Pender Strategic Growth and Income Fund – Manager’s Commentary – Q3
This year has been a year of change for the Pender Strategic Growth and Income Fund, formerly the Pender Balanced Fund. As Chief Investment Officer I wanted to write this Manager’s Commentary to inform you about some of the positive developments in the Fund.
- The name change
- The shift to a strategic asset allocation
- Changes to the fixed income team and approach for the fund
- Update on the equity side of the Fund.
- Fund Oversight
Why did we change the name?
With the changes we’ve made to the management of the Fund, we wanted the name to capture how the Fund is now managed. This is our most conservatively managed fund with equity exposure. It will skew towards identifying opportunities in larger, proven companies. Most balanced funds have a steady allocation to equities, bonds and government bonds. At Pender, we go where we find the best opportunities for the mandate and believe, with our unique opportunity set and our proven investment process, we believe we can deliver a truly unique mandate for all unitholders.
Moving to a strategic asset allocation policy with increased flexibility
We recently changed the allowable asset allocation in the Fund from 60/40:40/60 to 80/20:20/80. There are times when a heavy exposure to bonds makes sense and there are other times when it does not. Wall Streeter Shelby Cullom Davis once said: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk,” Which applies as much today as then. Today we are finding more attractive opportunities in equity markets than in fixed income markets. When you can find an investment grade credit where the earnings yield is 5-7% higher on the equity than the debt offers, we are drawn towards the stock. In today’s market with near zero government yields and securities that trade on yield rather than fundamentals, we are much more comfortable in non-interest rate driven securities. We are setting the asset allocation at 80% equity, 20% fixed income for the time being. This will be reviewed semi-annually by the investment team and updated to you accordingly.
Fixed income management
Historically, the fixed income portion of the portfolio has been invested in the Pender Corporate Bond Fund. On September 3, 2015 we brought management of that Fund in house. Geoff Castle is the newest member of the Pender Investment Team and the manager of the Pender Corporate Bond Fund. He will also be overseeing the fixed income portion of the Pender Strategic Growth and Income Fund.
As a result of a shift in asset allocation within the Pender Corporate Bond Fund towards non-investment grade bonds, we decreased the portfolio weighting in the Pender Corporate Bond Fund from 45% to 23% (at September 30, 2015) over the summer.
Moving forward, we expect to have modest exposure to the high yield market through the Pender Corporate Bond Fund and will also be investing directly in high quality issuers where the opportunity has merit.
Equity management
The Pender Investment Team seeks to own a portfolio of well-run larger businesses which, when purchased at sensible prices, we believe have the potential to generate total returns in the high-single-digit-to-low-double-digit range over time.
Small cap exposure
Since inception, the Fund has maintained a 5-10% exposure to small cap stocks through the Pender Small Cap Opportunities Fund. This will be maintained going forward.
Fund oversight and the Pender Investment Team
The last point I wanted to touch on was the overall risk management of the Fund. By internalizing management of the fixed income portion of the portfolio, Fund oversight and the overall risk management of the Fund is even greater today. We are able to monitor industry or company exposure more readily and rebalance when need be. The Pender Investment Team is stronger today as the equity and debt teams communicate with each other on an ongoing basis. When you look at a particular company from different parts of the capital structure, it provides a more thorough understanding of the business and the debate within the investment team serves to make everyone a better investor.
David Barr, CFA
1 Oct 2015