Author: Cole Heideman

Performance Summary

During the quarter, both the US Equity Strategy and Canadian Equity Strategy outperformed their respective benchmarks net of fees. Both the strategies also continued to outpace their respective benchmarks in terms of dividend growth.

For the full year, the US Equity strategy kept pace with the S&P 500 in a very narrow market, while our Canadian Equity strategy had a strong year relative to the S&P/TSX Composite. 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 Dec 31, 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.

Trust the Process

A year ago, the S&P 500 had just experienced its worst year since the Global Financial Crisis. There were widespread concerns that high interest rates and inflation would lead to a recession and that markets would continue to suffer as a result. Suffice it to say, in 2023 the market zigged while most expected it to zag. The S&P 500 finished the year up over 26%.

In our 2022 year-end client letter, following the challenging year, we counseled that investors zoom out and focus on the bigger picture. We wrote:

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. 

Much like Sam Hinkie and his rebuild of the Philadelphia 76ers, we asked investors to “trust the process”, not the outcome after a difficult 2022. That trust was seemingly rewarded in 2023.

In an environment of slow growth and the relative return headwind from not owning six of the “Magnificent Seven” stocks (either due to no dividend payments or subpar dividend growth), our portfolio and the companies within it have distinguished themselves through their better operating results than their dividend peers and having experienced much less multiple expansion and/or much better operating performance than the market.

Exhibit 1. 2023 Returns.

Source: Bristol Gate Capital Partners, Morningstar Direct.

While we are proud of our results in 2023, we never put too much stock in short term returns. How our strategy performs over the long-term matters much more. From that perspective, our formula has worked for almost 15 years now. As Exhibit 2 shows, over that time frame, our high dividend growth focus has consistently performed at the top relative to our peer group of dividend and income strategies and produced results that have been competitive with the Index across various time periods. We have achieved this despite not being able to own many of the non dividend paying tech and tech related companies that have created so much value in the Index over the past 15 years.

Exhibit 2. Returns Over Various Time Periods

Note: The eVestment US Dividend & Income Peer Group is a custom universe we have created based on a review of long-only dividend and/or equity income focused US large-cap strategies within the eVestment database.  Bristol Gate Capital Partners Inc. pays a licensing fee to eVestment to access their database. As at Jan 16, 2024.

We believe our long-term track record is a testament to our differentiated approach to dividend investing, taking advantage of structural market inefficiencies and using our investment process to create a competitive advantage.

We are singularly focused on high and sustainable dividend growth.

Everything we do is centered around high dividend growth and the underlying factors that can maintain it. In 2023, our portfolio companies delivered dividend increases of ~14%, well above the Index constituent average increase of ~7% and the actual S&P 500 Index cash dividend increase of less than 5%. 

Exhibit 3. Trailing 12 Month Dividend Growth

Note: As at December 31, 2023. Trailing dividend growth is 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.

Source: Bloomberg, Bristol Gate Capital Partners.

We are yield agnostic and do not compromise on quality.

Rather than requiring a minimum yield, our focus on high dividend growth as opposed to high dividend yield is a key differentiator that we believe leads to better long-term results. Often companies that are paying high yields do so in an unsustainable manner, with excessive payout ratios or dividend payments propped up with the use of leverage. We ignore those companies and instead focus on the ones that have low payout ratios, low leverage, who share a little bit of the strong cash flow they generate with us as investors, but more importantly, reinvest the bulk of it back into their businesses to drive that cash flow and dividend higher over time.

Exhibit 4. Bristol Gate’s Focus

Source: Bristol Gate Capital Partners.

Our process demands conviction.

We are not trying to be everything to everyone. We are looking for 22 stocks that meet our stringent requirements and we give each of them an equal weight in our portfolio. When those stocks exceed certain threshold weights, they are automatically rebalanced back to target weight on a quarterly basis.

That automatic rebalancing is an inherently contrarian mechanism within our process that has several positive outcomes. It allows us to stick with our winners over a long period of time without them becoming a big portfolio risk in themselves. It allocates to our laggards during periods when they are out of favour, increasing the internal rate of return on those investments versus a buy and hold strategy. Lastly, and perhaps most importantly, if forces us to have an honest conversation with ourselves when a holding is not meeting our expectations and decide if it deserves to remain in the portfolio or not.

