Three quarters of consecutive equity market gains gave way to increased volatility in September and a pullback in stock prices
Corporate revenue and earnings trend lines diverge, a potentially positive signal for near-term economic activity
Rise in fixed income yields suggests the market is underwriting a higher-for-longer interest rate cycle
Disney and RTX Corporation divested as our investment theses no longer support long-term ownership
Structurally advantaged companies remain Coleford’s sole focus
Conservative. Consistent. Committed.
PORTFOLIO MANAGEMENT TEAM
Alain Agostini
Robert Hill
James Leo
Craig Middaugh
Kenneth Wong
MACRO ENVIRONMENT
After three quarters of consecutive equity market gains from the lows registered in the fall of 2022, the month of September arrived with increased volatility as concerns about energy prices, inflation, future corporate earnings and growth came into view. The result was a price decline.
Equity Index Price Change
The companies that comprise the S&P500 reported their most recent quarterly earnings this summer. In general, profits were down year over year by about 5%. Even so, close to 80% of S&P500 constituents “beat” their earnings expectations. It is reasonable to ask why the Index gained almost 20% over the past 12 months when earnings were lower? The same question applies to the S&PTSX 60 Index, which was up almost 5% over the same period.
There are numerous explanations (such as Index composition) but chief among them is that equity markets are forward looking. Asset prices can reflect the willingness of market participants to look beyond today’s (lower) earnings to the future. This concept is ephemeral, driven by sentiment, and therefore can change at a moment’s notice. While today, market participants may be willing to patiently wait for inflation to subside and earnings growth to recover, they could simply change their minds tomorrow.
The other noticeable trend from recent earnings reports is the divergence between revenue and profit. In aggregate, revenue continued to increase, while earnings decreased. This is an unusual phenomenon, as historically, revenue and profits have increased and decreased in tandem. Where these trends move in the future is impossible to know. However, this divergence supports the view that economic activity (measured by revenue) continues to be strong enough to muddle through a potential recession – at least so far.
On interest rates, recent moderation in inflation is undoubtably good. After a single rate hike by the Bank of Canada and the Federal Reserve in the third quarter, we appear to be closer to the end than the beginning of quantitative tightening. As Federal Reserve Chairman Jerome Powell stated in September, “We’ve covered a lot of ground, and the full effects of our tightening have yet to be felt. Today, we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings. Looking ahead, we are in a position to proceed carefully in determining the extent of additional policy firming that may be appropriate.”
The question remains how large an impact tighter credit markets will have on growth in the economy. Recall that the Bank of Canada has raised rates 10 times since March of 2022 and in both countries, policy interest rates are the highest in two decades.
EQUITIES
In the Coleford Equity Portfolio, we made two changes in the quarter with the divestitures of shares in The Walt Disney Company and RTX Corporation. While these sale decisions were taken for different reasons, both reflected the fact that the fundamentals of these businesses no longer measured up to our long-term investment thesis. When that thesis is nullified, and companies’ structural advantage weakens, discipline demands (and gets) action.
When we first invested in Disney in 2018, our core thesis was that Disney’s unmatched breadth and quality of its intellectual property, combined with management’s long-term strategy to monetize this content, were distinct and meaningful structural advantages. Rather than simply selling individual units of content, Disney’s direct-to-consumer business model was designed to allow it to sell its intellectual property year-round through a multitude of media and formats completely owned and controlled by Disney.
Disney successfully launched their direct-to-consumer streaming platform Disney+ in 2019, reaching 100 million subscribers in less than 16 months, a feat that took Netflix 10 years to accomplish. During this time, as the Covid-19 pandemic swept the globe, other parts of the business suffered. This included Disney theme parks, which experienced rolling closures and capacity reductions. Of note, these tremendously large disruptions did not alter our long-term investment thesis. We reasoned that Disney could successfully navigate the pandemic, and in fact, this view was accurate. After two years of losses during the pandemic, Disney theme parks reported record operating income in 2022. However, during this period, two trends emerged and accelerated: the decline of linear (traditional television) content distribution; and the proliferation of content on direct-to-consumer streaming platforms. The acceleration of these trends has had a meaningful impact on our view of Disney’s ability to monetize its intellectual property.
The proliferation of direct-to-consumer content inherently makes content itself less valuable and the much more rapid decline of linear television reduces the means through which Disney can monetize its content. While we continue to believe that Disney’s content is a structural advantage, we also believe that the company will not be able to capture as much of the economic value of this content as we once thought. That excess value will now accrue to the consumers of streaming content rather than the makers/owners (in this case, Disney).
