Manager’s Quarterly Commentary – David Barr – Q1 2013

Following up on the Funds strong performance in 2012, your Fund was up 4.68%¹ in the first quarter compared to 3.34% for the benchmark.

Last year the Fund’s performance was assisted by several of the underlying companies being acquired by third parties. So far this year the M&A market has been much slower than in 2012. Since inception² the Fund has an annualized return of 18.33%¹, compared to 8.57% for the S&P/TSX Capped Composite Total Return Index.

1 Refers to Class A units in the Fund.
2 Inception is June 2009.

Corporate Restructurings – The Other Side of “Strategic Review”

When a company undertakes a strategic review, it often leads to the sale of the company and the short term gratification of shareholders, who are usually able to receive a premium for the position they held in the company. However, not all strategic reviews lead to an outright sale of the company. Sometimes the board can spin-off “non-core” businesses, leaving the company and management better able to focus their time and energy on the higher potential return segments of the business. While shareholders don’t receive the same short term gratification they would from the outright sale of the company, longer term, they may do much better as a result of being invested in a more focused, higher growth opportunity.

During Q1, several companies in the portfolio announced such transactions: Sierra Wireless (TSX:SW), Webtech Wireless (TSX:WEW), Hemisphere GPS (TSX:HEM) and ICG Group (NASDAQ:ICGE). Each of these companies spun-off non-core assets. We have spent a significant amount of time analyzing each of these companies and have found segments of the business that are very attractive from an investment perspective. As the companies divest non-core segments, these companies become easier to analyze from an outside perspective and this could serve as the catalyst for better understanding and valuation by the investment community.

Portfolio Updates

We sold four positions in the quarter, three of which were as a result of transactions announced in 2012. Cash in hand has decreased from 28% at the end of the last quarter to 21% at the end of this. This is a result of buying eight new holdings and adding to existing investments at opportunistic prices. We increased US exposure from 5.3% at the end of 2012 to 8.1% at the end of March 2013.

David Barr,
March 31, 2013

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in net asset value and assume reinvestment of all distributions and are net of all management and administrative fees, but do not take into account sales, redemption or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter and is provided for your information only. Every effort has been made to ensure the accuracy of its contents.

© Copyright PenderFund Capital Management Ltd. All rights reserved.  March 31, 2013.