting from the AI excitement. We believe we are participating responsibly as the companies we own trade at attractive absolute and relative valuations considering the opportunities they have ahead of them. 

Exhibit 3. Responsibly Participating in the AI Tech Revolution

Broadcom also announced during the quarter that the company had entered into two separate multi-year agreements with Apple AAPL for the supply of a range of specified high-performance RF and wireless components and modules.

Dollar General, MSCI and Thermo Fisher Scientific were the among the largest detractors during the quarter. Dollar General’s earnings disappointed as the company is facing a challenging environment. MSCI’s stock suffered on a slowdown in their ESG-related segment. Management reported seeing fewer larger deals, longer sales cycles and higher cancellations all due to the negative view some states have taken on ESG and changing regulation in Europe. Despite these challenges, the segment still delivered ~30% growth, and we believe the market is overreacting in the short-term. The fundamentals of the business are strong, and the management team has consistently allocated capital effectively. Thermo Fisher’s first-quarter earnings matched expectations, although results were somewhat marred by what we view as an expected decline in Covid-19-related testing revenue.

Although the portfolio’s price return lagged the market in the quarter, it continues to deliver from a fundamental perspective. Year-to-date, 11 of our companies have announced dividend increases averaging over 15% growth. This is well ahead of the market’s dividend growth and is supported by better revenue and earnings growth. In sharp contrast to the market, our portfolio companies delivered 13.9% earnings growth compared to the Index’s 3.7% decline for the first quarter of 2023. We expect the favorable fundamental trends to continue into the Q2 reporting season and believe the market will eventually recognize the strong relative performance.

Exhibit 4: Q1/23 Earnings and Revenue Growth

Source: Zacks, Bristol Gate Capital Partners.

Exhibit 5: US Equity Strategy Risk and Return Metrics

Source: Bristol Gate Capital Partners. There is a risk of loss inherent in any investment; past performance is not indicative of future results. Please see important dislosures at end of document.

Canadian Equity Strategy (all returns CAD)

The Canadian economy continues to remain in flux, as a strong labour market continues to face stubborn levels of inflation, leading to the Bank of Canada once again raising interest rates in June after not hiking since January, and signalling another potential hike. Against that backdrop, the S&P/TSX Composite Index rose just over 1% during the quarter. 

The Canadian Equity strategy continues to perform well in this environment and outperformed the index during the period. Stock selection drove most of the outperformance, particularly in the Materials and Financials sectors. This was partially offset by stock selection in the Information Technology, which essentially is because the strategy did not own Shopify, a stock that does not pay a dividend and as such is not in our investable universe. 

From an absolute perspective, Stella-Jones, Element Fleet Management and Dollarama were among the top contributors to the strategy’s performance in the quarter. Enghouse, Jamieson and Colliers International were among the largest detractors. 

From a fundamental perspective, the portfolio’s performance continues to reflect the quality of the businesses we do hold. With 20 companies reporting first quarter results through the end of June, the revenue and earnings growth for the portfolio has averaged 13% and 8.8%, respectively. Additionally, 11 companies have announced dividend increases this year, averaging over 11%, which stands in stark contrast to the index which saw the average company in the S&P/TSX Composite deliver a ~16% earnings decline in the first quarter. 

We remain focused on finding high quality businesses that deliver high dividend growth at a reasonable price to continue to deliver strong investment returns to our clients. 

Exhibit 3. Canadian Equity Strategy Risk and Return Metrics

Source: Bristol Gate Capital Partners. There is a risk of loss inherent in any investment; past performance is not indicative of future results. Please see important disclosures at end of document.

Firm Update

To all our clients, thank you for your ongoing support and trust. We are determined to do everything we can to provide you continued income growth and strong investment returns going forward.

Sincerely,

The Bristol Gate Team

---

---

Important disclosures

There is a risk of loss inherent in any investment; past performance is not indicative of future results. Prospective and existing investors in Bristol Gate’s pooled funds or ETF funds should refer to the fund’s offering documents which outline the risk factors associated with a decision to invest. Separately managed account clients should refer to disclosure documents provided which outline risks of investing. Pursuant to SEC regulations, a description of risks associated with Bristol Gate’s strategies is also contained in Bristol Gate’s Form ADV Part 2A located at www.bristolgate.com/regulatory-documents.

US Equity Strategy returns in this report refer to the Bristol Gate US Equity Strategy Composite (the “Composite”). The Composite consists of equities of publicly traded, dividend paying US companies. The Composite is valued in US Dollars and for comparison purposes is measured against the S&P 500 Total Return Index. The composite’s Investment Advisor, Bristol Gate Capital Partners Inc., defines itself as a portfolio manager, exempt market dealer and investment fund manager (as per its registration in Ontario, its principal regulator in Canada) and is also a Registered Investment Adviser with the U.S. Securities and Exchange Commission (the “SEC”). The Investment Advisor’s objective is to select companies with positive dividend growth, and which collectively will generate over the long term a growing income and capital appreciation for investors.  The inception date of the Composite is May 15, 2009. The US Dollar is the currency used to measure performance, which is presented on a gross and net basis and includes the reinvestment of investment income. The composite’s gross return is gross of withholding tax prior to January 1, 2017 and is net of withholding tax thereafter.  Net returns are calculated by reducing the gross returns by the maximum management fee charged by Bristol Gate of 1%, applied monthly. Actual investment advisory fees incurred by clients may vary. There is the opportunity for the use of leverage up to 30% of the net asset value of the underlying investments using a margin account at the prime broker.  Thus far no material leverage has been utilized.  An investor’s actual returns may be reduced by management fees, performance fees, and other operating expenses that may be incurred because of the management of the composite.  A performance fee may also be charged on some accounts and funds managed by the firm. Bristol Gate claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To obtain a GIPS Composite Report, please email us at info@bristolgate.com. 

The S&P 500® Total Return Index measures the performance of the broad US equity market, including dividend re-investment, in US dollars. This index is provided for information only and comparisons to the index has limitations. The benchmark is an appropriate standard against which the performance of the strategy can be measured over longer time periods as it represents the primary investment universe from which Bristol Gate selects securities. However, Bristol Gate’s portfolio construction process differs materially from that of the benchmark and the securities selected for inclusion in the strategy are not influenced by the composition of the benchmark. For example, the strategy is a concentrated portfolio of approximately equally weighted dividend-paying equity securities, rebalanced quarterly whereas the benchmark is a broad stock index (including both dividend and non-dividend paying equities) that is market capitalization weighted. As such, strategy performance deviations relative to the benchmark may be significant, particularly over shorter time periods. The strategy has concentrated investments in a limited number of companies; as a result, a change in one security’s value may have a more significant effect on the strategy’s value.

SPDR® S&P 500® ETF Trust (SPY US) sourced from Bloomberg has been used as a proxy for the S&P 500® Total Return Index for the purpose of providing non-return based portfolio statistics and sector weightings in this report.  SPY US is an ETF that seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index.

Canadian Equity Strategy returns in this report refer to the Bristol Gate Canadian Equity Strategy Composite (the “Composite”). The Composite consists primarily of equities of publicly traded, dividend paying Canadian companies. The Composite is valued in Canadian Dollars and for comparison purposes is measured against the S&P/TSX. The composite’s Investment Advisor, Bristol Gate Capital Partners Inc., defines itself as a portfolio manager, exempt market dealer and investment fund manager (as per its registration in Ontario, its principal regulator in Canada) and is also a Registered Investment Adviser with the U.S. Securities and Exchange Commission (the “SEC”). The Investment Advisor’s objective is to select companies primarily from the S&P/TSX universe with positive dividend growth and which collectively will generate over the long term a growing income and capital appreciation for investors.  The inception date of the Composite is July 1, 2013. Returns are presented gross and net of fees and include the reinvestment of all income. The composite’s gross return is gross of withholding tax prior to January 1, 2017 and is net of withholding tax thereafter. Net returns are calculated by reducing the gross returns by the maximum management fee charged by Bristol Gate of 0.7%, applied monthly. Actual investment advisory fees incurred by clients may vary.  An investor’s actual returns may be reduced by management fees, performance fees, and other operating expenses that may be incurred because of the management of the composite.  A performance fee may be charged on some accounts and funds managed by the firm.  Bristol Gate claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To obtain a GIPS Composite Report, please email us at info@bristolgate.com. 

The returns have been converted into Canadian Dollars using month‐end Bank of Canada Closing rates.

