Manager’s Quarterly Commentary – David Barr – Q2 2014 – Pender Small Cap Opps Fund

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The Fund has now passed its five year milestone and we are pleased to announce 5 year returns of 21.19%1 as compared to benchmark returns over the same period of 10.90%2. We believe that long term track records are a reliable indicator of the strength of the investment strategy as they account for Fund performance under various market conditions. Recently, the Canadian energy sector has performed well over the last year which is driving some expected underperformance relative to the benchmark because the Fund maintains a relatively low weighting in energy.

PERFORMANCE  3 Month    1 Year    3 Year    5 Year    Since Inception3  
Class A2.98%32.29%22.83%21.19%20.80%
S&P/TSX Capped Composite Index6.42%28.68%7.61%11.02%10.90%
1 Refers to Class A units in the Fund.
2 S&P/TSX Capped Composite Total Return Index.
3 Inception is June 2009.

Where the advantage lies for Pender

People are always asking us where we find our ideas. We dig very deep when we look into a potential holding and we maintain an understanding of the key factors affecting our investment thesis after we buy the stock. Sometimes we uncover information that points to strong or weak potential performance, but that is buried too deep for the market to react to or even be aware of. In doing so, we may be able to anticipate the market.

Last summer, TIO Networks was hovering at around $0.25 per share and publicly available information on the stock did not point to any kind imminent growth. However, our research uncovered three key data points that the market had overlooked.

  • TIO was in the process of a key acquisition.
  • TIO had an exclusive partnership with the discount brand of AT&T, AIO Wireless.
  • AT&T had proposed the acquisition of Cricket Wireless, TIO’s largest customer.

TIO went on to complete the acquisition of Globex Financial Services in January this year, which has led to improved profitability, and now points to revenue growth.

Even more exciting for us, TIO has recently announced that AT&T, who now own Cricket Wireless, have moved all Cricket dealer locations onto the TIO platform. Subsequent to quarter end, TIO have seen the volume of transactions go from 14,000 to 51,000 per day, which will drive further revenue, gross profit and net income improvements for TIO.

This information is not hard to uncover, but not everyone undertakes this deep due diligence. It gives us an advantage and means that we find opportunities ahead of the market and can position ourselves to take advantage of increases in stock value.

Portfolio Updates

During the quarter we made six new investments and sold nine holdings. We added to eight existing positions, and reduced our weighting in five positions. We can also report the take out of one of our smaller holdings, 360 Vox Corporation, bringing our total number of take outs in 2014 to four with two others still in progress. Key contributors to the portfolio in the quarter were Espial Group (TSX: ESP), TIO Networks (TSX-V: TNC) and Redline Communications (TSX: RDL).

David Barr, July 28, 2014