Dear Investors,
The return of the Fund, before fees, compared to the Index, for the nine months ended September 30, 2014, and year to date are presented in the table below:
| Annualized Performance Returns to June 30, 2014 | |||
|---|---|---|---|
| Nine months through September 30 |
Total return through October 21 |
||
| Bristol Gate in CAD | 15.2% | 15.3% | |
| S&P500 Total Return Index in CAD | 14.1% | 12.7% | |
| Excess returns in CAD | 1.1% | 2.6% | |
| Bristol Gate in USD | 9.4% | 9.3% | |
| S&P500 Total Return In USD | 8.3% | 6.7% | |
| Excess returns in USD | 1.1% | 2.6% | |
At September 30, the Fund’s return was ahead of the Index by over 1%. In the recent and dramatic equity sell-off and partial recovery, the gap between the Fund’s return and the Index has increased. Selling-off less in a market decline and recovering faster than the Index is behaviour entirely consistent with the history of the Fund, attributable we believe to the financial strength of our companies. The decline in the Canadian dollar has clearly helped $CAD investors.
Through September 30, the companies we own have increased their dividends paid in 2014 against dividends paid in 2013 by an average of nearly 28%, substantially above our historical record of 18% a year. We expect further dividend increase announcements through the balance of the year. There has been speculation in the financial press recently that share buyback activity will recommence in November, after reporting season. Dividend payments and share buyback activity are at record levels for US corporations.
Third quarter earnings season has begun. United Health, Southwest Airlines, Ingersoll Rand and Leggett & Platt all beat estimates and raised forward guidance. We sold WW Grainger as we no longer believe it will achieve our dividend growth expectations. Boeing and Amphenol each raised forward guidance yet the market is reserving judgment at the minute. We remain optimistic for the balance of the reporting season.
Since our last letter, we have completed substantial research work improving, we believe, our analytical approach to ranking our stock universe by expected dividend growth. Stock selection and portfolio construction are completed only after detailed corporate review – our Productive Capital Analysis™ We have sold and bought five stocks based on the results of this work. To remind, the Fund consists of 22 equally weighted stocks. This is normal turnover. Our expectation for the Fund’s dividend growth in the coming twelve months has been increased as a result of this activity. Going forward, our process will incorporate detailed semi-annual portfolio reviews. We rebalance the Fund’s positions quarterly. Naturally, we monitor our names on an ongoing basis to ensure that fundamentals stay consistent with our dividend growth expectations.
They never ring a bell to signal a correction. It appears that markets, both equity and debt, are adjusting to a slower growth outlook, at least outside the US. Interest rates look to remain lower for longer. Investors must choose between the risk-free rate for 10-year US treasuries currently at 2.25% or equities which can grow their coupon over time. We remain committed to finding exceptional dividend growth.
We thank you for your trust and confidence and welcome your questions at your convenience.
Sincerely,
| Richard Hamm Chief Executive Officer  |
Peter Simmie Chief Investment Officer  |
