Author: Jamie Houston

“Take a simple idea, and take it seriously.” – Charlie Munger

We believe this quote by Charlie Munger captures Bristol Gate’s business mission perfectly. At the core of our philosophy is the belief that the value of an asset is inherently tied to the income it generates. In our case, that income comes from the dividends paid by the stocks we own.

It’s well established that owning dividend-paying stocks generally offers a significant advantage over non-dividend-paying stocks over the long-term. Before launching our strategy, we asked: Within the universe of dividend payers, which companies are the best performers?

By asking this simple question, we discovered that companies in the highest dividend growth cohort—regardless of their current dividend yield — had historically delivered the most attractive risk-adjusted returns over time.

The figure below highlights the strength of high dividend growers from a capital appreciation perspective. As you can see, the correlation between a stock’s income and its value is clear and gets stronger over time. We believe this differentiated focus is an excellent complement to traditional dividend strategies that tend to own higher-yielding, but slower-growing, companies.

The chart above illustrates the total return for dividend paying securities in the S&P 500 based on their dividend growth rate over the relevant periods. The period referenced is from January 1, 1990, to December 31, 2024, and observations are made on a monthly basis. Source: Bristol Gate Capital Partners, FactSet. There is a risk of loss inherent in any investment; past performance is not indicative of future results – please see Important Disclosures.

With this evidence in hand, we developed a disciplined and systematic process to identify and hold the highest dividend growth companies. Since our inception, we have used data analytics to predict dividend growth. In 2017, we adopted a machine learning model designed specifically to forecast future dividend growth for each company in the S&P 500 over the next 12 months. Further, the application and insights provided through data science and artificial intelligence is leading to improvements in our understanding of the opportunity this unique approach provides.

Our predictive approach allows us to focus on what matters most to our strategy — future growth in cash flow to shareholders — while avoiding common behavioral biases that can cloud investment decisions. It also allows us to build a concentrated portfolio of companies that not only grow their dividends consistently, but do so from a position of business strength and quality.

Source: Bristol Gate Capital Partners, FactSet. See Important Disclosures for full performance history. Data for current holdings is shown as of Dec. 31, 2024. For these purposes, Holding Period reflects the adjusted close of the initial buy and final sell dates of these positions and does not reflect the actual return contribution to the portfolio. There is a risk of loss inherent in any investment; past performance is not indicative of future results – please see Important Disclosures.

The above chart provides a compelling proof of concept for the relationship between income growth (measured by dividend per share growth) and capital appreciation (measured by total return), showing the stocks that Bristol Gate has held for over 5 years. By systematically investing in companies with strong forward-looking dividend growth, we aim to capture not just rising income, but the capital appreciation that tends to follow. We’re not chasing yield. We’re not forecasting macro trends. We’re focused on what we believe is a powerful and repeatable investment edge: high, sustainable dividend growth backed by data and discipline.

Our simple idea: invest in the highest dividend growers with the strongest business quality andtake this idea seriously by using a machine learning algorithm to predict forward dividend growth, giving us an unbiased list of companies from which we create a concentrated portfolio.

At Bristol Gate, taking this simple idea seriously has meant building a differentiated process — one that combines human insight and data science— all in the service of a straightforward goal: deliver attractive returns to our investors driven by a growing stream of income.

Important disclosures

Performance Disclosure (As of August 31, 2025):

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.

The information contained herein is obtained from multiple sources that are believed to be reliable. However, such information may not have been veriﬁed, and may be different from the information included in documents and materials created by a sponsor ﬁrm in whose investment program a client participates. Some sponsor ﬁrms may require that these Bristol Gate materials are preceded or accompanied by investment proﬁles or other documents or materials prepared by such sponsor ﬁrms, which will be provided upon a client’s request. There may be discrepancies between Bristol Gate’s performance returns and the returns included in a sponsor ﬁrm’s proﬁle document (for example, but not limited to, differences in account size/type, portfolio management strategies, the number of securities held, average account size, inclusion of institutional or mutual fund accounts, etc.) For additional information, documents and/or materials, please speak to your Financial Advisor.

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.

In addition to strategy’s benchmark described above, the following additional index data may be presented for information purposes only and comparisons to this index data has limitations:

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 focuses on historical dividend growth, whereas Bristol Gate’s US Equity strategy’s securities are selected based on future dividend growth.

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.

Bristol Gate Capital Partners CIO, Izet Elmazi, discusses Q2 results of the US Equity Strategy.

Important Disclosures

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, 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

US Equity Strategy Results

The Bristol Gate U.S. Equity Strategy underperformed the S&P 500 Total Return Index during Q2 as uncertainty reigned as US trade tariffs were announced resulting in a decline early in the quarter and later suspended leading to a strong snap back for the index. On top of the “Liberation Day” narrative, the “One, Big, Beautiful Bill” sought to extend tax cuts passed in 2017, combined with increased defence spending, and cutbacks on programmes like Medicaid.

Diversification was not rewarded in the quarter with three sectors, Information Technology, Communication Services and Consumer Discretionary, contributing ~90% of the S&P 500’s return in Q2. After a slow start to the year, Meta, Nvidia and Microsoft accounted for ~50% of the index’s year to date return. Apple was the only member of the Magnificent 7 posting a negative return in the quarter. Real Estate, Health Care and Energy were the laggards. Health Care faced increased scrutiny as the Trump administration seeks to lower drug prices.

The Bristol Gate US Equity Strategy performed in-line with expectations year-to-date. In Q1, the strategy added value in a declining market.

