Manager’s Quarterly Commentary – Felix Narhi – Q2 2015 – Pender US All Cap Equity Fund

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Class A units were down 2.8% during the quarter and were valued at $12.56 at June 30, 2015. Altisource Portfolio Solutions, Panera Bread and Leucadia led the gainers for the quarter, while Syntel, Strayer Education and Iconix were the biggest detractors. During the quarter we initiated positions in two new stocks: Kennedy-Wilson Holdings and Navios Martime Holdings. We exited three positions: Iconix, Post Holdings and Gaming & Leisure Properties. The first two were sold after unexpected events increased business risk to levels we considered too high. The last holding was sold after it increased to our estimate of fair value. We modestly trimmed two holdings (Brookfield Asset Management, Syntel) and added to three positions (Altisource Portfolio Solutions, Posco, Strayer). The Fund ended the quarter with 21 holdings and a cash weighting of 13.4%.

Two New Additions

Founded in 1977, Kennedy-Wilson (KW) has grown from a small auction business into a truly one-of-a kind fully integrated real estate firm. The core management team has successfully exploited real estate’s recurring boom and bust cycles in Japan, the US and the UK. Its proven investment playbook is leveraged in markets where it has a strong regional presence and where distressed real estate opportunities are plentiful. Today, some of the best opportunities are in European markets where large international banks are embarking on meaningful deleveraging programs. Despite its track record, the stock flies under the radar of most investors because it remains a relatively small cap stock. In addition, its accounting can be confusing, and reported book value and earnings significantly understate its fair value. The stock trades as a discount to our estimate of its Net Asset Value, which we believe can continue to compound at a double digit annualized pace over time.

Navios Maritime Holdings (NM) operates as a vertically integrated seaborne shipping and logistics company. While NM is diversified across various different shipping-related businesses, it has been hard hit from its high exposure to the dry bulk segment (e.g. iron ore, coal, grain) where shipping rates collapsed to an all-time low earlier this year. The shipping industry is notoriously cyclical and difficult to predict, but extreme business conditions make the sector a fertile hunting ground for value seeking investors. If history is a guide, investors with the courage to buy the best operators at depressed prices and the patience to wait for the cycle to turn once again should be well rewarded. While the industry is still far away from “normalized conditions”, it appears forces are already in place that will ease today’s unbalanced conditions. As the saying goes, the cure for low prices is low prices. The weakest players go bust or liquidate assets, easing oversupplied conditions and paving a brighter future for survivors. NM is a low cost operator, has enough staying power to weather an extended downturn and is considered one of the best managed companies in the business. The stock trades at a wide discount to our estimate of its fair value and has significant exposure to spot shipping rates, so when the industry eventually recovers, it could obtain a significant increase in profit in a very short time.

Please do not hesitate to contact me, should you have questions or comments you wish to share with us.

Felix Narhi, CFA
August 10, 2015
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