The S&P/TSX Total Return Index measures the performance of the broad Canadian equity market, including dividend re-investment, in Canadian dollars. This index has been provided for information only and comparisons to the index has limitations. The benchmark is an appropriate standard against which the performance of the strategy can be measured over longer time periods as it represents the primary investment universe from which Bristol Gate selects securities. However, Bristol Gate’s portfolio construction process differs materially from that of the benchmark and the securities selected for inclusion in the strategy are not influenced by the composition of the benchmark. For example, the strategy is a concentrated portfolio of approximately equally weighted dividend-paying equity securities, rebalanced quarterly whereas the benchmark is a broad stock index (including both dividend and non-dividend paying equities) that is market capitalization weighted. As such, strategy performance deviations relative to the benchmark may be significant, particularly over shorter time periods. The strategy has concentrated investments in a limited number of companies; as a result, a change in one security’s value may have a more significant effect on the strategy’s value.

iShares Core S&P®/TSX® Capped Composite Index ETF (XIC CN) sourced from Bloomberg has been used as a proxy for the S&P®/TSX® Total Return Index for the purpose of providing non-return based portfolio statistics and sector weightings in this report. XIC CN is an ETF that seeks long-term capital growth by replicating the performance of the S&P®/TSX® Capped Composite Index, net of expenses.

This Report is for information purposes and should not be construed under any circumstances as a public offering of securities in any jurisdiction in which an offer or solicitation is not authorized. Prospective investors in Bristol Gate’s pooled funds or ETF funds should rely solely on the fund’s offering documents, which outline the risk factors associated with a decision to invest. No representations or warranties of any kind are intended or should be inferred with respect to the economic return or the tax implications of any investment in a Bristol Gate fund.

This piece is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. A full list of security holdings is available upon request. For more information contact Bristol Gate Capital Partners Inc. directly. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice. Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at bristolgate.com.

A Note About Forward-Looking Statements

This report may contain forward-looking statements including, but not limited to, statements about the Bristol Gate strategies, risks, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events and conditions or include words such as “may”, “could”, “would”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate” and similar forward-looking expressions or negative versions thereof.

These forward-looking statements are subject to various risks, uncertainties and assumptions about the investment strategies, capital markets and economic factors, which could cause actual financial performance and expectations to differ materially from the anticipated performance or other expectations expressed. Economic factors include, but are not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events.

Readers are cautioned not to place undue reliance on forward-looking statements and consider the above-mentioned factors and other factors carefully before making any investment decisions. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those expressed or implied in any forward-looking statements. Bristol Gate Capital Partners Inc. has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities legislation.

Performance Summary

During the quarter, both the US and Canadian Equity Strategies continued to outpace their respective benchmarks in terms of dividend growth. From a return perspective, US Equity Strategy portfolio underperformed the S&P 500 Total Return Index during the quarter. Our Canadian Equity Strategy outperformed the S&P/TSX Composite Total Return Index in the quarter. For a more detailed discussion on performance see each Strategy’s respective section below.

Portfolio Dividend Growth

Note: LTM Dividend Growth is the median of the actual trailing 12-month dividend growth of the individual stocks held by Strategies or Index constituents as reported by Bloomberg as at Mar 31, 2023. FTM Dividend Growth is the median of the Bristol Gate Model’s forward 12-month prediction for the individual stocks held by the Strategies and the median of consensus estimates for the constituents of the Indices as of quarter end. Companies without a consensus dividend forecast were excluded, as were dividend initiators with no prior year comparative.

Source: Bloomberg, FactSet, Bristol Gate Capital Partners.

Commentary

Exiting 2022 the consensus view was that markets would have a rough start in 2023 with an early selloff as we entered a recession. Strategist after strategist called for a drop to previous lows followed by a second half recovery as the Fed cut rates to support the economy. Since then, we have experienced the second largest bank failure ever in the US with the collapse of Silicon Valley Bank and long-standing issues at more systemically important Credit Suisse finally led to its demise. Rates have continued to rise, and inflation has been persistent. US PMI data has been in contraction territory for five consecutive months and credit conditions have been tightening since Q3-21. Accordingly, analyst estimates for S&P 500 earnings have deteriorated from an estimated decline of 0.3% y/y on December 31, 2022 to a drop of 6.8% currently. Despite all of this, the S&P 500 rose 7.5% during the first quarter as investor expectations regarding the hiking cycle coming to an end shortly grew. 

In today’s world we have access to an unprecedented amount of data and opinions on virtually any topic. We are constantly inundated with a seemingly endless stream of information from a variety of sources. While this abundance of data can be likened to a bottomless well of knowledge, it also presents a significant challenge: how to sift through

the vast quantity of information and determine what is valuable and what is not. That challenge is compounded by the complex, adaptive system that is the stock market which is characterized by aggregation (large scale behaviours from the collective interactions of the individual agents), adaptive decision rules, nonlinearity and feedback loops. Often the outcomes we expect are not the ones that materialize, and if they do, perhaps not in the timeframe we envisioned.

We think investors are rightfully concerned about interest rates rising, uncertainty in the financial sector, constantly changing expectations regarding monetary policy and the implications of all these matters on the markets in the short-term. We ourselves are very concerned about the ultimate impact the recent bank failures will have on markets and the broader economy. Approximately 40% of all loans in the US are made by the small and medium sized banks who are experiencing the largest challenges with respect to deposit outflows and higher cost funding. We expect credit conditions to continue tightening, possibly materially. However, we must realize the deeply uncertain decision-making environment we continually operate in and the possibility that our view may be wrong. As Socrates said, “All I know is that I know nothing.” As such, we believe our responsibility is not to build a portfolio to suit our macro view but instead build a portfolio in spite of it, one that recognizes the myriad of possible outcomes and is resilient regardless of which path we go down in the near term. 

Over the long term, our view that company fundamentals drive stock returns and that the income an asset produces, and its value are directly related over time is unwavering. We are not in the speculation business. We firmly believe the best way to insulate our clients during uncertain periods is by taking ownership stakes in businesses that we believe can grow irrespective of the macroeconomic conditions being faced and when faced with the choice of quality or valuation, we believe erring on the side of quality is the best path to follow.    Finally, we would be remiss not to mention the main objective we are trying to achieve. Growing our clients’ income at rates well above the market, year in and year out, irrespective of what the macro environment throws our way. Although that growing income stream may not be appreciated by the market at certain points in time, over time we believe it matters. If we can continue identifying high growing dividend streams before others, we think our investors will ultimately be well served.

Exhibit 1: US Equity Strategy Constituent Annual Dividend Growth 

As at December 31, 2022. Source: Bloomberg. Median of the annual trailing 12-month dividend growth (as reported on Bloomberg) of the individual stocks held at the end of each calendar year. There is a risk of loss inherent in any investment; past performance is not indicative of future results.

US Equity Strategy (all returns USD)

The US Equity strategy slightly underperformed the S&P 500 Index in Q1 (see Exhibit 5). The Index shrugged off the short-lived volatility the banking failures brought and the highest number of companies issuing negative earnings guidance since 2019, according to FactSet. 

Our relative underperformance was primarily driven by stock selection in the Information Technology and Consumer Discretionary sectors, as our more defensive holdings lagged the index. This was partially offset by stock selection in Financials and Health Care. On an absolute basis, Applied Materials, MSCI and Microsoft were among our largest contributors, while Dollar General, UnitedHealth and Sherwin-Williams were among the largest detractors. Dollar General and UnitedHealth were two of our best performers in 2022. Dollar General in particular, was trimmed as part of our regular rebalancing process in Q422, near its highs, highlighting the effectiveness of this systematic component of our process.   A more nuanced view of the market’s returns shows how bifurcated it was. In the first three months of the year, the largest 20 stocks in the S&P 500 by market capitalization rose by 16%, while the remaining 480-odd stocks rose collectively by just 2%.

Exhibit 2: Change in Market Capitalization of Top 20 vs Remaining S&P 500 Index Constituents

Source: Bloomberg. From Jan 1, 2023 to March 31, 2023.  

The stock returns of six companies (Apple, Nvidia, Tesla, Meta, Amazon and Alphabet) were more than 500 basis points of relative headwind on their own. Four of those companies do not pay a dividend, the other two do not meet our dividend growth objectives. An equally weighted basket of all dividend payers in the S&P 500 returned 1.6% during the quarter, while companies that grew their dividend in the last year were up 1.2% on average. Non dividend paying stocks carried the market returns, up an average of 11.9% in during the first three months of the year. In particular, the Information Technology sector rose over 24% in the first quarter even though the number of companies reporting negative guidance in the sector tied the highest since FactSet started tracking the figure in 2006.   

