Manager’s Quarterly Commentary – David Barr – Q4 2015

Written by

2015 was a challenging year with not a lot of places to hide. Our performance was strong to start the year, supported by market appreciation in some of our key holdings. We were actively trimming positions throughout the first part of the year, reaching cash balances towards the high end of our range. Markets then rolled over and in August we started to deploy our cash. We experienced attractive entry points throughout the year, whether through low outstanding bids during the market open crash on August 24, company specific events or tax loss selling. Our buying continued through to year end and into this year.

The New Year didn’t create the reprieve investors were hoping for. Markets have continued their decline. We look at the Russell 2000 as a good proxy for the North American small/mid cap market. Looking at its performance over the past two years leaves a lot to be desired. It was effectively flat in 2014 and down in 2015. More striking is the performance in the past 12 months where the index is 26% off its 52 week high. And according to one report we’ve read, the average company is off 43% from its 52 week high.

Faced with decreasing prices for businesses we love, we continue to be buyers. Our cash positions are hovering around 10%, down quite a bit from last August when we were 33% in the Pender Value Fund and 21% in the Pender Small Cap Opportunities Fund. Clearly we were early.

This is reminiscent of 2011 in the small cap fund when our cash position decreased from 33% at June 30 to 3% in late August. Having deployed the capital, we then experienced a drawdown of 8.6% in the fund in November 2011, our largest to date at that point in time.

This serves to highlight that as market timers, we are far from perfect but as business owners our discipline in allocating capital to businesses we like at sensible prices pays off over longer term cycles where fundamentals trump emotions. Allocating capital at a time when we were getting great prices was one of the key drivers for the next 36 months in the small cap fund.

David Barr
February 23, 2016