Exhibit 1:

Source: Bristol Gate Capital Partners, Bloomberg. Bristol Gate US Equity Strategy returns per the chart above belong to a representative account in the Bristol Gate US Equity Strategy Composite as a proxy to demonstrate daily returns on a gross basis and net basis (net of a 1% management fee). There is a risk of loss inherent in any investment; past performance is not indicative of future results. Please refer to full performance history of the Bristol Gate US Equity Strategy Composite within this letter. Please see important disclosures at end of document.

Q2 saw impressive returns for the S&P 500 and further upside from the Russell 1000 Growth as tech stocks continue their torrid run based on AI enthusiasm, cloud computing, internet of things and the subsequent earnings growth. While Bristol Gate lagged the two mentioned indices, we outpaced the S&P 500 Dividend Aristocrats, which generally has been the case in strong equity markets.

Exhibit 2:

Through the first half of 2025, our strategy is in-line with expectations in context of the S&P 500 and Russell 1000 Growth, while outperforming the S&P 500 Dividend Aristocrats.

Exhibit 3:

In Q2, previous narratives returned with mega-cap tech names, retail “buy the dip” investors and narrow breadth leading the market higher. The S&P 500 and Nasdaq 100 ended the quarter at new all-time highs. Growth and Momentum led factor returns, while Quality, Low Volatility and Dividend Yield were amongst the worst performing factors.

The US Dollar declined 10.7% in the first half of 2025, marking the worst first half since 1973, when President Richard Nixon broke the Bretton Woods gold standard. The dollar will continue to be a focal point as the year goes on.

Key Contributors

Positive relative sector allocation from Industrials and an underweight to Consumer Staples and Energy aided returns in the quarter. From an absolute return perspective, Information Technology, Industrials, and Financials drove returns.

Leading contributors included Broadcom, GE Aerospace and McKesson.

Broadcom’s strong returns in Q2 were driven by demand for AI networking and custom accelerators, combined with synergies integrating VMware’s infrastructure software. We continue to believe the company has a significant opportunity ahead of it with its custom semiconductor chip business as hyperscalers look for efficient computing solutions to lower the cost of their massive datacenter investments.

GE Aerospace’s performance was primarily helped by robust demand in commercial aviation services and new engine orders, supported by efficient operations, strategic investments in manufacturing and disciplined financial management which aided profitability and cash flow.

Healthcare services company McKesson benefitted from its core US pharmaceutical distribution businesses in speciality and high growth areas like GLP-1 medication. It also demonstrated strategic portfolio management through the acquisition of PRISM Vision Holdings, and the divestiture of its Canadian retail businesses (Rexall and Well.ca) while continuing to focus on efficiency and cost control.

Key Detractors

Health Care, Financials and Consumer Discretionary hurt relative returns in the quarter.

UnitedHealth Group, Thermo Fisher and Marsh & McLennan were the main detractors from absolute performance.

UnitedHealth fell after suspending its 2025 financial outlook and announcing the departure of CEO Andrew Witty in May. UnitedHealth has struggled with several issues over the last year, most notably higher than anticipated medical costs impacting profitability in its health insurance and OptumHealth segments. Given the nature of health insurance contracts (renewed annually) we believe the company will adjust pricing, benefits, premiums, and co-pays in the upcoming cycle to account for the current cost environment and as such expect profitability to improve going into 2026. Commentary from key competitors has also been consistent with such actions.

Thermo Fisher was impacted by an increase in regulatory and policy risk related to the healthcare sector. In May, President Trump issued an Executive Order aimed at reducing the cost of prescription drugs by directing federal agencies to link US prices to the lower prices paid for the same drugs in a group of other developed countries. This approach is referred to as “most favored nation” (MFN) pricing, however it is unclear how it will be implemented or which drugs will be affected. Nonetheless, the potential for lower profits at biotech and pharma companies led to R&D spending concerns for one of Thermo’s key customer segments. In addition, the threat of tariffs on pharmaceutical drugs and a reduction in federal funding for academic and government related research via the DOGE initiative weighed on the stock and the sector generally.

Marsh & McLennan declined during the quarter based on a modest revenue miss, diminishing insurance pricing and a dip in adjusted operating margin. This decline comes after an extended period of strong performance and despite beating earning per share expectations.

Portfolio Transactions

During the quarter, we initiated a position in Accenture by exiting our position in Microchip.

Accenture thrives on change, leveraging rapid technological advancements to drive consistent demand for its IT services. As the clear leader in the fragmented consulting market, Accenture’s strong brand, unmatched global scale, comprehensive service offerings, and deep client relationships position it to continually gain market share from smaller competitors. Financially, Accenture stands out with a compelling fundamental track record. Since launching a dividend in 2006, Accenture has had a history of consistently increasing it in the mid-teens.

With Microchip, a broad-based inventory destock has lasted longer and been deeper than we expected, negatively impacting the company’s operations and our dividend growth expectations. Recent tariff announcements have further increased uncertainty around the company’s future potential. The lowered dividend growth expectations plus the increased uncertainty led us to exit the stock after it rebounded from recent lows.

Outlook

The Bristol Gate US Equity strategy performed in-line with expectations year-to-date based on market dynamics (adding value in Q1 in a drawdown, lagging in Q2 in a strong growth market driven by narrow breadth). The second half of 2025 raises multiple questions regarding policy volatility, increasing debt and deficits, labour force strength, as well as potential interest rate cuts from the Federal Reserve. As the chart below shows, bond markets are betting on rate cuts while the equity market favours cyclicals over defensives.