Exhibit 5. Bristol Gate Rebalancing Approach

Source: Bristol Gate Capital Partners

We look to continuously improve our process.

We are not dogmatic about our process and critically evaluate each element of what we do in hopes of identifying a better way and improving our return potential. Our firm embraced machine learning in 2017, long before OpenAI’s Chat GPT made Artificial Intelligence a buzz word. We did so because it improved our chances of success by producing more accurate dividend growth predictions than the model we were using at the time. We are currently working on a number of projects across stock selection, portfolio construction and trading that we hope will be additive to our return opportunity in the future.

Summary

This coming year will see our US Equity Strategy reach the milestone of a 15-year track record. Over that timeframe, our process has withstood a variety of economic environments, whether it be falling or rising interest rates, economic expansion or contraction, geopolitical events, and a global pandemic. We continue not to guess where the macro environment is heading and instead trust our process. We remain confident that whatever the coming year may have in store for us, our clients and partners will benefit from our approach over the long term. Our approach is unchanged: build a portfolio of high-quality companies that can grow their dividends at high rates and buy them at reasonable prices. That strategy has served our investors well, and their dividend income has also risen substantially. We do not see why the factors that led to that performance should change in the future and look forward to continuing to compound our investors income and wealth.

US Equity Strategy

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.

Market Recap:

After declining in the third quarter, the S&P 500 closed out the year with a strong Q4, rising by over 11%. The rally was underpinned by inflation easing and the Federal Reserve signaled it could start cutting interest rates in 2024 if inflation continued to fall.

From a fundamental perspective, earnings growth continues to be slow for the broad market with FactSet forecasting flat earnings y/y for the S&P 500 in Q4/23. This is expected to accelerate to 11.4% in 2024. The brighter outlook, combined with a more dovish Fed led to wider breadth in the market. After being driven by a handful of stocks for the first nine months of the year, the last quarter was the only one in 2023 where the equal-weighted S&P 500 outperformed the market-cap weighted index. 

Portfolio Results:

The US Equity strategy outperformed the benchmark during the quarter net of fees. For the year, the portfolio underperformed the S&P 500, although it performed very well relative to our investable universe of dividend-paying stocks.

Contributors:

Both overweight and stock selection in Industrials, stock selection in Information Technology and no exposure to Energy contributed to the portfolio’s outperformance.

On an absolute basis, Broadcom, American Tower and Cintas were amongst our best performers in the quarter.

For the year, stock selection in Financials contributed to returns. The portfolio benefited by having no exposure to Energy and Utilities and both allocation and selection effects in Health Care and Industrials also contributed to returns.

Detractors:

Stock selection in Consumer Discretionary and both overweight and stock selection in Materials detracted from returns in the quarter.

On an absolute basis, Corteva, Activision Blizzard and UnitedHealth Group were among the weakest performers. 

For the year, the largest detractor was not owning six out of the “Magnificent Seven” group of companies, as they either did not pay a dividend or meet our criteria for dividend growth. Stock selection in Consumer Discretionary and Consumer Staples detracted from returns, as did allocation and selection effects in Communication Services and Materials.

Transactions:

During the quarter, with the cash received from Microsoft’s acquisition of Activision Blizzard in October, we initiated a new position in Carrier Global Corporation at a 4.5% weight and increased our positions in Thermo Fisher Scientific, Sherwin-Williams and Lowe’s back to target weight.

Carrier is a leading global provider of Heating, Ventilation and Air Conditioning (HVAC) and refrigeration solutions. We believe the business is positioned to deliver attractive dividend growth supported by solid underlying fundamentals.

HVAC is an attractive industry, historically growing at two times the rate of industrial production, fueled by long-term sustainability megatrends and a growing global middle class. The industry enjoys the benefits of a significant portion of its revenues coming from repair and replacement activities, buffering sales relative to other industrial segments during periods of economic weakness. Lastly, Carrier is trading at a meaningful discount to its HVAC peers, a valuation gap we expect to close as it becomes more of a pure play HVAC company, exiting certain non-HVAC businesses and integrating its acquisition of Viessmann Climate Solutions, a European heat pump business.

In this regard, management recently announced agreements to sell its global commercial refrigeration business to Haier for an enterprise value of approximately $800 million and its security business to Honeywell for an enterprise value of approximately $5 billion. The sales prices represented transaction multiples of 16.5x and approximately 17x 2023 expected EBITDA, respectively and were comfortably above our expectations, indicating the value in Carrier’s portfolio.

