The Manager's Commentary - November 2010

Markets are uncertain and investors want capital preservation, income and low volatility.

Pender has been successful with the Pender Corporate Bond Fund, which has an actively managed fixed income portfolio. It has had excellent performance, and maintains an impressive current yield with low volatility. Now, many of our investors are telling us that they would like income from a similarly managed, Canadian portfolio that has similar objectives of providing capital preservation, income and low volatility. In response, we are launching the Canadian Dividend Fund that will have an actively managed portfolio of Canadian equity securities.

We surveyed the market for a manager that has a long term track record of producing strong returns with low volatility and determined that Dixon Mitchell would be the best portfolio advisor for our new fund. They have been providing investment counsel and portfolio management services in Vancouver for over 10 years and now manage over $800 million. They believe in investing in a concentrated portfolio of excellent businesses and, therefore, have a low correlation to major indices and low volatility when compared against both the indexes and other Canadian equity funds.

The portfolio will be initially invested in 20 high quality, dividend paying Canadian companies.

Dixon Mitchell utilizes a robust qualitative and quantitative framework to evaluate prospective equity holdings to ensure that each has the appropriate characteristics and is supported by an attractive reward and risk payoff.

Over the last few months Dixon Mitchell observed that the market’s most speculative issues have enjoyed the greatest appreciation in price. Ironically this has been the indirect result of tempered economic growth expectations that started to emerge mid-summer. The US Federal Reserve, in an attempt to stave off a double dip recession, started to ruminate about injecting liquidity (printing money) into the economy through a bond buying program. Market participants responded through buying equities, wagering no matter what happened to the economy there was downside protection – should the economy accelerate beyond expectations, the equity bet would pay off and if the economy didn’t respond the Fed would inject liquidity thereby boosting equities. Of course we now know that the Fed has embarked on a Quantitative Easing program (dubbed QE2), and speculative equities as measured by the S&P/TSX Completion Index (the portion of the S&P/TSX Composite Index that does not include the larger S&P/TSX60 companies) has outperformed the S&P/TSX60 by 3:1. This has all been driven by multiple expansion driving S&P/TSX Completion Index to a record 28% valuation premium to the S&P/TSX60 Index. Dixon Mitchell believes that now is an excellent time to reduce speculative risk in equity portfolios.

We are excited to be able to introduce the Pender Canadian Dividend Fund and our new equity portfolio advisor, Dixon Mitchell. We assure you that we will continue our personal service and look forward to working with you over the years to come. If you would like any information on the Pender Canadian Dividend Fund or the portfolio advisor, please contact us at your convenience.

Kelly Edmison and David Barr
PenderFund Capital Management
November 29, 2010