Despite the uncertain macro environment, through March 31, seven portfolio companies have announced dividend increases averaging 19.2%. We believe the historical and expected (using consensus estimates) operating performance of our portfolio compares favourably to the broader market. In our view, owning high quality businesses

that are underpinned by strong balance sheets, that have numerous growth opportunities, generate higher cash returns and more consistent results and buying them at fair prices is the best way to compound returns over the long term.  

Exhibit 3: Bristol Gate US Equity Portfolio Operating Metrics vs S&P 500 Index

Note: As at March 9, 2023. Figures are based on the companies’ last completed fiscal year. Data points that were not meaningful or missing were excluded from average and median calculations. Forward estimates based on consensus estimates.  Source: Bloomberg, Bristol Gate Capital Partners.

Although our holdings trade at a premium valuation to the market, we think they are attractively priced considering their relative operating metrics, consistency and future opportunities. Looking at the past five years, despite consistently trading at a valuation premium on a forward P/E basis, the maximum multiple compression our portfolio experienced was less than the broad market.

Exhibit 4: Maximum Multiple Compression of Bristol Gate US Equity Portfolio vs S&P 500 (Last 5 Years)

Source: Bloomberg, Bristol Gate Capital Partners. 

The importance of quality cannot be underestimated. Even in the challenging macro environment we find ourselves in, our portfolio companies have been able to maintain their margins and deliver exceptional earnings growth thanks to their operating leverage. 

During the quarter, we sold Advance Auto Parts (AAP) and replaced it with Corteva (CTVA). We also trimmed our stakes in Broadcom and Zoetis as part of our regular rebalancing process. 

With AAP, we expected the operational changes they were making to lead to a better run organization with leaner inventories and more cash generation. While that may still happen, it was not happening in the timeframe we envisioned. Instead, inventories are moving up and cash flow is moving down as they respond to competitive actions and address some of their own missteps. We have no expectation for the current trends to reverse in the next year or two, so we moved on.

In CTVA we acquired a pure play agricultural company, that is a market leader in seeds and crop protection chemicals. Underlying farmer fundamentals are strong, driven by high crop prices and low inventory levels. CTVA has an attractive pipeline of opportunities to drive double digit earnings growth annually to 2025. We expect dividend growth to at least match earnings growth over that timeframe and find the current valuation attractive in light of that.

In addition to selling Advance Auto Parts (Consumer Discretionary) and buying Corteva (Materials), sector weightings changed compared to the prior quarter due to GICS sector classification changes (Visa & Mastercard moving from Technology to Financials and Dollar General moving from Consumer Discretionary to Consumer Staples).

Exhibit 5: US Equity Strategy Risk and Return Metrics

Source: Bristol Gate Capital Partners. There is a risk of loss inherent in any investment; past performance is not indicative of future results. Please see important disclosures at end of document.

Canadian Equity Strategy (all returns CAD)

The first quarter of 2023 saw the S&P/TSX Composite Index rise by 4.6%. At the sector level, the market was a mixed bag as the Energy sector posted a negative return, while the Information Technology sector rose by more than 25%. Market returns were more muted after a strong January as the Bank of Canada diverged from the Federal Reserve as, after raising rates in January, they held rates level in March over concerns in the housing sector and fears of hiking into a recession. This also had a ripple effect on the performance of the Financials sector. Global developments were also a cause for concern, as the collapse of Silicon Valley Bank and Credit Suisse added to market volatility.  

Against this backdrop, the Canadian Equity portfolio outperformed, continuing a trend of strong relative performance. Our lack of exposure to the underperforming Energy sector as well as both our overweight and stock selection in the Consumer Staples and Real Estate sectors were the primary contributors to outperformance. Open Text, Premium Brands Holdings and CCL Industries were among the leading contributors in the quarter, highlighting a strength of our disciplined rebalancing process which saw us add to our positions when their weights fell below our thresholds in 2022. 

As part of our regular quarterly rebalancing process, we added to our holdings in Telus and Jamieson Wellness, while trimming our weights in Element Fleet Financial and Enghouse Systems. As part of a corporate action, we sold our shares of the Brookfield Asset Management spinoff and reinvested the proceeds into Brookfield Corp. 

Our companies continue to deliver strong operating results. So far 12 companies have announced dividend increases this year, raising their payments by a healthy 12% on average, which we view as very strong given the testing environment we find ourselves in. Following Q422 results, where 15 of our 23 portfolio companies exceeded revenue or earnings forecasts, and the portfolio holdings on average grew their revenues by 12.4% and earnings by 14.7%, we expect another solid reporting quarter in Q123.  We believe the strong performance of the strategy over the quarter, and indeed the past 12 months, is a reward for the patience we have shown with these high-quality businesses, as the strong fundamentals we have consistently highlighted are being recognized by the market.

Exhibit 6. Canadian Equity Strategy Risk and Return Metrics

Source: Bristol Gate Capital Partners. There is a risk of loss inherent in any investment; past performance is not indicative of future results. Please see important disclosures at end of document.

Firm Update

To start the year, we have continued to make efforts to ensure that as a firm we are working in the most collaborative manner possible to ensure the best possible results for our clients and partners. As successful as we have been in operating in a hybrid work environment, we are always looking for ways to improve. As such, we are instituting one day a week where all of our employees are required to be in the office to maintain high levels of communication across the firm.

In addition, senior management have instituted an annual organizational feedback review process that involves all employees to determine how we can enhance our work culture for both our employees as individuals and as a firm.

To all our clients, thank you for your ongoing support and trust. We are determined to do everything we can to provide you continued income growth and strong investment returns going forward.

Sincerely,

The Bristol Gate Team

---

Important disclosures

There is a risk of loss inherent in any investment; past performance is not indicative of future results. Prospective and existing investors in Bristol Gate’s pooled funds or ETF funds should refer to the fund’s offering documents which outline the risk factors associated with a decision to invest. Separately managed account clients should refer to disclosure documents provided which outline risks of investing. Pursuant to SEC regulations, a description of risks associated with Bristol Gate’s strategies is also contained in Bristol Gate’s Form ADV Part 2A located at www.bristolgate.com/regulatory-documents.

Gross returns in this report refer to the Bristol Gate US Equity Strategy Composite and Canadian Equity Strategy Composite. No allowance has been made for custodial costs, taxes, operating costs, management and performance fees, which will reduce performance. Past performance is not indicative of future results. Allowance for withholding tax in the US strategy composite is partially reflected in the composite returns for periods commencing January 2017 and after. The Net returns for the Bristol Gate US Equity Strategy Composite and Canadian Equity Strategy Composite are reflective of the maximum management fee charged by Bristol Gate of 1% and 0.70%, respectively.

The Bristol Gate US Equity Strategy Composite was formerly known as the Bristol Gate US Dividend Growth Composite until April 1, 2015. The Composite inception date was May 15, 2009. The Composite consists of equities of publicly traded, dividend paying US companies and is valued in US Dollars.

The Bristol Gate Canadian Equity Strategy Composite was formerly known as the Bristol Gate Canadian Dividend Growth Composite until April 1, 2015. The Composite inception date was July 1, 2013. The Composite consists of equities of publicly traded, dividend paying Canadian and US companies and is valued in Canadian Dollars.

The S&P 500® Total Return Index measures the performance of the broad US equity market, including dividend re-investment, in US dollars. This index is provided for information only and comparisons to the index has limitations. The benchmark is an appropriate standard against which the performance of the strategy can be measured over longer time periods as it represents the primary investment universe from which Bristol Gate selects securities. However, Bristol Gate’s portfolio construction process differs materially from that of the benchmark and the securities selected for inclusion in the strategy are not influenced by the composition of the benchmark. For example, the strategy is a concentrated portfolio of approximately equally weighted dividend-paying equity securities, rebalanced quarterly whereas the benchmark is a broad stock index (including both dividend and non-dividend paying equities) that is market capitalization weighted. As such, strategy performance deviations relative to the benchmark may be significant, particularly over shorter time periods. The strategy has concentrated investments in a limited number of companies; as a result, a change in one security’s value may have a more significant effect on the strategy’s value.

SPDR S&P 500 ETF Trust (SPY US) sourced from Bloomberg has been used as a proxy for the S&P 500® for the purpose of providing non-return based portfolio statistics and sector weightings.