Exhibit 4:

Chart: © Apollo Global Management

In this period of uncertainty, the range of outcomes seems to multiply every week. While we cannot control outcomes, let alone headline risk, we are focused on ensuring the businesses we own are able to grow despite this volatility. As we said after the first quarter, our holdings include industry-leading firms characterized by solid market positions, strong balance sheets, consistent generation of substantial free cash flows, and proven resilience through past economic downturns.

Our portfolio continues to outpace the S&P 500 in positive earnings revisions versus the prior 3-month (59% vs 44%) and 6-month (64% vs 37%) time periods, illustrating the conviction of management guidance and the ability to grow earnings in an unpredictable environment.

The second quarter demonstrated how investor appetite for the AI trade has not been satisfied. While we see the merits of riding the dominant themes in the market, especially at times of uncertainty, we are committed to finding quality companies with rising dividends, knowing they will continue to serve investors well no matter the theme of the moment.

Given the portfolio companies’ robust financial health, we anticipate continually increasing dividend payouts in H2 2025, providing our investors with reliable and growing income streams, even amid market turbulence. We will look to take advantage of market volatility, and upgrade the quality if opportunities arise.

In closing, Bristol Gate believes our portfolio offers a basket of attractive companies that can benefit and navigate economic uncertainty.

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 Results

The Bristol Gate Canadian Equity Strategy modestly lagged the S&P/TSX Composite TR Index in Q2. Uncertainty reigned as US trade tariffs were announced and later suspended leading to a strong snap back. On top of the “Liberation Day” narrative, the “One, Big, Beautiful Bill” sought to extend tax cuts passed in 2017, combined with increased defence spending, and cutbacks on programmes like Medicaid.

In April, Canada’s trade deficit widened to a record $7.14 billion while Canadian exports dropped by 10.8% overall. The Canadian economy grew by 2.2% in Q1, front loading orders from Canada prior to tariffs. Prime Minister Mark Carney focused on transforming Canada’s economy, removing provincial trade barriers and developing key energy projects.

The Canadian dollar continued its appreciation since the end of last year, rising ~4.8% versus the US dollar in Q2.

Information Technology, Consumer Discretionary and Financials were the top 3 sectors during the quarter. In fact, all GICS sectors were positive, illustrating the depth and upward directionality generally for Canadian equities.

Key Contributors

Broadcom, Jamieson Wellness, and Element Fleet Management, were amongst the largest absolute contributors. An underweight to Energy, Communication Services and stock selection in Materials also aided relative performance.

Jamieson Wellness benefited from strong Q1 2025 earnings momentum during the quarter as growth in China, international expansion, innovation roadmap and new product launches expected in H2 2025 helped. Expansion in club and e-commerce channels in Canada, along with new distribution and e-commerce partnerships for the Youtheory brand in the US are expected to drive sales.

Element Fleet Management saw strong Q1 earnings on April 30, reporting solid net revenue growth as their capital light business model supported positive operating leverage. Return on Equity increased to 16.7% from 15.4% year-over-year. The company reported an order backlog of $2 billion, and affirmed their full-year guidance, reinforcing investor confidence. BMO and RBC Capital Markets increased price targets.

Key Detractors

Leading detractors included Waste Connections, Enghouse Systems, and Alimentation Couche-Tard. Stock selection and active weights in Financials, Industrials and Real Estate hurt relative returns.

While Waste Connections reported strong Q1 2025 earnings in late April, the stock was subdued during the rest of the quarter due to market rotation and a more risk-on environment. Investors rotated out of defensive and lower growth stocks into more growth-oriented sectors. Other factors hurting the stock price is its perceived premium valuation due to its consistent stable growth. It continues to trade at a premium to its peers, but consistent with its EV/EBITDA multiple over the past 5 years. The company’s fundamentals remain strong, but some analysts noted its valuation was “high” after the late April earnings release.

Enghouse Systems fell short of analyst expectations in Q2 earnings released earlier in June. The company missed on earnings and revenue forecasts, elevating negative sentiment. Net income decreased relative to the same period last year, EBITDA declined and operating cash flow decreased. Integration of the Margento and Trafi acquisitions haven’t been fully optimized and there’s been some challenges in monetizing AI. Despite the near-term challenges, Enghouse maintains a strong cash position with no external debt, has a long track record of increasing dividends and management expects a stronger second half of the year.

The primary factors on performance for Alimentation Couche-Tard (ATD) earlier in the quarter were analyst target price reductions and lack of positive developments in its bid for 7/11, followed by mixed earnings in late June. Q4 Fiscal 2025 earnings showed mixed results, with lower adjusted net earnings and revenue decline year-over-year with merchandise sales pressure in the US. Higher income tax rate and strategic investments hurt net earnings. Despite the challenges, ATD highlighted strong results in Canada and Europe in same-store merchandise sales, increased annual dividends, share repurchase programs, integration of the TotalEnergies assets in Europe and positive outlook from the majority of analysts.

Portfolio Transactions

During the quarter, we initiated a position in TerraVest by removing our position in Colliers.

TerraVest is a consolidator of manufacturing companies that sell goods and services to agriculture, mining, energy production and distribution, chemical, utilities, transportation and construction. Management have been excellent stewards of capital and demonstrated a disciplined approach to acquisitions, adding accretive businesses to their overall portfolio, while unlocking exceptional growth for shareholders over the past decade. The stock price returns reflect management’s execution, and we believe the current valuation justifies the growth and profitability going forward with the expectations of delivering double-digit dividend growth.