U.S. Pay-TV Subscribers 1-Year Change
Our decision to sell RTX Corporation follows a similar process. United Technologies, the predecessor to RTX Corporation, was an American multinational conglomerate we purchased in 2005. One of RTX Corporation’s key divisions (representing approximately a third of corporate revenue) is Pratt & Whitney, a top three turbofan engine manufacturer for commercial aircraft. Pratt & Whitney began developing a next-generation engine in the 1990s that promised significantly improved fuel efficiency and noise reduction. That engine finally entered service in 2016. This was an extended timeline, as Pratt & Whitney worked through and solved numerous reliability issues. Once in service, the new engine did achieve the promised fuel efficiency improvements but there were minor durability issues.
While the entire aviation industry was upended by the pandemic, we believed Pratt & Whitney would emerge with a more dominant market position as the supplier of proprietary, fuel-efficient engines once air travel recovered. This in fact came to pass as Pratt & Whitney achieved close to a 50% market share on certain new Airbus planes. However, this summer a new, more significant durability issue arose. We believe that this misstep will significantly alter the market-share dynamic for Pratt & Whitney, likely preventing them from achieving above industry margins. As such, we sold the position.
FIXED INCOME
The 3rd quarter saw a fairly strong rise in fixed income yields in the Canadian market – particularly yields on durations greater than three years. This move could be characterized as the market underwriting a higher interest rate environment for longer. As an example, the yield on a 10-year Government of Canada bond increased to 4.0% from 3.25% in the third quarter.
Government of Canada Interest Rate Curve – Q2 2023 to Q3 2023
We took advantage of higher rates on offer. During the quarter, we sold a bond position nearing maturity and had a bond mature. We used the proceeds from this sale and maturity to add three new bond positions, increasing the yield of the Coleford Fixed Income Model Portfolio.
CLOSING THOUGHTS
After three quarters of equity market gains, it is not unusual to see profit taking. In investor parlance, it is simply “noise” without bearing on long-term business fundamentals. What does matter, in our view, is owning structurally advantaged companies as part of a diligently managed portfolio. The recent decision to exit two Coleford Equity Model Portfolio holdings because their advantage weakened aligns with this disciplined approach and positions our clients well for the long-term future. As we redeploy capital, the same discipline will apply.
Know what you own and know why you own it.
— Peter Lynch —
Dividend Notice to all Series F Class Unitholders of record on December 15th, 2025.
The Coleford Equity Fund, a Mutual Fund Trust, announced on the 15th day of December 2025 a $2,248,308.75 dividend to be paid on the 15th day of December 2025 to all Series F Class Unitholders of record on the 15th day of December 2025. For the record and for income tax purposes, each unitholder of record should be aware that 55.33% of the dividend payment will be classified as an eligible dividend and the balance will be characterized as foreign business income.
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Optimized by Seraphinite Accelerator
2023 Q3 Coleford Quarterly Commentary
Quarterly Commentary
THIRD QUARTER 2023
Executive Summary
Conservative. Consistent. Committed.
PORTFOLIO MANAGEMENT TEAM
MACRO ENVIRONMENT
After three quarters of consecutive equity market gains from the lows registered in the fall of 2022, the month of September arrived with increased volatility as concerns about energy prices, inflation, future corporate earnings and growth came into view. The result was a price decline.
Equity Index Price Change
The companies that comprise the S&P500 reported their most recent quarterly earnings this summer. In general, profits were down year over year by about 5%. Even so, close to 80% of S&P500 constituents “beat” their earnings expectations. It is reasonable to ask why the Index gained almost 20% over the past 12 months when earnings were lower? The same question applies to the S&PTSX 60 Index, which was up almost 5% over the same period.
There are numerous explanations (such as Index composition) but chief among them is that equity markets are forward looking. Asset prices can reflect the willingness of market participants to look beyond today’s (lower) earnings to the future. This concept is ephemeral, driven by sentiment, and therefore can change at a moment’s notice. While today, market participants may be willing to patiently wait for inflation to subside and earnings growth to recover, they could simply change their minds tomorrow.
The other noticeable trend from recent earnings reports is the divergence between revenue and profit. In aggregate, revenue continued to increase, while earnings decreased. This is an unusual phenomenon, as historically, revenue and profits have increased and decreased in tandem. Where these trends move in the future is impossible to know. However, this divergence supports the view that economic activity (measured by revenue) continues to be strong enough to muddle through a potential recession – at least so far.
Diverging Trend Lines: S&P 500 Trailing 12 Month Revenue & Earnings
Interest Rates
On interest rates, recent moderation in inflation is undoubtably good. After a single rate hike by the Bank of Canada and the Federal Reserve in the third quarter, we appear to be closer to the end than the beginning of quantitative tightening. As Federal Reserve Chairman Jerome Powell stated in September, “We’ve covered a lot of ground, and the full effects of our tightening have yet to be felt. Today, we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings. Looking ahead, we are in a position to proceed carefully in determining the extent of additional policy firming that may be appropriate.”
