December 17, 2020

The Managers Commentary – November 2020

Written by David Barr

Fellow Unitholders,

Our holiday wishes came true early this year, in November. The Pender Value Fund had its highest monthly return in its history[1]  – an amazing 14.3%[2] for the month, ahead of the S&P 500 Index (CAD) with 8.1% and the S&P/TSX Composite Index with a 10.6% return. On a YTD basis (as of November 30, 2020), Pender Value Fund gained 8.3% compared to the S&P 500 Index (CAD) with a gain of 14.0% and the S&P/TSX Composite Index’s 3.8%. 

Portfolio Update
Having been unusually active repositioning the portfolio during October, we did not make any major changes in the Fund in November.

In November, EBIX Inc. (EBIX), MAV Beauty Brands Inc. (MAV), and Dye & Durham Ltd. (DND) were among the top contributors. EBIX has demonstrated remarkable resilience in its business model, generating strong cash flows in the midst of COVID when its travel, foreign exchange and remittance businesses were under a huge amount of pressure. EBIX continues to execute on the right path to growing profitably and the EBIXCash IPO in India could lead to considerable upside from its valuation today. MAV is one of the top holdings in the Fund. Having been a busted IPO it has delivered consistent growth through the pandemic and the stock has been on a tear since early August. MAV remains a high conviction name as we are still fond of its cash flow yield and its acquisition potential. DND is another core holding across multiple funds managed by Pender. It recently announced a sizable acquisition in Australia and also DoProcess LP in Canada, providing diversification to DND’s revenue base. DND has made incredible progress since its IPO in July and has been a key contributor to the Fund performance since.

On the flip side, eGain Corporation. (EGAN) was a detractor. EGAN reported decent quarterly financial results but releasing softer guidance and the loss of two customers resulted in churn. Underneath the negative news, EGAN actually had doubled new logo wins and announced a plan to double its sales and marketing team by March/April 2021. We believe the setback is temporary and that if its sales and marketing strategy executes well, we should see a meaningful rebound of growth in the second half of 2021. 

Introducing the ZIPSS
We have been talking a lot internally about a group of holdings we call the “ZIPSS”. This is a group of technology companies that have some similarities to the business models of the popular high flying big five tech names like Amazon and Facebook, but which we believe have much longer runways of growth ahead which have not been fully appreciated by many investors. With the digital transformation that we are witnessing, further accelerated by the global pandemic, we believe these companies are poised to create a lot of value for patient shareholders in the years ahead.

The pack is represented in the Fund by a group of five companies that are amongst the disruptive breakout leaders in their industry. Zillow Group Inc. (ZG) is disrupting how property is bought and sold in a world where consumers are increasingly demanding the same types of convenient online experiences and efficiencies they have become accustomed to in other industries. IAC/InterActiveCorp (IAC) is poised to transform a whole host of services “from search and entertainment to finding work and home repair”. PAR Technology Corporation (PAR) is gaining momentum and benefiting from the massive tailwinds caused by the sudden need to re-platform and digitize the restaurant industry. Stitch Fix Inc. (SFIX) is an online apparel company focused on hyper personalizing proper fit and style of clothing in order to delight consumers, and finally Square Inc. (SQ), a leading fintech that has become a significant disruptor in the payments and banking industry. All together, we have coined these companies the “ZIPSS”. And there are others in our portfolio with similar models, but for simplicity’s sake, we wanted to keep the acronym describing this theme short and “zippy”. Collectively, these companies have vastly outpaced the returns of the FAAMGs (big five tech companies) during the pandemic and we anticipate continued momentum ahead.

What excites us about these companies is that they have promising economic models to drive profitable growth as they scale, they are amongst the breakout leaders in their respective categories that benefit from positive feedback loops which tend to make the strong even stronger, and they target industries with massive total addressable markets. The ZIPSS are already disrupting traditional incumbents and with the pandemic driving people online, demand for their service platforms has dramatically increased. The trick for investors is to be patient and to hold as long as the companies continue to execute on their vision and valuations remain reasonable in the context of their potential future value creation. Each of these companies has seen the value of their shares drawdown in various periods, through a lack of confidence and other short term concerns, but if you sell during the dips because you are more worried about near term price action than the long-term value creation potential, you may miss out on longer term gains. Our goal is to hold onto core positions as long as our investment theses remain intact.

Ever wish you had bought into the FAAMGs when they were in the early stages of their value creation journey? We believe the ZIPSS of today have the potential to be the FAAMGs of tomorrow.  

David Barr, CFA
December 17, 2020

[1] Fund inception – June 2013

[2] F Class; PenderFund