Colliers focus on M&A over dividend growth fell short of our expectations, resulting in removal from the portfolio. Despite executing its growth plan, diversifying from capital markets revenue volatility in asset management and engineering services, ultimately our process focuses on dividend growth first and foremost, and we have a higher conviction in TerraVest relative to Colliers going forward.

Additionally, we removed Broadcom and Zoetis from the portfolio this quarter. Bristol Gate Capital Partners continually evaluates and strives for efficacy in the optimization of our product suite to reflect client demands where applicable. Since the launch of the Bristol Gate Canadian Equity ETF in early 2018, the Bristol Gate Canadian Equity strategy has had limited US equity exposure, holding up to 2 US securities. Feedback from advisors and institutional clientele have emphasized a strong preference for a pure play building block in the Canadian high dividend growth equity bucket. This change provides allocators optimal flexibility in portfolio construction.

The Bristol Gate Canadian Equity Strategy delivers a high active share portfolio that doesn’t look like the index. We focus on maximizing long-term returns and diversifying our exposures across risk vectors, not sectors. After careful consideration of our portfolio and the Canadian high dividend growth universe, we’ve eliminated our US equity exposure as we focus on delivering a Canadian Equity portfolio in the high dividend growth space. The Bristol Gate Canadian Equity Strategy will now hold 20 names, an appropriate number of holdings to balance diversification and concentration in the high dividend growth universe.

Outlook

While US relations and trade policy should be ironed out in due time, other possible risks include tariff reversal, inflation and rising unemployment which has an inverse correlation on housing prices and vice-versa, impacting consumer confidence and sentiment. The S&P/TSX Composite TR outperformed the S&P 500 TR in the first half of the year but lagged in Q2 as the S&P 500 TR delivered a strong quarter. Canadian equities have benefitted from Growth tailwinds as well with Small Cap Growth, Mid-Cap Growth and Momentum leading the way during the quarter over other factors like Dividend, and Low Volatility.

Consumer sentiment has rebounded somewhat, however its yet to fully recover from a decline earlier this year. Housing markets are showing signs of stabilization, but sales are low. The Bank of Canada will likely resume cutting rates in the second half of the year as long as inflation remains predictable.

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

We continue to build relationships in North America and beyond, which will provide future growth for our firm. Our focus on using artificial intelligence to enhance our investment process is increasingly valued and there continues to be demand for a unique, evidence-based investment approach that provides investors with additional income every year.

We are happy to announce that Clayton Kelly joined Bristol Gate in April as a Portfolio Specialist and Shalini Chirimunj joined us in May as an Operations Analyst. These additions will strengthen our ability to continue to serve our clients to the best of our abilities.

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 into the future.

Sincerely,

The Bristol Gate Team

Important disclosures

US Equity Strategy returns in this report refer to the Bristol Gate US Equity Strategy Composite (the “US Composite”). The US Composite consists of equities of publicly traded, dividend paying US companies. The US Composite is valued in US Dollars and for comparison purposes is measured against the S&P 500 Total Return Index. The US 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 US 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 US 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 US 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.

In addition to the US Equity strategy’s benchmark described above, the following additional Index data may be presented for information purposes only and comparisons to these Indices has limitations:

The Russell 1000 Growth Total Return Index measures the performance of the large-cap growth segment of the US Equity universe. This Index may be used to contextualize the performance of the Bristol Gate US Equity strategy as it is a broadly utilized style index. However, this index does not solely focus on dividend paying securities, whereas Bristol Gate’s US Equity strategy’s securities solely are focused on dividend paying securities.

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 “Canadian Composite”). The Canadian Composite consists primarily of equities of publicly traded, dividend paying Canadian companies. The Canadian Composite is valued in Canadian Dollars and for comparison purposes is measured against the S&P/TSX. The Canadian 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 Canadian Composite is July 1, 2013. Returns are presented gross and net of fees and include the reinvestment of all income. The Canadian 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 Canadian 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 the prevailing Canadian/United States dollar exchange rate.

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.

A Note About Forward-Looking Statements

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.

The 2000s is widely considered the lost decade where returns for the S&P 500 were 0%. Starting in January 2000 through the end of 2009, the S&P 500 Dividend Aristocrats TR (a benchmark proxy for Bristol Gate US Equity Strategy, prior to its inception) relative cumulative excess return was 96.6% vs -24.3% Russell 1000 Growth vs the S&P 500 TR. During this period, buying the “market” did not help passive index investors.

Bristol Gate believes high dividend growth companies provide an attractive approach to risk management in growth equities through a combination of Income Growth and Capital Appreciation.

IN DEPTH ANALYSIS: Bristol Gate Capital Partners Chartbook May 2025

WATCH: Re-evaluating Growth Equities Podcast – Q2 2025

Over the last 15 years through April 30 2025, the S&P 500 TR has delivered a 13% annualized return aided by a period of historically low interest rates and thematic growth tailwinds leading to an elevated concentration in the top ten holdings of the S&P 500. If you believe in mean reversion to long-term annual average returns, it may be an opportune time for investors to revisit their allocation to Growth Equities (through passive or otherwise).

Source: Morningstar

In the 2010s and onward, Growth equities have provided the perfect runway for passive index investors, from the Zero Interest Rate Policy era through the MAG 7 dominance. However, adding Bristol Gate US Equity Strategy’s high dividend growth mandate since 2010 (inception May 15, 2009), provides directional correlation for most of the time period to the Russell 1000 Growth TR.

Source: Morningstar

Since the start of 2024, all forms of dividends (quality, high dividend growth, and high current yield) directionally have gained in prominence relative to Growth and the broad market. We don’t know when traditional growth will go out of favour, but we do feel confident our focus on high dividend growth sets up well for investors over the long term.

