Manager’s Quarterly Commentary – David Barr – Q1 2014 – Pender Value Fund

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We now have our first three quarters under our belt and things have progressed nicely for the Fund. Units that were initially priced at $10.00 were valued at $13.27 at March 31, 2014.

We continue to hold a concentrated portfolio with 27 companies. 16 of these companies are in the Pender Small Cap Opportunities Fund, seven in the Pender US All Cap Equity Fund and four investments unique to the Fund. We expect this to evolve over time so that the portfolio will constitute approximately 1/3 of each. However we won’t be tied to this constraint and will always be investing in the best ideas for the mandate.

In the quarter we added four new positions to the fund and exited from four positions. On the geographical front, the portfolio is 49% Canadian, 33% US and 16% Cash.

Let’s protect on the downside – Cash and Special Situations
We recently reread some of Buffett’s partnership letters from the 1960s. One category of investment he talked about was “workouts”, or as we call them, “special situations”. Our definition of “special sits” can be found in the glossary on our website. Buffett talks about how investing in workouts provides strong absolute returns over time, with the added benefit of these types of investments not fluctuating with the general market. This was really proven out in 1962 when the Dow had a very tough year and Buffett dramatically outperformed, which he attributed to his workout situations.

In the midst of a five year old bull market, we are searching for investments to protect our capital in the case of short term negative market moves. Cash is one way we can achieve this, the other is through investing in special situations. One such new investment is Maxim Power. Maxim is a business with several different assets: power generation in France; power generation in the Northeast US; power generation in Alberta and a coal property in Alberta. Given the diversity of businesses and with a market cap of just $150 million, there are not a lot of investors who naturally follow the company. The Book Value (BV) of the company today is $4.98. We built our position below $2.80 per share, a 44% discount to the BV. We think the BV is a conservative measure of intrinsic value. Therefore the margin of safety is likely to be higher than 44%. We classify the investment as a special situation because the company had reached an agreement to sell the US power generating assets which was canceled by the buyer as a result of a regulatory inquiry. The company announced that it will “investigate further sales opportunities as they arise.” It is our experience that once companies decide to divest of assets to focus on other parts of their business, the will stay focused until the divestiture is complete. As the company monetizes its assets, we believe the discount to Book Value will close and shareholders will benefit.

David Barr
April 15, 2014