Manager’s
Quarterly Commentary – David Barr Q3, 2018
Penderfund
Capital Management Ltd.
The
rest of the world is selling Canada
…so we are buying it. Low oil and other commodity prices,
uncertainty in global trade and fears about Canadian housing have all been key
reasons that Canadian markets have effectively gone nowhere for the past two
years. This has created the opportunity for us to increase our Canadian
exposure from 13% at the beginning of the year to 38% at September 30 in the
Pender Value Fund. We have been able to deploy capital into our historical
Canadian small and microcap universe (more on this later), but we have also
been active in the midcap space and in the energy sector, thanks to the
contributions of Amar Pandya who joined us over a year ago to focus on these
areas.
Déjà
vu
In 2015 we started to deploy cash into US listed companies.
As small and mid cap stocks became cheaper we were able to buy companies we
liked at an attractive price. But as is usually the case, momentum continued to
work against us and a lot of these stocks became even cheaper. We’re not market
timers. We’re not going to time investments to hit the bottom, so we focus on
paying the right price. Similarly, in Canada, as we rotated back into Canada,
momentum acted against us and while our performance has been dragged down by
our Canadian universe year to date, we remain comfortable in the long term
because we own businesses we like and understand, at what we believe is an
attractive price.
Small
and microcap Canada
If you picked up a national newspaper in the last couple of
weeks, you will probably have noticed a substantial part of the business
section was dedicated to the impending legalization date (now passed) of
cannabis in Canada
US
small and mid cap
This part of the market has been very interesting this year
to say the least. One aspect that is very attractive to us is the volatility we
witness. As a refresher for first time readers, for us, volatility is a
wonderful tool that “Mr. Market” provides so that we can buy businesses we know
well at a price below what we believe they are worth, before trimming or
selling them when they become priced at a premium to their value. The first
half of the year drove strong performance in the Fund and a lot was from this
exposure. This came off a bit in Q3 and then October hit. The Russell 2000 was
down 9% in early October and we experienced some of this in our portfolios. During
this time, we saw several names in our universe fall around 50% from their
52-week highs. That’s a buying opportunity and that’s what we did.
A
rotation to quality
Finally, when the market experiences volatility it gives us
a chance to make switches within portfolios and to increase the quality of our
portfolios. For example, we have been able to increase the weighting in
businesses we view as compounders to 60% of the Pender Value Fund portfolio.
The
future?
Well, we truly have no idea what is going to happen over the
next few months. Momentum has turned negative and this could continue to drive
markets down. Investor sentiment indicators, like the CNN fear and greed index,
keep on bouncing off the “extreme fear” indicator. It would not be unexpected
to see more downside in this type of environment. But we are not market timers.
What we do know is that as prices decline, risk is reduced and future prospects
improve, all things being equal. The Pender Value Fund today is at historical
lows in cash, historical highs in allocation to compounders and the margin of
safety, as we measure it, is very attractive today.
David Barr
November 5, 2018
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