Performance Disclosure (As of April 30, 2025):

Important disclosures

In addition to strategy’s benchmark described above, the following additional Index data may be presented for information purposes only and comparisons to these Indices has limitations:

The Russell 1000 Growth Total Return Index measures the performance of the large-cap growth segment of the US Equity universe. This index may be used to contextualize the performance of the Bristol Gate US Equity strategy as it is a broadly utilized style index. However, this index do not solely focus on dividend paying securities, whereas Bristol Gate’s US Equity strategy’s securities are selected based on future dividend growth.

The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance. The index is used to highlight the impact of concentration in the market cap weighted index but it does not solely focus on dividend paying securities, whereas Bristol Gate’s US Equity strategy’s securities are selected based on future dividend growth.

A Note About Forward-Looking Statements

US Equity Strategy

Dividend Growth

Note: LTM Dividend Growth is the median of the actual trailing 12-month dividend growth of the individual stocks held by Strategy or Index constituents as reported by Bloomberg on March 31, 2025. FTM Dividend Growth is the median of the Bristol Gate Model’s forward 12-month prediction for the individual stocks held by the Strategy and the median of consensus estimates for the constituents of the Index as of March 31, 2025. Companies without a consensus dividend forecast were excluded, as were dividend initiators due to a lack of prior year comparable.

Source: Bloomberg, FactSet, Bristol Gate Capital Partners.

Portfolio Results

The Bristol Gate U.S. Equity Strategy outperformed the S&P 500 Total Return Index during a volatile Q1. The quarter began with optimism driven by the inauguration of Donald Trump and an anticipated pro-business agenda, including tax cuts and deregulation, driving the Index above 6,100 by late January. However, February and March saw sharp declines in the market amid concerns about economic growth, inflation, and tariff-related uncertainties. The administration’s inconsistent tariff policies significantly increased market uncertainty, negatively impacting business confidence as well as consumer and investor sentiment.

Key Contributors

Sector allocation and stock selection aided the strategy’s outperformance in Q1. Leading contributors included GE Aerospace, McKesson, and Marsh & McLennan. The portfolio’s underweight to the “Magnificent Seven” benefitted the strategy during the quarter. While these companies drove market performance in 2024, their average decline of 16% this quarter led to outsized declines in the market.

Key Detractors

The traditional defensive sectors—Consumer Staples, Energy, Real Estate, and Utilities— performed well and detracted from our relative performance during the quarter. These sectors offer higher dividend yields but lower dividend growth potential, aligning less closely with our strategy of prioritizing companies capable of sustained high dividend growth. During periods of economic uncertainty or heightened recessionary risks, investors often shift towards sectors offering higher yields and lower volatility rather than future dividend increases.

Broadcom, Microchip, and Applied Materials were amongst the leading laggards. Broadcom and Applied Materials were impacted by souring investor sentiment around the AI theme. We still believe Broadcom and Applied Materials are extremely well positioned to take advantage of durable long-term trends. Microchip continues to navigate a difficult demand environment following broad inventory adjustments across its customer base. The company held an Investor Day in early March where management provided a detailed nine-point restructuring plan, implementing change across the company. Microchip’s realized savings from these actions should total ~$140M. Furthermore, management cited improved bookings and a stabilized backlog, potentially indicating the bottom of the inventory correction, albeit that was prior to the tariff announcements discussed below.

Portfolio Transactions

During the quarter, we initiated positions in Eli Lilly and Co. (LLY), Westinghouse Air Brake Technologies Corp. (WAB), and Domino’s Pizza Inc. (DPZ). These purchases were primarily funded by exiting CSX Corp. (CSX), Corteva Inc. (CTVA), and Lowe’s Companies Inc. (LOW). The rationale for exiting the names was primarily driven by reduced dividend growth expectations.

Eli Lilly was added after a pullback, providing an attractive entry point. We’re encouraged and anticipate sustained revenue and earnings growth driven by its leading diabetes and obesity treatments, especially given increasing insurance coverage due to therapeutic validation in related comorbidities for its GLP-1 drugs. We expect ongoing dividend growth at a robust mid-teens rate or higher.

Westinghouse Air Brake Technologies is a global market leader in freight and passenger rail technologies, which benefits from a significant installed base that generates stable, recurring revenue. Its expanding international presence and its exposure to the domestic locomotive fleet’s upgrade cycle offer compelling growth opportunities. WAB also maintains a solid track record of consistent dividend increases and announced an additional 25% dividend increase in February.

Domino’s Pizza, the largest pizza company in the world, operates an asset-light, highly franchised model (99% franchised), generating strong free cash flow and high return on capital. The company consistently gains market share within the fragmented U.S. pizza industry, driven by superior unit economics, technology leadership, incremental aggregator partnerships (e.g., Uber Eats, DoorDash), and a powerful brand that appeals to value-conscious consumers. Domino’s substantial international growth opportunity, particularly in China and India, provides significant long-term upside. Plans for store expansion include targeting 18,500 international stores by 2028 (versus approximately 14,400 currently) and ultimately 40,000 units globally.

During the quarter, we trimmed positions in Broadcom, MSCI, Moody’s, Mastercard, and GE Aerospace, reallocating capital toward the new positions, along with increasing our weighs in Applied Materials and Microchip, as part of our portfolio rebalancing process.

Outlook

90% of our holdings beat consensus earnings estimates, delivering median EPS growth of 12% (14% average) during the most recent earnings season. Bristol Gate remains confident in our portfolio’s fundamental strength.

