Manager’s Quarterly Commentary – David Barr – Q3 2013
The Pender Small Cap Opportunities Fund turned in another strong quarter. It was up 8.39%1 compared to 6.26% for the benchmark2.
Again, the performance of the Fund was largely driven by the performance of key holdings including QHR Technologies (TSX-V: QHR), CRH Medical (TSX: CRH) and Tio Networks (TSX-V: TNC) with the assistance of one announced takeover in the quarter, Novus Energy (TSX-V: NVS). Since inception3 the Fund has had an annualized return of 19.19%1, compared to 8.02% for the benchmark.
1 Refers to Class A units in the Fund. 2 S&P/TSX Capped Composite Total Return Index. 3 Inception is June 2009.Forward thinking, finding catalysts
As value investors, we are in the business of buying low and selling high. Firstly, we are always buying what we believe are undervalued stocks. The second part of the equation is for the price of the business to reach our estimates of intrinsic value which gives us an opportunity to profit from our investment. Sometimes, the market will help “close the discount” as continued strong financial performance increases the share price of a holding. Many traditional value investors use time as an ally in this regard. However, it often takes longer than expected, leading to the dreaded “value trap”.
In the small cap investing world, companies tend to be acquired more frequently than in the large cap world. Obviously, there are more potential buyers for a $500 million market cap company than for a $100 Billion market cap company.
A key part of our investment process is that we constantly look for potential catalysts that can accelerate the “closing of the discount”. During the quarter, we read the most recent MD&A for Novus Energy. The company originally came to our attention in December 2012, when it announced a “value optimization process”, investment banker talk for “we are trying to sell the company”. In the recent MD&A, in the penultimate paragraph on page 17, Novus disclosed:
“The Company confirms that it is currently in exclusive negotiations with respect to a potential transaction. In that regard, the Company received an order of the Court of Queen’s Bench of Alberta, as well as confirmation from the TSX Venture Exchange, that it may delay its annual general meeting of shareholders until October 24, 2013. This may save the Company the expense of holding an additional meeting, should the Company undertake a transaction which requires shareholder approval”.
To us, this looked like a company that was right at the finish line in closing a sale of the company. We immediately increased our weighting to 2% of the Fund at $0.85 per share. Trading in the company was halted three business days later and it announced that it was being acquired for $1.18 per share, a 38.8% premium from the price we paid days earlier.
Portfolio Updates
It is worth noting that the four companies that presented at the Pender Small Cap Opportunities Investment Ideas Lunch in June also had good quarters.
In our search for value, we added four new companies to the portfolio. To make room for these new ideas, we sold five positions – two as a result of being acquired and three based on valuation concerns.
Within the portfolio, we were quite active in the quarter. As information about companies was made available, we changed our weightings to reflect changing risk/reward metrics.
The cash position in the fund moved back up to 24%, approximately the average cash weighting we’ve had since inception so if the world ends with the potential US government shutdown, I’m going bargain hunting.
David Barr, CFA September 30, 2013Commissions, 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.