The question remains how large an impact tighter credit markets will have on growth in the economy. Recall that the Bank of Canada has raised rates 10 times since March of 2022 and in both countries, policy interest rates are the highest in two decades.
EQUITIES
In the Coleford Equity Portfolio, we made two changes in the quarter with the divestitures of shares in The Walt Disney Company and RTX Corporation. While these sale decisions were taken for different reasons, both reflected the fact that the fundamentals of these businesses no longer measured up to our long-term investment thesis. When that thesis is nullified, and companies’ structural advantage weakens, discipline demands (and gets) action.
When we first invested in Disney in 2018, our core thesis was that Disney’s unmatched breadth and quality of its intellectual property, combined with management’s long-term strategy to monetize this content, were distinct and meaningful structural advantages. Rather than simply selling individual units of content, Disney’s direct-to-consumer business model was designed to allow it to sell its intellectual property year-round through a multitude of media and formats completely owned and controlled by Disney.
Disney successfully launched their direct-to-consumer streaming platform Disney+ in 2019, reaching 100 million subscribers in less than 16 months, a feat that took Netflix 10 years to accomplish. During this time, as the Covid-19 pandemic swept the globe, other parts of the business suffered. This included Disney theme parks, which experienced rolling closures and capacity reductions. Of note, these tremendously large disruptions did not alter our long-term investment thesis. We reasoned that Disney could successfully navigate the pandemic, and in fact, this view was accurate. After two years of losses during the pandemic, Disney theme parks reported record operating income in 2022. However, during this period, two trends emerged and accelerated: the decline of linear (traditional television) content distribution; and the proliferation of content on direct-to-consumer streaming platforms. The acceleration of these trends has had a meaningful impact on our view of Disney’s ability to monetize its intellectual property.
The proliferation of direct-to-consumer content inherently makes content itself less valuable and the much more rapid decline of linear television reduces the means through which Disney can monetize its content. While we continue to believe that Disney’s content is a structural advantage, we also believe that the company will not be able to capture as much of the economic value of this content as we once thought. That excess value will now accrue to the consumers of streaming content rather than the makers/owners (in this case, Disney).
U.S. Pay-TV Subscribers 1-Year Change
Our decision to sell RTX Corporation follows a similar process. United Technologies, the predecessor to RTX Corporation, was an American multinational conglomerate we purchased in 2005. One of RTX Corporation’s key divisions (representing approximately a third of corporate revenue) is Pratt & Whitney, a top three turbofan engine manufacturer for commercial aircraft. Pratt & Whitney began developing a next-generation engine in the 1990s that promised significantly improved fuel efficiency and noise reduction. That engine finally entered service in 2016. This was an extended timeline, as Pratt & Whitney worked through and solved numerous reliability issues. Once in service, the new engine did achieve the promised fuel efficiency improvements but there were minor durability issues.
While the entire aviation industry was upended by the pandemic, we believed Pratt & Whitney would emerge with a more dominant market position as the supplier of proprietary, fuel-efficient engines once air travel recovered. This in fact came to pass as Pratt & Whitney achieved close to a 50% market share on certain new Airbus planes. However, this summer a new, more significant durability issue arose. We believe that this misstep will significantly alter the market-share dynamic for Pratt & Whitney, likely preventing them from achieving above industry margins. As such, we sold the position.
FIXED INCOME
The 3rd quarter saw a fairly strong rise in fixed income yields in the Canadian market – particularly yields on durations greater than three years. This move could be characterized as the market underwriting a higher interest rate environment for longer. As an example, the yield on a 10-year Government of Canada bond increased to 4.0% from 3.25% in the third quarter.
Government of Canada Interest Rate Curve – Q2 2023 to Q3 2023
We took advantage of higher rates on offer. During the quarter, we sold a bond position nearing maturity and had a bond mature. We used the proceeds from this sale and maturity to add three new bond positions, increasing the yield of the Coleford Fixed Income Model Portfolio.
CLOSING THOUGHTS
After three quarters of equity market gains, it is not unusual to see profit taking. In investor parlance, it is simply “noise” without bearing on long-term business fundamentals. What does matter, in our view, is owning structurally advantaged companies as part of a diligently managed portfolio. The recent decision to exit two Coleford Equity Model Portfolio holdings because their advantage weakened aligns with this disciplined approach and positions our clients well for the long-term future. As we redeploy capital, the same discipline will apply.