Unlike many Canadian money managers in a weak market, PenderFund Capital Management has managed to stand out with its performance in the small cap space.
The Pender Small Cap Opportunities Fund has seen a 17 per cent compounded return since inception in June 2009 with its “bottom-up” stock picking strategy, says the fund’s portfolio manager, David Barr, who previously worked as a consultant to emerging tech companies.
His experience in technology has proved useful, as the sector currently comprises 43 per cent of the fund’s portfolio. In an interview with Proactive Investors, Barr says he typically shies away from “big dream tech” companies, and focuses on the business side of technology, with companies that have “solid customer relationships and tangible products.”
Indeed, the fund has continued to employ its strategy of staying away from resource companies during cyclical highs, which paid off in 2011. The fund was up 4.66 per cent last year, versus down 8.7 per cent for the benchmark S&P/TSX Capped Composite Total Return Index, and down 18.1 per cent for the BMO Nesbitt Burns Canadian Small Cap Index.
During the second quarter, the S&P/TSX Index was down 5.68 per cent, while the Pender fund was able to buck the trend and gain 1.89 per cent for the three month period. For the year so far, the Pender Small Cap fund is up a whopping 19.07 per cent – compared to up a mere 1.88 per cent for the S&P/TSX Index.
“The issue with buying “cash boxes” in the resource space now is that many of these companies are spending all their money on exploration, and the cash may go to zero,” says Barr.
The Pender small cap fund looks to invest in companies that are seemingly undervalued by the broader market, with “strong competitive positions” that have the potential for sharp capital appreciation. There are currently four companies in the fund that are trading at or below cash value.
Specifically, Barr says the fund seeks companies that have potential catalysts to drive up their stock price, such as mergers or takeovers.
The Pender vehicle also invests in distressed stocks trading below their breakup value. One unique investment in the fund’s portfolio is Arctic Glacier Income Fund, in which Pender started purchasing units when the ice maker was actually in bankruptcy, at 5 cents per unit.
While most fund managers would steer clear of companies in bankruptcy, Barr says he calculated a final disbursement to unit holders of between 10 and 30 cents a unit, based on a press release from Arctic Glacier that said every stakeholder would ultimately receive value.
After certain anti-trust lawsuits against Arctic Glacier were settled, the company was bought out by HIG Capital in a $400 million deal, with the final disbursement now projected at between 25 and 50 cents, says Pender’s manager.
The volatility in the marketplace has worked for the Pender small cap fund, adds Barr.
“I always thought we would be a buy and hold fund, but I am a fan of volatility. You can potentially gain more alpha from trading positions.”
The fund, however, also has its “buy and hold” stocks like Wi-LAN (TSE:WIN), which acquires and licenses a range of intellectual property in communications and consumer electronics, and makes its money through patent suits.
This is because Wi-LAN is led by former Mosaid management Jim Skippen, who, since joining the company in 2006, has increased Wi-LAN’s market cap from $25 million to more than $700 million, placing it among the top 10 per cent of the fastest growing companies in North America. Revenue has also been boosted by $200 million and the stock has close to a 3 per cent dividend yield, he asserts.
Maker of laptop security and tracking products Absolute Software (TSE:ABT) is another of Pender’s tech investments, a smaller opportunity that was recently “over penalized for a soft quarter.” Barr says the company, which is expanding in the “bring your own device to work” platform, is a “fantastic business with one third of its market cap in cash.”
Pender has recently added to its position in Absolute, moving the company to the fund’s top holding.
Meanwhile, Barr’s catalyst-driven strategy panned out with Miranda Technologies (TSE:MT) - a hardware and software provider for the broadcast industry that received a takeover offer of $17.00 per share in June. This represents a 68 per cent increase over the fund’s average purchase price of $10.11 in March of this year.
The rest of the Pender Small Cap Opportunities Fund portfolio is comprised of junior industrials, health care stocks and specialty financials, such as US-based collection agency Portfolio Recovery Associates (NASDAQ:PRAA) – which Pender picked up at $65, now trading at around $100.
US investments are currently allocated just 5.5 per cent of the fund, however, with Canadian stocks taking up the majority of the portfolio.
When asked his view on the future of the Canadian markets, Barr is somewhat cautious given the current trend in commodities but says his focus remains on “good-value stocks”. He says many of the companies in the Pender Small Cap portfolio have “extra leverage” as they export to the US, which would result in more profit if the Canadian dollar decreases relative to the greenback.