We are continually monitoring the potential tariff impacts on our portfolio and remain diligent in our review. In our view, the portfolio has limited direct tariff exposure. Half of the portfolio consists of service-oriented businesses, largely insulated from tariff impacts. The remaining names have proactively developed strategies such as supply chain adjustments and pricing initiatives to mitigate potential risks.

Our concern lies in the indirect risks posed by tariffs, specifically the potential for these policies to spark broader economic instability or a recession. The economic consequences of President Trump’s “Liberation Day” tariffs have been swift and significant. The policy marks the most expansive and disruptive tariff implementation since the Smoot-Hawley Tariff Act of 1930. The Trump tariffs, initially a universal 10% tariff on all imported goods with subsequent higher rates targeting specific nations, quickly led to escalations with various trade partners, highlighted by China’s perceived defiance and lack of cooperation to negotiate. Market reaction was severe: the S&P 500 dropped 10.5% over two trading sessions from April 3rd to April 4th, marking the largest two-day decline since the depths of the Global Financial Crisis as investors rapidly priced in fears of retaliatory tariffs, rising costs for both businesses and consumers, weakening demand, and declining corporate profitability.

Market events of this magnitude erode investor confidence, prompting investors to make impulsive decisions, such as exiting the market, often to their detriment. While the probability of a global recession has increased, we caution investors against adopting an overly defensive posture for several compelling reasons:

the administration’s seemingly unpredictable tariff policies might yield positive engagement
the initial broad-based tariffs could be a strategic “shock and awe” tactic intended to strengthen negotiating leverage and potentially paving the way toward more balanced, long-term trade policies
the portfolio is exceptionally well-equipped to navigate, and even benefit from challenging economic environments. Our holdings include industry-leading firms characterized by solid market positions, strong balance sheets, consistent generation of substantial free cash flows, and proven resilience through past economic downturns
these companies are strategically positioned not only to endure economic stresses but to leverage market downturns by acquiring weaker competitors or making strategic self funded investments, enhancing their long-term market strength

These businesses have consistently demonstrated a commitment to growing dividends. Eight of our holdings announced dividend increases in Q1/25 averaging approximately 15%. Given the portfolio companies’ robust financial health, we anticipate continually increasing dividend payouts, providing our investors with reliable and growing income streams, even amid market turbulence.

We will look to take advantage of the volatility and upgrade the portfolio where opportunities arise. Inevitably volatility spikes are often excellent opportunities to deploy or reposition capital to build long term wealth.

In summary, despite the current unknowns, we firmly believe our thoughtfully constructed portfolio offers an attractive investment opportunity. Our strategic selection of resilient, market-leading companies positions us to manage risks effectively while continuing to generate strong returns for our investors with the utmost confidence. Strategies that pursued broader diversification, such as the S&P 500 Equal Weight Index, also underperformed the S&P 500 Index (weighted by market capitalization). The Equal Weight Index was up by approximately 13% in 2024.

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

Dividend Growth

Source: Bloomberg, FactSet, Bristol Gate Capital Partners.

Portfolio Results

The Bristol Gate Canadian Equity Strategy underperformed the S&P/TSX Composite Index in Q1. Markets started the year strong, however, February and March saw increased volatility amid growing concerns about economic growth, inflation, and tariff-related uncertainties. Despite the volatility, the Index ended the quarter in positive territory led by Materials (gold companies) delivering an outsized 20.3% return (over 1500 basis points higher than the next closest sector. Utilities and Energy rounded out the top 3 sectors in Q1.

Key Contributors

Stock selection within Financials, TMX Group and Intact Financial were the leading contributor in Q1. Intact delivered strong quarterly results that beat analyst expectations driven by lower than expected catastrophe losses and stronger than expected underwriting results. Intact raised its dividend by 10%, marking the 20th consecutive annual dividend increase.

TMX Group began February on a strong note, after posting better than expected quarterly results that continued through the rest of the period. Management successfully diversified roughly half of the company’s revenue sources with subscription-based value-add services and the balance in the traditional trading and capital formation related businesses. investors received the news positively, as TMX Group closed its valuation gap relative to international exchange peers. Of note, the company also raised its dividend by 5%.

Stock selection in Consumer Discretionary, led by Dollarama was also a positive contributor. Towards the end of Q1, the company announced the acquisition of the leading Australia discount retailer, The Reject Shop, adding another growth lever.

Key Detractors

A portfolio underweight to Materials (gold companies), negatively impacted relative returns in the quarter as gold prices rose close to 20%. Traditionally, the mining sector has not produced consistent dividend growers and disciplined capital allocators, resulting in a meaningful underweight.

On an absolute basis, TFI International, Broadcom and Jamieson Wellness were our leading laggards in Q1.

TFI International declined significantly after reporting disappointing quarterly results in February. Subdued freight volumes combined with market share losses, specifically in the US, where larger competitors used their scale and cost advantage in a challenging environment, hurt results. While the results are a disappointing start for a new holding, we have faith in management both as operators and capital allocators. Bristol Gate expects management to address and improve efficiencies in the performance of its US business over time.

Broadcom was impacted by souring sentiment around the AI theme. We believe the company is extremely well positioned to take advantage of durable long-term trends.

Jamieson Wellness underperformed despite demonstrating continued strong international growth and Canadian market leadership as reflected in solid quarterly results. Late Q1, the company hosted an investor event where it highlighted various opportunities, including continuing to grow profitably in the US and China. Bristol Gate believes the market does not fully appreciate these long-term opportunities.