The S&P/TSX Total Return Index measures the performance of the broad Canadian equity market, including dividend re-investment, in Canadian dollars. This index has been provided for information only and comparisons to the index has limitations. The benchmark is an appropriate standard against which the performance of the strategy can be measured over longer time periods as it represents the primary investment universe from which Bristol Gate selects securities. However, Bristol Gate’s portfolio construction process differs materially from that of the benchmark and the securities selected for inclusion in the strategy are not influenced by the composition of the benchmark. For example, the strategy is a concentrated portfolio of approximately equally weighted dividend-paying equity securities, rebalanced quarterly whereas the benchmark is a broad stock index (including both dividend and non-dividend paying equities) that is market capitalization weighted. As such, strategy performance deviations relative to the benchmark may be significant, particularly over shorter time periods. The strategy has concentrated investments in a limited number of companies; as a result, a change in one security’s value may have a more significant effect on the strategy’s value.

iShares Core S&P/TSX Capped Composite Index ETF (XIC CN) sourced from Bloomberg has been used as a proxy for the S&P/TSX Total Return Index for the purpose of providing non-return based portfolio statistics and sector weightings.

There is the opportunity to use leverage up to 30% of the net asset value. Leverage is not used as an investment tool to enhance returns, but for cash management needs of certain composite portfolios.

This Report is for information purposes and should not be construed under any circumstances as a public offering of securities in any jurisdiction in which an offer or solicitation is not authorized. Prospective investors in Bristol Gate’s pooled funds or ETF funds should rely solely on the fund’s offering documents, which outline the risk factors associated with a decision to invest. No representations or warranties of any kind are intended or should be inferred with respect to the economic return or the tax implications of any investment in a Bristol Gate fund.

Bristol Gate claims compliance with the Global Investment Performance Standards [GIPS®]. To receive a list of composite descriptions and/or a presentation that complies with the GIPS® standards, please contact us at info@bristolgate.com. Bristol Gate Capital Partners Inc. has been independently verified for the periods commencing May 2009 until December 2015 by Ashland Partners International PLLC and from January 1, 2016 – December 31, 2020 by ACA Group, Performance Services Division.

This piece is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. A full list of security holdings is available upon request. For more information contact Bristol Gate Capital Partners Inc. directly. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice.

Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at bristolgate.com.

A Note About Forward-Looking Statements

This report may contain forward-looking statements including, but not limited to, statements about the Bristol Gate strategies, risks, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events and conditions or include words such as “may”, “could”, “would”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate” and similar forward-looking expressions or negative versions thereof.

These forward-looking statements are subject to various risks, uncertainties and assumptions about the investment strategies, capital markets and economic factors, which could cause actual financial performance and expectations to differ materially from the anticipated performance or other expectations expressed. Economic factors include, but are not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events.

Readers are cautioned not to place undue reliance on forward-looking statements and consider the above-mentioned factors and other factors carefully before making any investment decisions. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those expressed or implied in any forward-looking statements. Bristol Gate Capital Partners Inc. has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities legislation.

Performance Summary

During the quarter, both the US and Canadian Equity Strategies continued to outpace their respective benchmarks in terms of dividend growth. From a return perspective, US Equity Strategy portfolio outperformed the S&P 500 Total Return Index during the quarter. Our Canadian Equity Strategy underperformed the S&P/TSX Composite Total Return Index in the quarter. For a more detailed discussion on performance see each Strategy’s respective section below.

Dividend Growth

Note: LTM Dividend Growth is the median of the actual trailing 12-month dividend growth of the individual stocks held by Strategies or Index constituents as reported by Bloomberg as at Dec 31, 2022. FTM Dividend Growth is the median of the Bristol Gate Model’s forward 12-month prediction for the individual stocks held by the Strategies and the median of consensus estimates for the constituents of the Indices as of quarter end. Companies without a consensus dividend forecast were excluded. Return commentary based on gross returns.

Source: Bloomberg, FactSet, Bristol Gate Capital Partners.

Commentary

2022 proved to be a difficult year for public market investors. There was no escaping the negative effects rising inflation and tightening monetary policy had on asset values. The S&P 500 had its worst year since the Global Financial Crisis, declining over 18% and investors were unable to find shelter in fixed income with the US Aggregate Bond Index declining over 12%.

During periods like these, it is easy to get caught up in the here and now. Focusing on the daily fluctuations of the market can make investors lose sight of the bigger picture, often resulting in hasty decisions based on short-term market trends. Whenever we are faced with difficult market conditions, we always remind ourselves to zoom out. 

Zooming out can be important in a number of contexts, as it allows one to take a broader perspective on a situation or problem. This can help to identify patterns or trends that might not be immediately visible when focused on the details. It can also provide a sense of context and help to put things into perspective, which can be useful when making decisions or trying to understand a complex issue.

Lastly, zooming out can help to identify the bigger picture and facilitate the development of long-term strategies or plans.[1] Often when zooming out, things don’t look so bad. If we look at the last five years instead of just the last one, our US strategy has generated a compounded annual return (CAGR) of 10.2% (gross) (9.1% net), the S&P 500 Total Return Index a CAGR of 9.4%, and the S&P Dividend Aristocrats Total Return Index a CAGR of 9.8%. We think those are attractive results considering experiencing two bouts of Fed tightening (2016-2019 and again now), a global pandemic and the economic fallout resulting from it, a major war in Europe and rising tensions between the world’s two superpowers, amongst other negative events. Even after the market decline this year, many investors are well ahead of plan in reaching their long-term financial goals.

---

Exhibit 1. Bristol Gate US Equity Strategy and Select S&P Index Total Returns (Growth of $100)

As at Dec 31, 2022. Source: Morningstar, Bristol Gate Capital Partners.  There is a risk of loss inherent in any investment; past performance is not indicative of future results. Please see Exhibit 5 below for full performance history of the Bristol Gate US Equity Strategy and see Important Disclosures at end of document.

[1] This paragraph was written by OpenAI’s ChatGPT, which we spent some time fiddling around with over the holidays.

Zooming out also allows us to focus on the things we can control and continue making the investments necessary to drive our business or investor financial goals forward. While we don’t know when the Fed will stop raising rates or whether we will be pushed into a recession before they do, a broader perspective tells us that markets will eventually recover. They always have, particularly the good companies with solid balance sheets and underlying fundamentals. That knowledge allows us to continue investing for the future, with the goal of those investments driving improved outcomes for our investors.

In that regard, we wanted to take this opportunity to update our clients on two investments made in the last year. The first focused on our continuous efforts to optimize the decision making and performance of our Investment Committee (IC) and the second related to our dividend predictions.

Investment Committee Review

Renowned behaviour psychologist Daniel Kahneman wrote ‘wherever there is judgement, there is noise – and more of it than you think… To understand error in judgment, we must understand both bias and noise.

We believe a disciplined, evidence-based approach will serve our investors and partners better. This is why we built our firm with evidence and data at the centre, rather than individual and ego. Understanding bias and noise is important to our decision-making process and ensuring we don’t stray from our focus.

In this vein, we hired BehaviorQuant (“BQ”), the brainchild of Thomas Oberlechner, an expert in behavioral finance and financial psychology to examine our IC. Mr. Oberlechner holds a psychology doctorate and three Masters’ degrees in law, psychology, and consulting psychology from Harvard University and University of Vienna. BQ use psychometrics and machine learning to quantify decision makers’ behavioral characteristics, preferences, and biases. BQ has worked with hundreds of different teams of investment managers and some of the world’s largest trading floors to build a database to determine what drives people in the financial business. Behavioral Quant’s own findings have shown that by choosing the wrong investment team an investor’s return is approximately 33% below that of a team well suited to one another.

We think a thorough evaluation of all firm risks, including an expert analysis of the people responsible for the stewardship of client assets should be undertaken regularly. If we can ensure that our Investment Committee fits well together, use our collective strengths and improve on our weaknesses, we will be better at understanding how to optimize our investment decision making for the benefit of investors. By identifying invisible decision biases and harmful behavioral tendencies, we think we are better able to limit the harmful noise Kahneman is referring to.

Our intention in engaging BQ was to systematically evaluate all members of the investment team, identify any red flags, and develop a plan to improve our individual and collective decision making. Each member was subjected to a test, measuring their personality characteristics, assessing competencies and measuring risk capacity and tolerance. Scores were measured individually and then consolidated into an overall team analysis. Our team scores were then analyzed against hundreds of other investment teams.

While there are always areas for improvement, our overall team results were exactly what we were hoping for. We have a team that operates with strongly shared convictions regarding the process, believe in the power of dividend growth, but are also not afraid to share their ideas and challenge convention and each other in a respectful and open manner.