The proceeds from the disposition will help the company pay down debt from their Viessmann deal and reach their committed leverage target quicker, allowing them to resume share buybacks.

Outlook:

In an environment of slow growth and the relative return headwind from not owning six of the “Magnificent Seven” stocks (either due to no dividend payments or subpar dividend growth), our portfolio companies have distinguished themselves through their operating results.

Exhibit 7. Bristol Gate US Equity Portfolio Metrics vs S&P 500 Index

Source: Bristol Gate Capital Partners, Bloomberg

The entire market’s gain for 2023 can be attributed to multiple expansion as earnings are expected to be down for 2023. In contrast, our collection of high dividend growth, high quality businesses experienced significantly less multiple expansion than the market, accounting for less than a third of our return for the year. Said another way, relative to the market, we believe consensus expectations have set the operating hurdle for 2024 much lower for our holdings. If they continue operating as they have, and we see no reason for that to change, it should result in a good outcome for our investors. The broad market on the other hand must deliver a significant increase in earnings to justify the multiple expansion it was awarded in 2023.

Canadian Equity Strategy

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.

Market Recap:

The S&P/TSX Composite rose over 8% in the quarter. After GDP contracted in the third quarter, the Bank of Canada maintained their policy rates during Q4 to try and continue to support domestic growth.

Portfolio Results:

The Canadian Equity strategy outperformed the benchmark during the quarter and added considerable value above the benchmark for the year. We view the long-term results of the strategy relative to the S&P/TSX Composite as validation that a high-quality portfolio of high dividend growth stocks can outperform the market over the long-term.

Contributors:

Having no exposure to the Energy sector as well as both selection and allocation effects in Materials, Consumer Staples and Real Estate contributed to the portfolio’s outperformance.

On an absolute basis, Jamieson Wellness, Colliers International and Brookfield were amongst our best performers in the quarter.

For the year, the portfolios underweight to and stock selection within the Materials sector, stock selection in Real Estate and Financials and the lack of exposure to the Energy sector were the primary contributors to outperformance.

Detractors:

The underweight to Financials, and stock selection in the Information Technology sector detracted from returns in the quarter. 

On an absolute basis, Premium Brands Holdings, Dollarama and Intact Financial were among the weakest performers.

For the year, stock selection in Information Technology was the largest detractor from returns.

Transactions:

There were no material transactions for the Canadian strategy in Q4.

Firm Update

During the past year we continued to make progress at the firm level by welcoming back Vincent Racine to the Data Science Team and Aman Dhaliwal to the Sales and Marketing Team. Both had been co-op students with us in the past and after completing their degrees decided to return to Bristol Gate. We are delighted with their decisions. 

On the business side we had a busy and productive year and were successful earning the right to be represented on a couple of significant SMA platforms at major distribution firms in Canada. We have increased our efforts in the US by contracting with 2 separate firms to represent us there and we hope to have continued success in both markets moving forward. 

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

Sincerely,  The Bristol Gate Team

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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.

S&P 500 ® Total Return Dividend Aristocrats Index measures the performance of a subset of S&P 500® Index companies that have increased their dividends every year for the last 25 consecutive years. This Index has limited relevancy to our approach as it focuses on historical dividend growth, whereas Bristol Gate’s US Equity strategy’s securities are selected based on future dividend growth.

S&P 500 ® High Dividend Index is designed to measure the performance of 80 high yield companies within the S&P 500 and is equally weighted to best represent the performance of this group, regardless of constituent size. This Index has

limited relevancy to our approach as it focuses on dividend yield, whereas Bristol Gate’s US Equity strategy’s securities are selected based on future dividend growth.

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

From a return perspective, the US Equity Strategy portfolio performed in line with the S&P 500 Total Return Index (net of fees) during the quarter. Our Canadian Equity Strategy underperformed 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 Sep 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

Market Recap

The S&P 500 gave back some of the year-to-date gains in Q3, falling over 3%. Although the Fed opted to maintain its benchmark interest rate in September, it indicated that it is not done raising rates in 2023, possibly diminishing the chances of a soft landing and driving the market 5% lower in September alone. With wages remaining strong and unemployment levels low, the elements that may contribute towards any potential rate cuts remain missing.

