Manager’s Quarterly Commentary – Felix Narhi – Q3 2013

Written by Felix Narhi

The Fund was opened to investors on July 5, 2013 and ended the quarter with 14 holdings and a cash weighting of 4.8%. Class A units that were initially purchased at C$10.00 were valued at C$10.79 at September 27, 20131. A US$ denominated version of the Fund became available on September 6, 2013.

One of our first investments was Volterra Semiconductor (NASDAQ: VLTR) – a niche power management chip maker. Two days after our initial purchase, Maxim Integrated (NASDAQ: MXIM) announced a takeover of the company.  It has been said that the investment process is part skill and part luck. When investing, it is customary to attribute good outcomes to skill and bad outcomes to luck (but we will leave it to the reader to decide which category Volterra fits in). Other positive contributors during the quarter included Encore Capital Group, Apollo Group, and Syntel.

Investment strategy & company highlight

There are two approaches to investing that we follow with the goal being to compound your capital:

1) Intrinsic Value Growth, or buy low and let grow, and;

2) Close the Discount to Intrinsic Value, or buy low and sell high.

The first approach requires patience while investing with competent managers who have strong track records of creating wealth and ideally, eat their own cooking. The second approach requires being opportunistic and buying stocks that are really cheap. Portfolio holdings like Markel Corp. (NYSE: MKL) would fit into the first category while our former holding Volterra fits into the second category.

For fans of Berkshire Hathaway (NYSE: BRK-A), Markel is a company that is following a similar model; it is an insurance company with an emphasis on underwriting profits instead of premium growth, investing its float unconventionally (more equities than most insurance companies) and it is even at the early stages of investing in operating businesses through their Markel Ventures segment. The company’s recent merger with insurer Alterra earlier this year was transformative because it meaningfully strengthened Markel’s global insurance franchise and increased the size of the investment portfolio.

Overall, we believe insurers tend to be mediocre businesses, but they can be terrific investment vehicles in the hands of capable capital allocators like Warren Buffett or Markel’s accomplished Chief Investment Officer, Tom Gayner.  It is worth noting that actuarial tables favour Markel: Mr. Gayner (age 50) is much younger than Mr. Buffett (age 83) which is a key consideration when management is one of the most important long-term drivers of shareholder returns. Over the last two decades both Markel’s stock and the underlying business have actually outperformed Berkshire Hathaway – no wonder the company is often called a mini-Berkshire! While we remain long-time admirers of Berkshire Hathaway, we believe Markel continues to represent the better bet because it is cheaper and its smaller relative size makes it easier to grow. All told, we believe the new Markel is in a unique and fantastic position in that they have a lot of dry powder to deploy in what could be a rapidly changing environment.

A comment about the US government shutdown and debt ceiling fears

We cannot predict how this situation will be resolved. However, we believe Winston Churchill’s decades old observation still holds true today: “We can always count on the Americans to do the right thing, after they have exhausted all the other possibilities.” Although a US fund, in our view these events will have minimal long-term bearing on the fund or its performance. The underlying intrinsic value of the vast majority of businesses does not change very much quarter to quarter or even year to year, for that matter.         Therefore, if we are roughly right in our evaluation of a company and it is worth more than we paid for it, then the price of the stock or security will ultimately reflect this underlying value and potentially provide satisfactory returns over the long-term.  Therefore, it makes no sense to sell well run and undervalued businesses just because of potential political brinkmanship. If anything, any resulting volatility may present opportunities to buy or upgrade the quality of the portfolio rather than sell.

We therefore intend to maintain our course and stay true to our investment process.

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

Felix Narhi, CFA
October 7, 2013

1 The Pender US All Cap Equity Fund is priced weekly. The quarter is priced on the last Friday of every quarter. Standard performance information for the Pender US All Cap Equity Fund is not available because the Fund has been in operation for less than one year. Standard performance information will become available on the first anniversary of the Fund’s inception (July 2, 2013).

Commissions, 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.