Distant Future Prediction

Bristol Gate uses data-science driven predictions as part of its investment process in conjunction with fundamental analysis. Through the research being done by our data science team, we have concluded we can materially improve our performance potential if we can extend our dividend prediction horizon.  This is aligned with the fact that the earlier a signal is captured, the greater its potential. Exhibit 2 below details the results of our testing based on having perfect foresight. That is, knowing and investing in the fastest dividend growers in advance of the forecast horizon. Portfolio 1 (blue line) is composed of the top quartile of the fastest dividend growers over period “X”. We will call it the “Near Future Prediction”. Portfolio 2 (red line) is composed of the top quartile of the fastest dividend growers over period “Y”. Period “Y” is greater than period “X”. We will call it the “Distant Future Prediction”. Both portfolios are reconstituted annually, with no other trading occurring in the intervening period.

Exhibit 2. Annual Excess Return vs. S&P 500 Total Return Index – Perfect Foresight

Note: Dashed lines are median excess returns over the period presented.

Source: FactSet, Bristol Gate Capital Partners.

You can see that based on perfect foresight, the Distant Future Prediction consistently and meaningfully outperforms the Near Future Prediction. This is the theoretical alpha opportunity of moving to a Distant Future prediction.

One issue with which all forecasters struggle is that the further out the prediction, the higher the uncertainty. This is because the range of possible outcomes expands exponentially the further out we look. Real world challenges (changing macro conditions, random events like COVID, unforeseen competitive responses, etc.) mean that we never expect to fully capture the theoretical alpha opportunity. We will never be able to predict with 100% accuracy. 

However, Exhibit 3 tells us that we should be willing to sacrifice accuracy for a longer prediction horizon. Again, based on the perfect foresight portfolio, at anything better than a 20% hit rate (we only get one in five of the top quartile of dividend growers over the forecast horizon right), the probability of outperforming our benchmark Index is higher with Distant Future Prediction (the red line is above the blue line in the graph below).

Exhibit 3. Probability of Outperformance vs. Hit Rate – Perfect Foresight

Source: FactSet, Bristol Gate Capital Partners.

Said another way, having an 80% hit rate with Near Future Prediction Horizon provides the same probability of outperformance (70%) as a 40% hit rate with the Distant Future Prediction horizon. The historical data suggests that we are well compensated despite being less accurate. In addition, the slope of the line (hit rate vs probability of outperformance) for the Distant Future Prediction is steeper, almost twice that of its counterpart for the Near Future Prediction. Therefore, any improvement in forecast accuracy has a much larger impact on the Distant Future model compared to the Near Future one. 

Given the results above, we have spent the last year building a new model to extend our prediction horizon. The new model is built leveraging the knowledge we accumulated over years of predicting dividend growth and the early results are encouraging.

Exhibit 4. Distant Future Prediction vs Current Prediction Annual Return Difference – 1Y Holding Period

Source: FactSet, Bristol Gate Capital Partners.

Exhibit 4 plots the excess return of the top quartile of dividend growers of our new Distant Future model compared to our current one. Despite an approximate 30% lower hit rate in terms of accuracy, our Distant Horizon model outperformed our current version in back testing. Upon analysis, this model outperformance is consistent over holding periods ranging from one to three years. Extending our forecast, even with lower accuracy, clearly tilts the odds of outperforming our benchmark further in our favour. While that annual outperformance may seem minimal, even small differences compounded over time can add up to meaningful amounts.

While we are excited with all the above, we do not want to set unrealistic expectations. We are early in the process of eventually putting the Distant Future Prediction into production. We have a lot of work ahead of us and the new prediction does not come without its own set of challenges. We will be spending the coming months continuing to work to improve our hit rate and analyzing the data to better understand such things as impact on turnover, volatility and other risk related metrics. We want to ensure what we have seen in the lab ultimately translates to real world application. If we can improve our hit rate from these initial results, the opportunity appears very interesting.

US Equity Strategy (all returns USD)

The US Equity strategy outperformed the S&P 500 Index during the quarter. While we are never happy with a negative return, we were encouraged that the portfolio was able to make up almost all of the 700 basis point performance deficit (net basis) it faced relative to the S&P 500 Index at the end of Q1/22. At the time we wrote the following:

We believe our investment discipline of owning high quality companies, with good balance sheets that can grow their dividends at exceptional rates over the longer term will eventually return in favour and will provide competitive returns through the entire economic cycle. Although our investment performance has been disappointing this quarter, we have not been disappointed with the aggregate financial results of our companies.

We followed that up with this in our Q3/22 note:

During times like these quality matters because stability and consistency of earnings combined with dividend growth is often more appreciated by the market when there is a lack of it available. We believe we are in one of those periods now. The quality and resilience of our portfolios are critical in allowing us to look through the current turbulence with optimism and predict into the future with some degree of confidence. Our holdings have the ability and willingness to continue investing through the uncertainty, increasing their competitive advantages and coming out stronger on the other end. They have done so in the past and we expect the same going forward.

Over the trailing 12 months (the December quarter has yet to be reported), our portfolio companies have averaged double digit revenue and EPS growth and their latest quarterly dividends were ~18% higher than the year ago period. After some great companies were thrown out with the bathwater to start the year, we believe the quality of the companies we own was better reflected by the market as the year wore on, with the portfolio rising ~5% in the second half of the year compared to the market’s ~2% increase.

Exhibit 5: US Equity Strategy Risk and Return Metrics

Source: Bristol Gate Capital Partners. There is a risk of loss inherent in any investment; past performance is not indicative of future results. Please see important dislosures at end of document.

Relative to the S&P 500 Index, stock selection was the primary driver of outperformance in the quarter. Sectoral allocation was again negative, largely due to our overweight in Consumer Discretionary and zero weight in Energy. 

During the quarter, Broadcom, Starbucks and Roper Technologies were among the largest absolute contributors to returns. Advance Auto Parts (AAP) and Zoetis were our only two negative returning stocks. AAP was the largest detractor after reporting another disappointing quarter.

When we initially invested in AAP in mid-2021, our thesis was that company was in a solid industry but operationally lagged its public peers. Management had embarked on a multi-year operational improvement plan and the process changes they were making were significant.

We knew going in improvements would not come in a straight line and not be without challenges. However, given the combination of our dividend prediction (amongst the best dividend growth in the market at the time), the attractive industry dynamics and the inexpensive valuation (AAP was trading at a 6.5% FCF yield on enterprise value at the time), we were willing to take on the execution risk around the improvement plan.

The company struggled on two fronts this year. The first was that they could not meet demand for certain products where the assortment was moved to private label due to supply chain challenges. Management has identified and implemented actions to address these issues and we expect to see improvement going forward.

Secondly, two of AAP’s largest competitors decided to sacrifice their own margins to gain share in the do-it-for-me (DIFM) channel, where they both trail AAP. AAP’s management had a decision to make, protect margins to achieve their guidance and lose further share or respond in kind. They chose the latter. We think they made the right decision as any loss in sales would have had a negative effect on margins regardless. This current pricing dynamic is uncharacteristic for the industry which has generally been well behaved from that perspective. We continue to monitor the situation closely but believe management has taken a prudent stance in their outlook and the initial share price decline following the quarter went too far.

As part of our regular rebalancing process in November, Dollar General and Starbucks were trimmed. The proceeds were allocated to Intuit, Zoetis, Mastercard, Lowe’s and Moody’s.

For the year, the top contributors to portfolio returns were Activision Blizzard, UnitedHealth Group and Dollar General, while the bottom three were Zoetis, Intuit and Applied Materials. All three detractors experienced significant multiple contraction during the year despite solid underlying fundamentals.

Exhibit 6. Top Annual Detractors Underlying Fundamentals

Note: EPS is based on adjusted EPS comparable to consensus estimates. Dividend growth is based on the last quarterly payment.

Source: FactSet, Bristol Gate Capital Partners.

Relative to the benchmark, our stock selection was positive but entirely offset by sector allocation. Our zero weight in Energy had an almost 220 basis point negative impact on relative annual returns. As we have highlighted previously, it is not unusual for us to have low exposure to commodity related markets due to our process and their unpredictable nature.

It has undoubtedly been a trying year. From our perspective, times like these offer attractive opportunities for long-term investors. Valuations have been reset. Inflation, while persistent, appears to have peaked. The Fed is likely closer to the end of the hiking cycle than the beginning. An economic recession sometime in 2023 has become a consensus view and markets have already discounted some of that. Although we continue to believe 2023 consensus expectations for double digit earnings growth for the broader market look optimistic considering slowing economic growth and rising costs, we are not investing in the entire market. We are looking for 22 companies that can grow their dividends at above average rates on the back of solid underlying fundamentals. Our disciplined process and philosophy aim to eliminate the noise market volatility creates and instead take advantage of it. There is a broader offering of investment opportunities available at more attractive valuations than existed a year ago, and we enter the new year enthusiastic about the future for our clients.