Portfolio Transactions

In Q1, we trimmed Broadcom and reinvested the proceeds into Stella Jones and Premium Brands as part of our regular quarterly rebalancing process.

Outlook

We remain confident in the portfolio’s fundamental strength. Approximately 70% of our holdings surpassed revenue and earnings expectations, achieving median growth rates of 6.5% and 13.0%, respectively.

We are continually monitoring the potential tariff impacts on our portfolio and remain diligent in our review. In our view, the portfolio has modest direct tariff exposure. Many of our holdings attribute a large portion of their revenues to the US, but they also maintain production capacity within the US, helping mitigate tariff implications. The remaining holdings have proactively developed strategies such as supply chain adjustments and pricing initiatives to mitigate risks and potential exposure. Like our US Strategy, the primary risk remains indirect—potential tariffs triggering broader economic stress or a recession.

Our companies remain well-positioned due to market leadership, robust balance sheets, strong cash flows, and a proven track record. We expect our companies to leverage economic downturns through strategic investments and acquisitions, supporting sustained dividend growth averaging 11.2% year-to-date. Overall, the portfolio continues to represent an attractive opportunity in an uncertain market.

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 income growth and strong investment returns in the future.

Sincerely,

The Bristol Gate Team

Important disclosures

In addition to the US Equity strategy’s benchmark described above, the following additional Index data may be presented for information purposes only and comparisons to this index has limitations:

The returns have been converted into Canadian Dollars using the prevailing Canadian/United States dollar exchange rate.

A Note About Forward-Looking Statements

Bristol Gate President and Chair of the Investment Committee, Mike Capombassis, was recently featured on BNN where he discussed ongoing tariff developments, how market concentration has progressed in 2025, as well as a few companies and areas of the market we are excited about.

Important Disclosures

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, 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

In the November 27th issue of Value Investor Insights, Chief Investment Officer Izet Elmazi and Portfolio Manager Achilleas Taxildaris were interviewed and shared insights on the Bristol Gate investment process and highlighted two representative holdings, Broadcom and Old Dominion Freight Lines.

READ THE FULL INTERVIEW

Article Highlights:

Bristol Gate emphasizes a predictive approach to dividend growth, using machine learning to identify companies in the S&P 500 with strong earnings potential and sustainable competitive advantages. This forward-looking method distinguishes their strategy from traditional dividend investing by providing a focus list of the best predicted dividend growers over the next 12 months to the Fundamental team to select from.
The concentrated 22-stock portfolio allows them to focus on high-quality businesses while confidently excluding those that don’t meet their rigorous standards for dividend growth, quality and valuation.
Industries where capital discipline meets growth potential are a key focus. Their investments in areas like AI-driven semiconductors, less-than-truckload logistics, and enterprise software demonstrate this philosophy in action.
Dividend growth serves as a reliable proxy for long-term earnings growth and shareholder returns. Bristol Gate’s strategy seeks to align with companies that signal confidence through reinvestment and increasing dividends.

Important disclosures

A Note About Forward-Looking Statements

We are dedicated to identifying high-quality businesses with high prospective dividend growth. We aim to build resilient portfolios, which can withstand market volatility and deliver long-term returns. When it comes to portfolio construction, we spend considerable time thinking about the best way to manage an equally weighted portfolio outside of our regular re-balancing time periods. Our data science team has solved this issue by developing a methodical approach using stock price information to build a “threshold” framework which allows for stocks to rise and fall within certain pricing bands in the interim between re-balancing dates. This allows us to take advantage of the opportunities presented during short-term periods of market euphoria and fear.

As outlined in Exhibit 1, we have employed a strategic method to reallocate our investments to optimize portfolio performance. When the weight of any stock fluctuates more than 1% from its target equal weight of 4.55%, we automatically trim or add to those positions on a quarterly basis. As an example, a stock that has experienced gains and exceeds the threshold of 1% would be trimmed back to equal weight and in doing so capture profits and reinvest them into a portfolio company that the market may be undervaluing.

Exhibit 1: Bristol Gate Quarterly Rebalancing Approach

Source: Bristol Gate Capital Partners

We implemented this approach in 2021, based on our findings which examined its potential impact on performance. Our previous approach had been rebalancing all names that had deviated from their target weight, bringing the portfolio to equal weight on a quarterly basis. The results of our study determined that not only was there no detrimental impact on performance potential but that this approach to introduce thresholds would likely have a positive impact given the reduced trading costs associated with it.

From a process perspective, we believe this approach has two primary benefits. The first benefit is it acts as a contrarian system: it reduces our exposure to businesses with near-term valuations that may be stretched while simultaneously increasing our exposure to businesses trading at cheaper valuations. The second benefit is it demands conviction. If we are going to add to laggards which have become our smallest positions, we must discuss and determine the validity of our thesis with the investment committee. If the company’s poor performance is more likely a result of fundamental issues rather than short-term volatility, we are more likely to sell the name rather than add to it.

To demonstrate the impact of this rebalancing on the portfolio, we can look at the history of our ownership of Stella-Jones (SJ), one of the longest held names in our Bristol Gate Concentrated Canadian Equity ETF. SJ is a high-quality, high dividend grower that has fallen in and out of favour with the market since we first initiated our position in the company in 2017.

Throughout our ownership of Stella-Jones, our thesis has not changed. It is a market leader in two of its three main operating segments (utility poles and railway ties). It has discernible competitive advantages versus its competitors. Due to its scale, it can offer coast-to-coast service to large customers (such as Tier-1 Railways), as well as SJ’s treating facilities, which are both very hard to replicate. These advantages have allowed Stella-Jones to have a steady increase in sales volumes in both segments driven by maintenance demand. They also have pricing power, giving them the ability to pass on increasing input costs to their customers.

