Manager’s Quarterly Commentary – Felix Narhi – Q1 2015 – Pender Strategic Growth & Income Fund
Class A units in the Fund generated a total return of 2.4% during the quarter and were valued at C$12.20 on March 31, 2015.
Effective on January 23, 2015 Pender took over the management of the entire equity portion of the Fund from Dixon Mitchell Investment Counsel Inc. Pender has always been the portfolio manager of the Fund and has been responsible for asset allocation. Historically, the mid-to-large cap portion of the equity side was managed by Dixon Mitchell and the small-cap portion was managed by Pender. Pender now manages the mid-to-large cap as well as the small-cap portions. Fulcra Asset Management continues to advise on the fixed income strategy of the portfolio. Overall the Fund will remain our most conservatively managed fund.
The overall investment strategy of the Fund will not change. We continue to target an allocation of 40-60% allocation in Canadian and foreign equities with the balance being fixed income and cash. The equity portion of the portfolio takes a value-based approach through a portfolio of North American and international securities with the same objectives of a) capital appreciation; b) generating income, and c) preserving capital. For the mid-to-large cap equity portion of the portfolio, the Fund will continue to target relatively mature companies that have defensible competitive positions, are led by competent and experienced management teams and are available at reasonable prices.
All things being equal, we prefer dividend paying companies, but we believe the global chase for income has driven the valuations of many higher yielding stocks to increasingly unattractive levels. We believe Raymond DeVoe Jr’s adage that “More money has been lost reaching for yield than at the point of a gun” is increasingly relevant today. As a result, this cautionary view has led to a moderate de-emphasis of dividend-paying equities, meaning total returns will derive more from capital appreciation. We also anticipate that we will have less resource exposure over time and more exposure to less cyclically-driven sectors. However, this will be a slow migration of holdings over time.
During the quarter we sold out of Apple, International Flavors & Fragrances and Oracle and added a position in Google. We also trimmed our holdings in Canadian National Railway, Home Capital Group, 3M and McDonalds. The Fund ended the quarter with a cash weighting of 6.45%. Broadly speaking, we believe the valuations of large US companies are becoming somewhat stretched. As the S&P500 is now trading near the highest levels over the past decade, we remain increasingly vigilant about trimming and selling individual holdings when their valuations appear high and endeavour to recycle that capital into other opportunities that are more reasonably priced.
Felix Narhi, CFA
May 15, 2015
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