The “Magnificent Seven” stocks, which have provided the bulk of the market’s gains year-to-date retreated in Q3. The Energy sector was by far the best performing, rising 12%, benefitting from higher oil prices. Large caps continued to outperform small caps. 

Exhibit 1: Various Asset Class Year-to-Date Returns

Bristol Gate US Equity Strategy returns are in USD net of 1% fee. Bristol Gate Canadian strategy returns are in CAD net of 0.7% fee. Source: Bristol Gate Capital Partners, LSEG Datastream, Reuters, Oct 2, 2023

US Equity Strategy (all returns USD)

The Bristol Gate US Equity Strategy performed in line with the benchmark (net of fees) during the quarter despite a zero weight in Energy.

Top Contributors:

Stock selection in the Information Technology, Health Care and Communication Services sectors contributed to the portfolio’s relative performance during the quarter.

On an absolute basis, Activision Blizzard, Intuit and MSCI were amongst the top contributors during the quarter. Activision shares held steady as the market gained confidence that their acquisition by Microsoft would clear regulatory hurdles. Intuit continues to deliver sturdy top line and earnings growth and management reiterated their guidance for strong long-term growth expectations. MSCI’s quarterly results topped street expectations and the company continues to grow all their major business segments at attractive rates.

Bottom Detractors:

Having no exposure to the outperforming Energy sector was the largest headwind for the portfolio in the quarter (~50bps on a relative basis). Both stock selection and our overweight to Real Estate also detracted from returns.

On an absolute basis, American Tower (AMT), Microchip Technology (MCHP) and Allegion (ALLE) were amongst our bottom contributors during the quarter. AMT has been our worst performing stock year-to-date, hampered by higher interest rates, volatile foreign exchange and customer consolidation. We also believe it has suffered from some indiscriminate selling of the Real Estate sector. Real Estate was the second worst performing sector in the Index during the quarter. Unlike other segments within the sector that are exposed to poor or deteriorating fundamentals (retail, commercial office, etc.), we see robust underlying demand for AMT’s wireless and data center infrastructure assets globally, for the foreseeable future as we move to a “connected everything” world. While higher rates do pose a challenge given the company’s debt load, we believe its current customer consolidation headwinds are largely behind it and expect a near term catalyst when the company sells a majority stake of its Indian business. The company’s CEO said they are in the late stages of the sale process and reiterated his confidence in getting a deal done shortly at a recent investor conference. In the meantime, AMT announced a dividend increase of 10% y/y in September.

Portfolio Positioning

We increased our weights in Allegion and Corteva as both fell below our quarterly rebalancing weight threshold and sourced the funds from sales of Broadcom and Intuit.

During the quarter, we exited our position in Dollar General (DG). We initially invested in DG in 2020 due to its attractive dividend growth, its business model focused on value and convenience and a reasonable valuation. We expected the company to provide some ballast to our portfolio, particularly in difficult economic times as consumers increasingly searched for value. The current economic environment, characterized by high inflation and growing pressure on consumer spending budgets, was the exact type of scenario where we thought DG could thrive. However, after reporting a disappointing Q1/23 result we became increasingly concerned about the firm’s competitive positioning and operational execution, namely:

– The effect persistent inflation was having on the financial health of the low-end consumer, as well as the fact that higher-income consumers did not become more price conscious and start to shop at DG, which normally would offset that impact.

-The growing complexity of DG’s business and supply chain with the implementation of several initiatives to drive sales, like DG Fresh which introduces produce but brings challenges such as cold storage, food safety, rotting, etc.

-Increasing competitive pressure resulting in negative traffic trends. Retail giants continue to invest in omnichannel delivery capabilities gradually eroding DG’s rural moat while lowering prices to attract consumers.

-A view that DG had underinvested in labour as its business has become more complex and its stores experienced growing incidents of theft and employee safety concerns.

With the above concerns, and a deteriorating dividend growth prediction, we decided to sell DG just prior to the company reporting Q2/23 results at the end of August. Q2 also fell short of expectations and the stock has fallen over 30% since our sale.

We used the proceeds from DG to purchase CSX Corp., a leading transportation company. CSX provides rail, intermodal and other services to a broad array of markets through their network of approximately 20,000 route miles of track connecting the Eastern United States and Canada.

