April 2025
Jeffrey S.D. Tory, CFA
Chair, Partner, Director, Portfolio Manager
Dear Unitholder,
The Pembroke Genesis Pooled Fund had a disappointing start to 2025 following the strong returns of 2024. In the three months ended March 31st, the Fund fell 12.3%, well behind the benchmark which was up slightly. The small cap benchmarks were helped by the very strong performance of gold equities which are not part of the Genesis mandate.
This most recent experience is a good example of why chasing performance (and marketing short-term performance) is a mug’s game. Some regression to the mean was not unexpected after the very strong returns in 2024, where the stars aligned for the Fund in a buoyant market for smaller stocks in Canada (including several takeovers and excellent performances from several smaller companies that were “discovered” in 2024). Some of the decline in the unit value was due to simple valuation compression in some of those same holding companies that did so well in 2024 as investors became skittish about Trump and his threats around tariffs. Most of the holdings in the Fund should not be directly affected by tariffs. They will be indirectly affected though if the overall economy is weakened by the trade war. Because of the uncertainty that has been added to the investment environment, a continued focus on quality companies with good balance sheets should help the Fund ride out the storm.
The decline in the share price of Hammond Power is a great illustration of the challenges the Fund faced in the first quarter. In 2023 and 2024, the shares of Hammond rose over 500 percent due to the virtuous combination of very strong demand for the company’s transformers (a key component in the boom in electrification), rising margins and earnings and an expanding valuation as the company was discovered by the investment community. In early 2025, despite continued strong fundamentals and good visibility on demand, the shares have fallen over 40% due to fears over tariffs (currently unfounded) and a possible slowdown in demand if the economy goes into recession. The company is in the process of integrating a recent US acquisition which will serve as a hedge against adverse trade developments while also increasing capacity to meet demand for the company’s specialty transformers. After the decline, the shares are now trading at six times earnings before interest, taxes, depreciation and amortization (EBITDA) and ten times earnings for a company that is still growing with a clean balance sheet in a high demand sector.
The other major detractor in the quarter was Vecima Networks, a Victoria-based leader in the broadband equipment sector. Vecima has been hit by a slowdown in demand for its key products. The key customers in the cable industry have been deferring their investments in the next generation networks to preserve cash. The earnings shortfall and lack of visibility into 2026 orders have impacted the valuation of the shares. This is a good example of where customer concentration can lead to a rocky experience in the stock markets. Despite its short-term challenges, Vecima’s core customers will have to invest to keep up in the competition for broadband customers and this should lead to a resumption in growth.
On the positive front, the gains were small but in the cases of Red Violet (a small cap software provider), McCoy Global (oil and gas services) and Universal Technical Institute, very strong earnings helped the shares resist the general downward pressure in equities.
The current volatility represents a great opportunity to revisit the portfolio holdings and the research pipeline as the recent share price declines have been mostly based on sentiment as the fundamentals remain solid. The fourth-quarter earnings reports were good for most of the holdings and the growth outlook for 2025 remains very positive as most of these smaller companies have long runways for expansion. Absent a major economic dislocation, at the portfolio level, the growth rates should remain strong.
The current environment offers a great time to high-grade the portfolio and enhance the risk/return profile. While the outcome of the trade war is uncertain, the good companies will adapt to the changing conditions and prosper in the long term. We meet with the portfolio holdings on a regular basis. The upcoming first quarter of 2025 earnings reports will give us another set of data and a reason to check in with our portfolio holdings. The good fundamentals and the high level of alignment of the management teams of the portfolio holdings give us many reasons to be optimistic as we work through the current turmoil. The “sea change” in our relationship with the United States represents a great opportunity for Canada to take charge of its economic future and it also underscores the importance of the role of the Pembroke Genesis Pooled Fund in supporting the next generation of Canadian champions.
Sincerely,
Jeffrey S.D. Tory
DOWNLOAD
Other Articles Of Interest
Disclaimer
This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.