Canadian Equity Strategy (all returns CAD)

The Canadian Equity strategy underperformed the S&P/TSX Composite Index during the quarter, finishing in line with the benchmark for year (net basis), erasing almost all of a significant relative deficit to the index (~700bps) that we faced after Q1/22.

Source: Bristol Gate Capital Partners. There is a risk of loss inherent in any investment; past performance is not indicative of future results. Please see important disclosures at end of document.

Stock selection in the Industrials, Materials and Consumer Discretionary sectors and having no exposure to the Energy sector drove the relative underperformance in the quarter. This was partially offset by both our overweight and stock selection in the Information Technology sector, and no exposure to Utilities. Stella Jones, Enghouse and Element Fleet were among the largest absolute contributors to returns, while CCL Industries, Waste Connection and Brookfield Corp. were among the largest detractors.

As part of our regular rebalancing process, in November we trimmed both Waste Connections and Intact Financial to our target equal weights. The proceeds were allocated to Open Text, Premium Brands and Zoetis.

On a relative basis for the year, not having any exposure to Energy cost us over 400bps of relative performance. This was larger than what we experienced in the US due to the sector’s weight in the Canadian Index. Our portfolio was able to overcome that hurdle due to solid stock selection and the underlying fundamental strength of our holdings. Over the trailing 12 months (the December quarter has yet to be reported), our portfolio companies delivered median ~16% revenue growth, ~15% EPS growth and their latest quarterly dividends were ~11% higher than the year ago period.

Firm Update

This year we were thrilled that we were able to once again see many of our valued clients in person as our sales and investment teams have slowly resumed traveling. We have returned to a new normal, hybrid work environment this year. Our culture is one of trust and accountability, and we are proud of how we navigated the challenges that the pandemic brought to the workplace.

As we look ahead to the next year, our priority remains on finding the best possible ways to help our clients achieve their goals. We are always looking for ways to improve and make our investment process more robust. In addition to the two projects discussed earlier, others remain at various stages of completion.

We are also delighted to welcome Laura Hall to the team in the role of Operations Analyst. Laura is an avid learner, evidenced by the fact that she has a double major undergraduate degree, which is only outnumbered by how many pet dogs she has (3!). 

To all our clients, thank you for your ongoing support and trust. We are determined to do everything we can to provide you continued income growth and strong investment returns going forward. If we have not done so already, we hope to see you in person sometime soon. In the meantime, we wanted to highlight two upcoming webinar events.  On January 31^st, our CIO, Izet Elmazi, will be presenting at the CFA Society Toronto’s Annual Equity Symposium. He will be discussing our investment process and highlighting a company we own in the portfolio. Then on February 9^th, we will be hosting the third installment of our Speaker Series. This edition will feature Chris Miller, author of the 2022 FT Business Book of the Year, Chip War: The Fight for the World’s Most Critical Technology. We believe Chris will provide fascinating insight on a very relevant current event. We hope you can join us for both.

Sincerely,

The Bristol Gate Team

---

---

Important disclosures

There is a risk of loss inherent in any investment; past performance is not indicative of future results. Prospective and existing investors in Bristol Gate’s pooled funds or ETF funds should refer to the fund’s offering documents which outline the risk factors associated with a decision to invest. Separately managed account clients should refer to disclosure documents provided which outline risks of investing. Pursuant to SEC regulations, a description of risks associated with Bristol Gate’s strategies is also contained in Bristol Gate’s Form ADV Part 2A located at www.bristolgate.com/regulatory-documents.

Gross returns in this report refer to the Bristol Gate US Equity Strategy Composite and Canadian Equity Strategy Composite. No allowance has been made for custodial costs, taxes, operating costs, management and performance fees, which will reduce performance. Past performance is not indicative of future results. Allowance for withholding tax in the US strategy composite is partially reflected in the composite returns for periods commencing January 2017 and after. The Net returns for the Bristol Gate US Equity Strategy Composite and Canadian Equity Strategy Composite are reflective of the maximum management fee charged by Bristol Gate of 1% and 0.70%, respectively.

The Bristol Gate US Equity Strategy Composite was formerly known as the Bristol Gate US Dividend Growth Composite until April 1, 2015. The Composite inception date was May 15, 2009. The Composite consists of equities of publicly traded, dividend paying US companies and is valued in US Dollars.

The Bristol Gate Canadian Equity Strategy Composite was formerly known as the Bristol Gate Canadian Dividend Growth Composite until April 1, 2015. The Composite inception date was July 1, 2013. The Composite consists of equities of publicly traded, dividend paying Canadian and US companies and is valued in Canadian Dollars.

The S&P 500® Total Return Index measures the performance of the broad US equity market, including dividend re-investment, in US dollars. This index is provided for information only and comparisons to the index has limitations. The benchmark is an appropriate standard against which the performance of the strategy can be measured over longer time periods as it represents the primary investment universe from which Bristol Gate selects securities. However, Bristol Gate’s portfolio construction process differs materially from that of the benchmark and the securities selected for inclusion in the strategy are not influenced by the composition of the benchmark. For example, the strategy is a concentrated portfolio of approximately equally weighted dividend-paying equity securities, rebalanced quarterly whereas the benchmark is a broad stock index (including both dividend and non-dividend paying equities) that is market capitalization weighted. As such, strategy performance deviations relative to the benchmark may be significant, particularly over shorter time periods. The strategy has concentrated investments in a limited number of companies; as a result, a change in one security’s value may have a more significant effect on the strategy’s value.

SPDR S&P 500 ETF Trust (SPY US) sourced from Bloomberg has been used as a proxy for the S&P 500® for the purpose of providing non-return based portfolio statistics and sector weightings.

The S&P/TSX Total Return Index measures the performance of the broad Canadian equity market, including dividend re-investment, in Canadian dollars. This index has been provided for information only and comparisons to the index has limitations. The benchmark is an appropriate standard against which the performance of the strategy can be measured over longer time periods as it represents the primary investment universe from which Bristol Gate selects securities. However, Bristol Gate’s portfolio construction process differs materially from that of the benchmark and the securities selected for inclusion in the strategy are not influenced by the composition of the benchmark. For example, the strategy is a concentrated portfolio of approximately equally weighted dividend-paying equity securities, rebalanced quarterly whereas the benchmark is a broad stock index (including both dividend and non-dividend paying equities) that is market capitalization weighted. As such, strategy performance deviations relative to the benchmark may be significant, particularly over shorter time periods. The strategy has concentrated investments in a limited number of companies; as a result, a change in one security’s value may have a more significant effect on the strategy’s value.

iShares Core S&P/TSX Capped Composite Index ETF (XIC CN) sourced from Bloomberg has been used as a proxy for the S&P/TSX Total Return Index for the purpose of providing non-return based portfolio statistics and sector weightings.

There is the opportunity to use leverage up to 30% of the net asset value. Leverage is not used as an investment tool to enhance returns, but for cash management needs of certain composite portfolios.

This Report is for information purposes and should not be construed under any circumstances as a public offering of securities in any jurisdiction in which an offer or solicitation is not authorized. Prospective investors in Bristol Gate’s pooled funds or ETF funds should rely solely on the fund’s offering documents, which outline the risk factors associated with a decision to invest. No representations or warranties of any kind are intended or should be inferred with respect to the economic return or the tax implications of any investment in a Bristol Gate fund.

Bristol Gate claims compliance with the Global Investment Performance Standards [GIPS®]. To receive a list of composite descriptions and/or a presentation that complies with the GIPS® standards, please contact us at info@bristolgate.com. Bristol Gate Capital Partners Inc. has been independently verified for the periods commencing May 2009 until December 2015 by Ashland Partners International PLLC and from January 1, 2016 – December 31, 2020 by ACA Group, Performance Services Division.

This piece is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. A full list of security holdings is available upon request. For more information contact Bristol Gate Capital Partners Inc. directly. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice. Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at bristolgate.com.

A Note About Forward-Looking Statements

This report may contain forward-looking statements including, but not limited to, statements about the Bristol Gate strategies, risks, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events and conditions or include words such as “may”, “could”, “would”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate” and similar forward-looking expressions or negative versions thereof.