In addition to a growing dividend, CSX exhibits many of the fundamental attributes we look for in a ‘Bristol Gate company’:

•     The company has a large opportunity to gain market share, as the North American transportation market, estimated to be approximately $900B, is still mostly (approximately two-thirds) still addressed by trucking. As such there is a large opportunity to gain market share as rail is a more efficient and environmentally friendly alternative to trucking.

•     The company operates in an industry with oligopolistic characteristics. Consolidation over the last 50 years has resulted in six Class 1 railroads in North America, accounting for approximately two thirds of the industry’s mileage and over 90% of freight revenues. Many local markets are monopolies or duopolies for the railroads.

•     CSX is a best-in-class operator, and the company’s high free cash flow margins have enabled consistent dividend growth that is expected to continue. Expected volume and service level recoveries from COVID-related supply chain disruptions should lead to better pricing and revenue going forward. The high fixed cost nature of the business should mean a lot of that recovery falls to the bottom line.

•     We also find the company’s current valuation attractive, particularly relative to the broader market where it is trading near decade-plus lows.

Outlook:

From a corporate earnings perspective, the broad market’s performance remains lackluster. The S&P 500 saw earnings decline on relatively flat revenues in the second quarter. Our portfolio companies continue to deliver far superior operating results than most S&P 500 companies. They are generating consistent revenue growth and the operating leverage we expect from high quality companies despite being in a difficult macro environment. 

Exhibit 2: Bristol Gate Fundamentals vs S&P 500 Index

As at September 22, 2023. Source: Bloomberg, Zacks, Bristol Gate Capital Partners

The strong fundamental performance has supported dividend increases that have exceeded the market’s mid-single digit y/y growth rate by a wide margin.

Exhibit 3: Bristol Gate Holdings YTD Dividend Increases

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

As discussed above, much of the market’s gains this year have come from the fundamental performance and related multiple expansion of just a small subset of stocks, namely, the ‘Magnificent Seven’. Those companies have had an outsized impact on the Index due to their large market weights. Outside that group, the Index’s 493 other companies have collectively struggled. Despite this, the market’s forward earnings multiple has remained at a similar value to the beginning of the year. In contrast, our portfolio companies are trading at a 5% discount relative to their valuations to the start the year, with much stronger revenue and earnings growth:

We remain confident that our companies will continue to demonstrate the fundamental consistency they have thus far this year and our unique approach to high dividend growth investing will serve our clients well in the long term.

Exhibit 4: Bristol Gate US Equity Strategy vs Magnificent Seven vs S&P 500

 

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

Exhibit 5: Bristol Gate 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 S&P/TSX declined by over 2% during the third quarter of the year. The decline was broad but was cushioned by the Energy sector which rose over 10%. The Bank of Canada held rates steady in September, as although core inflation remains higher than the central bank’s target, higher interest rates have had their desired effect and economic growth has slowed domestically.

Portfolio Review:

The Canadian Equity strategy underperformed the benchmark in the quarter.

From a fundamental perspective, we are pleased with how our portfolio companies are navigating an environment where corporate growth broadly has been challenged. Year-to-date, 15 of our businesses have raised their dividends by an average of 10.4%, and delivered strong second quarter earnings, averaging 11.5% revenue growth and 2.4% EPS growth respectively, which stacks up well compared to the index: 

Exhibit 6. Canadian Equity Strategy Risk and Return Metrics

Source: LSEG I/B/E/S, Bristol Gate Capital Partners, Bloomberg. As at Sep 30, 2023

Portfolio Positioning:

As per our quarterly rebalancing process, we increased our weights in Jamieson Wellness and Enghouse Systems as both fell below our threshold and sourced the funds from sale of shares in Alimentation Couche-Tard, Colliers International and Premium Brands Holdings. 

Top Contributors:

Stock selection in the Consumer Discretionary and Real Estate sectors contributed to the strategy’s returns, as did not having exposure to the underperforming Utilities sector.

On an absolute basis, Dollarama, Colliers International and Zoetis were amongst the largest contributors to returns.

Bottom Detractors:

The underperformance for the quarter can almost entirely be attributed to not having any exposure to the Energy sector. Stock selection in the Consumer Staples also detracted from returns.

On an absolute basis, Jamieson Wellness, Open Text and CCL Industries were amongst the bottom detractors in the quarter.

Exhibit 7. 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

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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

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

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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

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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.