Manager’s Quarterly Commentary – David Barr – Q2 2015 – Pender Small Cap Opportunities Fund

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The second quarter was met with some volatility in the Canadian markets, but we are glad to report the Fund performed positively. The Pender Small Cap Opportunities Fund returned a positive 3.90%1 vs the benchmark return of negative 1.63%2. Since inception our Fund has returned an annualized 22.42%1 in comparison to the benchmark return of 9.14%2. Without trying to sound like a broken record, it was again the Fund’s limited exposure to energy that drove this quarter’s outperformance over the benchmark. As an example of this fact, the S&P/TSX Equal Weight Oil and Gas Index fell 5.74%3 in the second quarter of 2015 and makes up nearly 25% of the S&P/TSX Capped Composite Index.

1 Refers to Class F units of the Fund. 2 S&P/TSX Capped Composite Total Return Index 3 Source: CapitalIQ

Key Portfolio Drivers

Main contributors to the Funds’ performance were Polaris Infrastructure, Nobilis Health Corp. and Webtech Wireless. On the negative side, the three largest detractors to the portfolio were Loyalist Group, Terago Inc. and Espial Group.

Nobilis’ share price improved during the quarter as the stock was previously oversold due to a financing with a warrant attached. This has a big impact on the portfolio as Nobilis remains one of the largest holdings in the Fund. Webtech increased in value nicely in the quarter on the back of an announcement that they had certain charges in Brazil against them dropped. This previous uncertainty had put a lid on the intrinsic value of the company and the removal of this relatively large potential liability served as a catalyst in the quarter.

On the negative side, the biggest detractor was Loyalist Group.  After reporting impressive performance for several quarters, the company surprised us and the market with a horrendous earnings release.  Intrinsic value was dramatically impaired, we lost money and have now moved on. We believe that the other negative detractors in the portfolio are down only temporarily and that intrinsic value continues to grow — an example of this is Terago Inc. The company made a nice acquisition that increased the percentage of their business from data centers and cloud servicing, but it then fumbled the associated financing which created short term pressure on the stock price.

Portfolio Updates

There was less activity in the Fund in comparison to the first quarter of the year, but we do remain opportunistic in allocating capital. Two positions were initiated and two were exited over the last three months, which keeps the total number of individual positions in the portfolio at 43. Our cash position now sits at around 18% from 25% at the end of the previous quarter. Cash was utilized by actively increasing six positions in the Fund, offsetting two active decreases. US exposure increased slightly to nearly 13% of the total portfolio, and our top sectors continue to be Information Technology and Healthcare.

We remain focused on delivering superior risk adjusted returns, where risk is measured not simply as short term volatility, but as a permanent impairment of capital.  As we have done thus far, it is our goal that a consistent process and unwavering attention to mitigating such risk will create value for our Funds and fellow unit holders.

David Barr, CFA
July 2015