These forward-looking statements are subject to various risks, uncertainties and assumptions about the investment strategies, capital markets and economic factors, which could cause actual financial performance and expectations to differ materially from the anticipated performance or other expectations expressed. Economic factors include, but are not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events.

Readers are cautioned not to place undue reliance on forward-looking statements and consider the above-mentioned factors and other factors carefully before making any investment decisions. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those expressed or implied in any forward-looking statements. Bristol Gate Capital Partners Inc. has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities legislation.

Performance Summary

During the quarter, both the US and Canadian Equity Strategies continued to outpace their respective benchmarks in terms of dividend growth. From a return perspective, US Equity Strategy portfolio performed in line with the S&P 500 Total Return Index while our Canadian Equity Strategy outperformed the S&P/TSX Composite Total Return Index. For a more detailed discussion on performance see each Strategy’s respective section below.

Dividend Growth Summary

Note: LTM Dividend Growth is the median of the actual trailing 12-month dividend growth of the individual stocks held by Strategies or Index constituents as reported by Bloomberg on September 30, 2022. FTM Dividend Growth is the median of the Bristol Gate Model’s forward 12-month prediction for the individual stocks held by the Strategies and the median of consensus estimates for the constituents of the Indices as of September 30, 2022. Companies without a consensus dividend forecast were excluded.

Source: Bloomberg, FactSet, Bristol Gate Capital Partners.

Commentary – Quality is Job 1

We usually end our quarterly notes thanking clients for their continued support. In turbulent times like these, that unwavering confidence in our investment process is worth noting up front and is particularly appreciated as it allows us to remain focused on the long term.

A cocktail of high inflation, aggressive global central bank policy, an ongoing war in Europe, a growing Cold War with China, the global consequences a strong US dollar, amongst other risks has resulted in a highly uncertain macro environment. As US Federal Reserve Chair Jerome Powell said in September, “The chances of a soft landing are likely to diminish (as the Fed keeps raising rates)…No one knows whether this process will lead to a recession or, if so, how significant that recession would be.”

Financial conditions are tightening, economic growth is slowing, and things are starting to break. One current high-profile example in the financial press is the UK pension scheme, where a strategy to leverage their bond portfolio to generate additional returns has spectacularly backfired, forcing them to sell assets to cover losses and margin loans. More than a decade of virtually free money funded a lot of questionable ideas that usually involve unsustainable leverage and/or poor business models. Those two characteristics can be a death blow when rates are rising rapidly as they currently are. We would not be surprised if more things start to break.

The damage stock markets have sustained thus far has largely been sentiment related. Valuation multiples have contracted significantly, accounting for all of the S&P 500’s decline to date. Its 12-month forward P/E ratio has fallen 29% since year end compared to the Index’s price decline of 25% to the end of September. We believe the next phase of this cycle, if it has further to go, will be driven by a revision of earnings expectations. Consensus earnings forecasts for the S&P 500 have largely remained stable to this point, inadequately reflecting the deteriorating macro environment in our view. 

In markets like these, we are always reminded of the 1980’s Ford commercial slogan, “Quality is Job 1”. Business quality is one of the four pillars of our investment process and is something that we do not compromise on when building our portfolios, believing it inherently builds resilience. In ecology, resilience is defined as the capacity of an ecosystem to respond to disturbances by resisting damage and recovering quickly. Resilience accepts that uncertainty and change are inevitable and focuses on withstanding the unexpected. While the definition of quality may slightly vary from person to person, we think US Supreme Court Justice Potter Stewart put it best in his landmark case defining obscenity, “I know it when I see it.” At Bristol Gate we define quality based on the nine traits in Exhibit 1 below.

Exhibit 1. Quality Traits of Bristol Gate Dividend Growers

Source: Bristol Gate Capital Partners Investment Presentation.

We believe quality companies exhibit stable and persistent earnings, high returns, strong cash flows, stable and wide profit margins, and low debt levels. All our portfolio companies are investment grade rated by the major credit rating agencies. We believe these characteristics fundamentally reduce risk and often provide us the conviction to stick with our companies when stock prices are gyrating wildly, as they currently are. Leverage especially matters because too much of it significantly reduces resiliency. Often, companies with too much leverage do not make it to the other side of the challenges we are currently facing. The free money to fund excessive risk taking is no longer there.

As with everything we do, we seek objective evidence to corroborate our views and conclusions, including our assessment of our portfolio’s quality. S&P Global has provided Quality Rankings on common stocks since 1956. Their ranking is driven by the long-term growth, cyclicality and stability of a company’s earnings and dividend record. They recognize that a company’s earnings and dividend performance are the end results of the interaction of a wide variety of factors including but not limited to, market demand for a company’s products or services; product development, production, and marketing strategies; the strength of its executive leadership; its industry position and competitive advantage; its capital structure and capital investment policies. As S&P states, “Over the long run, we believe a company’s record of earnings performance and dividend distributions can tell investors a lot.”

Companies rated “A-” or higher are considered above average quality. “B+” is considered average and anything ranked “B” or lower is considered low quality. Companies without a 10-year history are not rated (“NR”).

Exhibit 2. S&P Global Quality Rankings

As at September 30, 2022.

Source: Bristol Gate Capital Partners, FactSet, S&P Global.

Approximately 60% of the constituents of our US Equity Strategy have above average quality rankings, compared to approximately 30% of the S&P 500. Over 80% of our portfolio is average or better versus 55% for the Index. We believe the three companies (14%) in our portfolio not rated will eventually be classified as average or better once they have a 10-year history. Our sole below average ranking is

Microchip Technology Inc., a company we believe will also graduate to higher rankings in due course now that it has committed to and is executing against a clearly defined capital allocation strategy.

During times like these quality matters because stability and consistency of earnings combined with dividend growth is often more appreciated by the market when there is a lack of it available. We believe we are in one of those periods now. The quality and resilience of our portfolios are critical in allowing us to look through the current turbulence with optimism and predict into the future with some degree of confidence. Our holdings have the ability and willingness to continue investing through the uncertainty, increasing their competitive advantages and coming out stronger on the other end. They have done so in the past and we expect the same going forward.

US Equity Strategy (all returns USD)

During the quarter, the US Equity Strategy performed in line with the S&P 500 Total Return Index. Central banks globally are seeking to reign in persistently high inflation with aggressive policies. Higher rates, higher costs and the growing risk of an economic slowdown further soured investor sentiment.

Exhibit 3. US Equity Strategy Risk and Return Metrics

Source: Bristol Gate Capital Partners Inc. Please refer to “Important disclosures” section below.

Both our overweight and stock selection in the Communication Services sector were the primary contributors to performance in the quarter. Starbucks Corp. was the largest absolute individual contributor to portfolio returns following strong quarterly results in August and a very positive outlook during its Investor Day in September.

Both our overweight and stock selection in the Real Estate sector were the primary detractors from returns in the quarter. On an absolute basis, American Tower Corp. was the largest detractor on growing concerns regarding its high foreign exposure in a strong US dollar environment and fixed contractual annual price increases in its core U.S. market that are below current inflation rates. On the currency issue, we believe that the long-term growth available in the international segment more than compensates us for the currency risk. We suspect that the international segment will once again be looked at as a positive when the macro environment normalizes, and the U.S. dollar potentially gives up some of its recent gains versus other currencies. In terms of the margin concerns related to high inflation, we just do not believe it is as significant a risk as the market does. American Tower has a high fixed cost base including ground rent, which is primarily fixed under long-term lease agreements with its own annual cost escalations, property taxes and depreciation and amortization. These are not significantly affected in the near term by inflation. In fact, high inflation and by extension higher interest rates, may actually lower the price of its land-related costs over time. In the case of certain variable costs such as power and fuel, some or all are directly passed through to tenants.

In addition, in the past we have discussed how businesses with high margins have inherent inflation protection, not needing to raise prices as much as low margin businesses to cover cost increases and maintain dollar profits. American Tower has extremely attractive incremental margins. A cellular tower with one tenant produces gross margin of approximately 40% and a 3% return on investment. Moving to three tenants on the same tower increases gross margin to over 80% and return on investment to approximately 25%. The characteristic is an inflation shock-absorber in our opinion.

Year to date, the US Equity Strategy has lagged the S&P 500 Total Return Index. Our zero weights in Energy, Staples and Utilities have overwhelmed the positive contribution from stock selection. It is not unusual for us to underperform the Index when those sectors are performing relatively well as they have historically offered little opportunity to find high quality, high dividend growers consistent with our investment philosophy.

