January 16, 2015

Manager’s Quarterly Commentary – David Barr – Q4 2014 – Pender Small Cap Opportunities Fund

Written by David Barr

The Pender Small Cap Opportunities Fund ended the year with an excellent quarter. It was up 15.05%1 compared to 0.30% for the benchmark2. Again, the performance of the Fund was largely driven by the performance of key holdings including Nobilis Health (TSX: NHC), CRH Medical (TSX: CRH) and Absolute Software (ABT), with the assistance of one announced takeover in the quarter, NexGen Financial (TSX: NFX).  Also assisting our relative performance was our underweight position in Energy which had a fairly violent downturn in the quarter.  For the year, the Fund was up 23.76% compared to 12.55% for the benchmark.  Since inception3 the Fund has had an annualized return of 21.71%1, compared to 9.81% for the benchmark.

1 Refers to Class A units in the Fund.
2 S&P/TSX Capped Composite Total Return Index.
3 Inception is June 2009.

Hat Trick!

As a marginal hockey player there haven’t been too many hat tricks in a long career of men’s league hockey.  Occasionally the Fund experiences a “Hat Trick” of sorts with three significant value creation events.

1.    In October, NexGen Financial announced it was being sold to Natixis Global Asset Management, a global investment management firm, for $7.25 per share, a 125% premium to our purchase price.

Then in December we had back-to-back transformative transactions in two of our largest holdings.

2.    First, Nobilis Health announced the acquisition of Athas Health which potentially adds US$60 million to the company’s top line and should really signal to the market that this company has serious growth potential.

3.    Second, CRH Medical announced the acquisition of Gastroenterology Anesthesia Associates transforming the company into a proforma $33 million revenue $18 million EBITDA business, and the market responded as the share price increased to $1.96 (December 31, 2014).

While we are always trying to score a “Hat trick”, we do recognize that luck can sometimes play a part in the outcome. We don’t expect to have many quarters like the one we just had, but we will continue to invest the same way and try to stack the probabilities in our favour so we can celebrate another one in the future.  As for a hat trick on the ice, I’m going to have to get VERY lucky.

Portfolio Updates

With the backdrop of a fairly bumpy market, we were able to take advantage of the volatility to add two new positions and sell four positions including NexGen. We increased the weighting in four positions while decreasing in three positions.

The cash position in the Fund moved up to 21.16% at year end, approximately the average cash weighting we’ve had since inception. If volatility picks up again, we are ready and willing to move on new opportunities.

January 15, 2015