The Manager's Commentary - December 31, 2010
A Year in Review
I thought I would take this opportunity to review the performance of the Fund for 2010 which I believe provides valuable insight into our investment strategy and demonstrates how the Fund can generate strong risk adjusted returns over the long term. For 2010, Class A units of the Pender Small Cap Opportunities Fund was up 22.85%, compared to 17.61% for the S&P TSX Capped Composite Index.
Patience is required when investing in small cap stocks, as the stock price can remain unchanged for extended periods of time. In order for the stock to appreciate in value, it requires a “catalyst”. Catalysts include: an analyst picking up coverage or changing a recommendation, strong financial results, or the acquisition by a third party. These catalysts usually cause sudden and dramatic changes in the market price of the company.
We aim to identify potential catalysts as one of the criteria for investment in the Fund, so that we may create better returns and lower volatility for our Unit holders. During the past year, six positions held by the Fund announced they were going to be acquired.
| Company | Investment Price | Aquisition Price | Return |
|---|---|---|---|
| SeaCliff Construction | $7.55 | $17.05 | +126% |
| Western Coal | $4.97 | $11.50 | +131% |
| Xenos Group | $2.25 | $3.50 | +56% |
| E-xact Transactions | $0.24 | $0.40 | +67% |
| Matrikon | $2.55 | $3.85 | +51% |
| Menu Foods Income Fund | $2.75 | $4.80 |
When we made our initial investment, our analysis and due diligence process allowed us to generate an investment thesis that each company was undervalued relative to what a third party would pay for various reasons. SeaCliff had a dominant market position in Western Canada that was highly complementary to other Canadian competitors. Western Coal had a proven resource base and secure distribution to a growing market in Asia. Xenos was undervalued relative to its working capital and operating cash flow. E-xact was trading at a valuation below its working capital. Matrikon was a well run business, and it’s large shareholders had a history of pushing for a company sale. Menu Foods was trading below replacement value of its plant and had very strong operating cash flow.
The Fund currently has a cash position of approximately 30%. Information technology continues to be the largest industry weighting at 57% of the Fund’s net assets. The Funds’ exposure to the resource sector has been decreased to 3.5%, as we find it hard to find value in the sector with commodity prices at or near cyclical highs. We continue to seek out the next undiscovered opportunity. We are also patient and willing to wait in order to invest correctly. At this time, we believe it’s better to hold cash and wait for a fat pitch than to be fully invested.
Dave Barr
December 31st, 2010