During the COVID pandemic in 2020, lumber prices shot up due to increased home improvement demand. This boosted Stella-Jones’ share price, and we were able to harvest gains twice during that period. Subsequently, as lumber demand normalized and prices fell after the pandemic, SJ’s revenue from its residential lumber segment fell too. Through our fundamental evaluation, we viewed the drop in share price as overly punitive and we were happy to add to the position.

Stella-Jones management’s medium-term guidance and positive quarterly results since mid-2023, driven by strong demand in utility poles due to increased infrastructure spending in the U.S., a large maintenance replacement cycle and an increase in environmental fires, have since helped its stock price reach new all-time highs. Once again allowing us to realize some profits by trimming our shares and reallocating to other under-appreciated names in our portfolio.

Exhibit 2 demonstrates the evolution of our investment in SJ since our initial investment. Stella-Jones’ stock price has gone from ~$45 to ~$92 between Dec 18, 2017 through August 31, 2024, resulting in a 102% cumulative return (or 11.1% annualized). Our rebalancing process has resulted in excess returns of 1.6% per year as opposed to if we had simply bought and held the stock.

Exhibit 2: Bristol Gate US Equity strategy ownership changes in Stella Jones

Source: Bloomberg, Bristol Gate Capital Partners

The key strength of a disciplined and rigorous investment process is its ability to provide consistency, irrespective of market conditions. At Bristol Gate, our investment strategy is firmly grounded in evidence-based methods, which helps us steer clear of emotional or reactionary decisions, regardless of what the market throws at us. This disciplined approach keeps us aligned with the long-term goals of our clients.

Performance Disclosure (As at August 31, 2024):

Important disclosures

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 S&P/TSX Total Return Index measures the performance of the broad Canadian equity market, including dividend re-investment, in Canadian dollars. This index is provided for information only and comparisons to the index have 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.

A Note About Forward-Looking Statements

At Bristol Gate, we focus on investing in high-quality companies that demonstrate strong potential for high dividend growth. We utilize advanced machine learning algorithms alongside the assessment from our portfolio managers to help determine a company’s dividend growth and quality characteristics. Once we have determined a high level of confidence that a company will grow its dividend at a high rate, we look for specific traits that set these companies apart. What does a Bristol Gate company look like?

Structural Growth. Companies with strong pricing power and support from secular growth trends tend to exhibit structural growth. These companies can maintain a healthy level of growth over time, thanks to their ability to adapt to long-term market trends and sustain robust pricing strategies.

Dominant Franchises. We prefer companies that are dominant in their respective industries. Typically, these companies are a top three player in their space. This dominance can indicate a competitive advantage, ensuring they can sustain their market position and continue to grow.

Free Cash Flow (FCF) Generation. Companies that generate substantial free cash flow are able to meaningfully reinvest back into their business. While we focus on dividend growth, we like companies that allocate cash flow to high return investment opportunities as well. This reinvestment is crucial because it allows companies to earn high returns on invested capital. As equity owners, we want to see companies use their cash flow to fuel further growth and create additional value which will, in turn, drive future dividend growth.

Value Creating Reinvestment. High-quality companies have significant opportunities for value-creating reinvestment. These businesses can allocate capital effectively, reinvesting in areas that will generate high returns. This reinvestment strategy supports their long-term growth and enhances their overall value.

Effective Management. The best companies are led by management teams that excel at capital allocation. These teams know how to balance reinvestment in their own businesses, dividend growth, share buybacks, and strategic acquisitions to maximize shareholder value. Their ability to make smart capital allocation decisions is a key driver of their long-term success. Additionally, we appreciate when management compensation is aligned with shareholder interests and the long-term performance of the company.

Stakeholder Focused. Quality companies prioritize taking care of their customers, employees, and communities. A strong commitment to stakeholders not only ensures a positive impact on society but also contributes to the company’s sustainability and long-term success.

Low Payout Ratios. A lower payout ratio means the company retains more earnings, providing flexibility for future dividend growth. It also means the company sees significant value creation opportunities. A lower payout ratio often means dividend increases are sustainable over the long term.

Strong Balance Sheets. Financial strength is a non-negotiable trait for Bristol Gate companies. We only invest in companies whose debt is investment grade as rated by major rating agencies. A strong balance sheet ensures stability and reduces financial risk, making these companies more resilient during economic downturns.

Consistency. We value consistency and durability in businesses. Companies that demonstrate consistent performance and predictable results make it easier for us to forecast their future growth. This reliability allows us to sleep easier at night, knowing our investments are in stable, well-managed companies.

Our investment strategy focuses on high dividend growth companies. Within this group, we seek to identify and invest in companies that exhibit some or all of these “quality” traits. By doing so, we aim to build a portfolio of high-quality businesses poised for substantial dividend growth and long-term success.

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.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, 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.

Author: Jamie Houston

Dividend Growth -> Capital Growth

Bristol Gate Q2 Update

Report to Investors 2nd Quarter 2025

Re-evaluating Growth Equities

Report to Investors 1st Quarter 2025

Bristol Gate President Mike Capombassis featured on BNN – March 24, 2025

Value Investor Insight (November 27, 2024): Capital Return

Threshold Rebalancing Process: Stella-Jones Case Study

The Essential Traits of High-Quality Companies: A Bristol Gate Perspective

How much do you know about dividends?

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