We added to Applied Materials Inc. and trimmed Cintas Corp. and Dollar General Corp. as part of our regular quarterly rebalancing process that brings positions back to equal weights after they exceed targeted thresholds. The macroeconomic backdrop remains uncertain. We believe owning quality companies that are financially sound and can grow their dividends at above average rates will allow our portfolio to successfully navigate this challenging environment. We believe quality is more than just an idea and can be measured. Sixteen of our 22 portfolio companies have announced dividend increases thus far in 2022, averaging 19.3%. In addition, as shown in Exhibit 4, our holdings in aggregate have delivered higher revenue and earnings growth compared to the Index, while paying out a lower portion of their earnings to shareholders and generating significantly superior return on equity. We believe the willingness and ability to increase their dividends at such a high rate in the context of the current macro environment speaks to the strength and durability of our investments’ business models.

Exhibit 4. US Equity Strategy Portfolio Characteristics

As at September 30, 2022.

Source: Bristol Gate Capital Partners, Bloomberg.

Canadian Equity Strategy (all returns CAD)

During the quarter, the Canadian Equity Strategy outperformed the S&P/TSX Composite Total Return Index. As we outlined earlier, central banks globally are seeking to reign in persistently high inflation with aggressive policies. Higher rates, higher costs and the growing risk of an economic slowdown further soured investor sentiment.

Exhibit 5. Canadian Equity Strategy Risk and Return Metrics

Source: Bristol Gate Capital Partners Inc. Please refer to “Important disclosures” section below.

Outperformance was primarily driven by stock selection in the Financials and Materials sectors, as well as having no exposure to the Energy sector. Element Fleet Management Corp. was the largest absolute contributor to returns over the quarter as the company is in a unique position to benefit from higher interest

rates, energy prices as well as inflationary pressures. Company management also raised their full year guidance.

We added to Enghouse Systems Ltd. and InterRent Real Estate Investment Trust and trimmed Element Fleet as part of our regular quarterly rebalancing process that brings positions back to equal weights after they exceed targeted thresholds.

Fourteen of our 23 portfolio companies have announced dividend increases thus far in 2022, averaging ~12%. In addition, our holdings in aggregate have delivered revenue and earnings growth of ~14% and ~11%. Like our U.S. Strategy, we believe the willingness and ability to increase their dividends at such a high rate in the context of the current macro environment speaks to the strength and durability of our investments’ business models.

Firm Update

To all our clients, thank you for your continued trust and confidence. Since our inception, we have continually invested for the long-term by owning the best prospective dividend growers for the coming year. Dividends and dividend growth have played a significant role in terms of their contribution to total returns in other tumultuous periods such as the inflationary 1940s and 1970s or the stock market’s “lost decade” of the 2000s. We believe rising income leading to rising value is a fundamental investment “truth” across markets and time and do not believe the concept has lost its relevance in today’s environment.

Sincerely, The Bristol Gate Team

---

Important disclosures

There is a risk of loss inherent in any investment; past performance is not indicative of future results. Prospective and existing investors in Bristol Gate’s pooled funds or ETF funds should refer to the fund’s offering documents which outline the risk factors associated with a decision to invest. Separately managed account clients should refer to disclosure documents provided which outline risks of investing. Pursuant to SEC regulations, a description of risks associated with Bristol Gate’s strategies is also contained in Bristol Gate’s Form ADV Part 2A located at www.bristolgate.com/regulatory-documents.

Gross returns in this report refer to the Bristol Gate US Equity Strategy Composite and Canadian Equity Strategy Composite. No allowance has been made for custodial costs, taxes, operating costs, management and performance fees, which will reduce performance. Past performance is not indicative of future results. Allowance for withholding tax in the US strategy composite is partially reflected in the composite returns for periods commencing January 2017 and after. The Net returns for the Bristol Gate US Equity Strategy Composite and Canadian Equity Strategy Composite are reflective of the maximum management fee charged by Bristol Gate of 1% and 0.70%, respectively.

The Bristol Gate US Equity Strategy Composite was formerly known as the Bristol Gate US Dividend Growth Composite until April 1, 2015. The Composite inception date was May 15, 2009. The Composite consists of equities of publicly traded, dividend paying US companies and is valued in US Dollars.

The Bristol Gate Canadian Equity Strategy Composite was formerly known as the Bristol Gate Canadian Dividend Growth Composite until April 1, 2015. The Composite inception date was July 1, 2013. The Composite consists of equities of publicly traded, dividend paying Canadian and US companies and is valued in Canadian Dollars.

The S&P 500® Total Return Index measures the performance of the broad US equity market, including dividend re-investment, in US dollars. This index is provided for information only and comparisons to the index has limitations. The benchmark is an appropriate standard against which the performance of the strategy can be measured over longer time periods as it represents the primary investment universe from which Bristol Gate selects securities. However, Bristol Gate’s portfolio construction process differs materially from that of the benchmark and the securities selected for inclusion in the strategy are not influenced by the composition of the benchmark. For example, the strategy is a concentrated portfolio of approximately equally weighted dividend-paying equity securities, rebalanced quarterly whereas the benchmark is a broad stock index (including both dividend and non-dividend paying equities) that is market capitalization weighted. As such, strategy performance deviations relative to the benchmark may be significant, particularly over shorter time periods. The strategy has concentrated investments in a limited number of companies; as a result, a change in one security’s value may have a more significant effect on the strategy’s value.

SPDR S&P 500 ETF Trust (SPY US) sourced from Bloomberg has been used as a proxy for the S&P 500® for the purpose of providing non-return based portfolio statistics and sector weightings.

The S&P/TSX Total Return Index measures the performance of the broad Canadian equity market, including dividend re-investment, in Canadian dollars. This index has been provided for information only and comparisons to the index has limitations. The benchmark is an appropriate standard against which the performance of the strategy can be measured over longer time periods as it represents the primary investment universe from which Bristol Gate selects securities. However, Bristol Gate’s portfolio construction process differs materially from that of the benchmark and the securities selected for inclusion in the strategy are not influenced by the composition of the benchmark. For example, the strategy is a concentrated portfolio of approximately equally weighted dividend-paying equity securities, rebalanced quarterly whereas the benchmark is a broad stock index (including both dividend and non-dividend paying equities) that is market capitalization weighted. As such, strategy performance deviations relative to the benchmark may be significant, particularly over shorter time periods. The strategy has concentrated investments in a limited number of companies; as a result, a change in one security’s value may have a more significant effect on the strategy’s value.

iShares Core S&P/TSX Capped Composite Index ETF (XIC CN) sourced from Bloomberg has been used as a proxy for the S&P/TSX Total Return Index for the purpose of providing non-return based portfolio statistics and sector weightings.

There is the opportunity to use leverage up to 30% of the net asset value. Leverage is not used as an investment tool to enhance returns, but for cash management needs of certain composite portfolios.

This Report is for information purposes and should not be construed under any circumstances as a public offering of securities in any jurisdiction in which an offer or solicitation is not authorized. Prospective investors in Bristol Gate’s pooled funds or ETF funds should rely solely on the fund’s offering documents, which outline the risk factors associated with a decision to invest. No representations or warranties of any kind are intended or should be inferred with respect to the economic return or the tax implications of any investment in a Bristol Gate fund.

Bristol Gate claims compliance with the Global Investment Performance Standards [GIPS®]. To receive a list of composite descriptions and/or a presentation that complies with the GIPS® standards, please contact us at info@bristolgate.com. Bristol Gate Capital Partners Inc. has been independently verified for the periods commencing May 2009 until December 2015 by Ashland Partners International PLLC and from January 1, 2016 – December 31, 2020 by ACA Group, Performance Services Division.

This piece is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. A full list of security holdings is available upon request. For more information contact Bristol Gate Capital Partners Inc. directly. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice. Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at bristolgate.com.

A Note About Forward-Looking Statements

This report may contain forward-looking statements including, but not limited to, statements about the Bristol Gate strategies, risks, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events and conditions or include words such as “may”, “could”, “would”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate” and similar forward-looking expressions or negative versions thereof.

These forward-looking statements are subject to various risks, uncertainties and assumptions about the investment strategies, capital markets and economic factors, which could cause actual financial performance and expectations to differ materially from the anticipated performance or other expectations expressed. Economic factors include, but are not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events. Readers are cautioned not to place undue reliance on forward-looking statements and consider the above-mentioned factors and other factors carefully before making any investment decisions. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those expressed or implied in any forward-looking statements. Bristol Gate Capital Partners Inc. has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities legislation.