Pembroke Concentrated Fund Commentary

The Pembroke Concentrated Fund (“PCF”) modestly underperformed its benchmark in Q2 2021, as growth stocks continued to lag value stocks, and high-quality stocks broadly lagged low-quality stocks.   

 With the positive vaccine announcements and Democratic sweep in the November US elections, North American stock markets simultaneously experienced a reflationary  rally through the end of May. However, PCF outperformed its benchmark in June, as the stubborn realities of US politics, COVID-19, and structurally low interest rates met a market that was decidedly positioned for a strong cyclical recovery.

 While periods of underperformance are inevitable, PCF is geared for such moments. We strive to own the highest quality, lowest binary risk, and strongest long-term growth businesses in Pembroke’s portfolios. When these businesses “go on sale” and underperform the market, we believe that represents an opportunity. As such, we remain confident about the portfolio and enthusiastic about PCF’s long-term outlook.

Performance results by fund class and currency

	1-Month	3-Month	YTD	1-Year	3-Year	Since Inception, annualized	Since Inception, cumulative
PCF A, CAD	4.95	1.64	2.39	28.45	16.08	19.99	86.38
PCF A, USD	2.13	3.01	5.27	40.98	18.41	19.67	84.70
PCF F, CAD	4.85	1.35	1.78	26.96		22.87
PCF F, USD	2.03	2.71	4.65	39.35		27.55
R2000, CAD	4.66	2.79	14.42	47.35	11.25	13.63	54.74
R2000, USD	1.94	4.29	17.54	62.03	13.52	13.36	53.48
S&P 500, CAD	5.06	6.99	12.19	28.05	16.30	15.50	63.60
S&P 500, USD	2.33	8.55	15.25	40.79	18.67	15.22	62.27

FTSE Russell is a trading name of FTSE International Limited (“FTSE”), Frank Russell Company (“Russell”), FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and MTS Next Limited. The Russell 2000 is a market cap weighted index that includes the smallest 2,000 companies covered in the Russell 3000 universe of US-based listed equities. The index is designed to be broad and unbiased in its inclusion criteria and is recompiled annually to account for the inevitable changes that occur as stocks rise and fall in value. Russell refers to the various indices copyrighted and trademarked by the Frank Russell Co. The S&P/TSX Composite is the headline index for the Canadian equity market. It is the broadest in the S&P/TSX family. The S&P/TSX Completion Index is comprised of the constituents of the S&P/TSX Composite Index that are not included in the S&P/TSX 60 Index. The index was formally the S&P/TSX MidCap Index. The FTSE TMX Indices comprise of a series of benchmarks which are designed to track the performance of bonds denominated in Canadian Dollars (CAD). The FTSE TMX Canada Universe Bond Index is the broadest and most widely used measure of performance of marketable government and corporate bonds outstanding in the Canadian market.

Two stocks that made positive contributions to performance during the quarter

Bio-Techne (“TECH”), a leading provider of consumables and analytical instruments used by researchers in all aspects of life science research, saw its stock price increase by 16% in the second quarter of 2021, due to better-than-expected earnings. Organic growth continues to accelerate and was again broad-based across all segments, with biopharma demand remaining robust while academic labs continue to reopen. Operating margin expansion is ahead of schedule with margins finishing the quarter above the 40% long-term target. The company also increased its long-term revenue guidance from $1.5B in 2025 to $2.0B in sales in 2026, suggesting at least mid-teens organic revenue growth over the next few years. We will be looking for further details at the upcoming analyst day in September. Bio-Techne offers a rare combination of sustainable organic growth and high profitability. The company is also nurturing a dozen potential unicorns in its product portfolio in some of the fastest growing areas in health care, such as proteomics, liquid biopsy diagnostics as well as cell and gene therapies.

Shares in Globus Medical (“GMED”) jumped on the back of the company’s impressive first-quarter results and after the company significantly raised revenue guidance for 2021. Globus provides components and technology used in spine surgery. During the worst of COVID, elective surgeries declined and hurt Globus’ growth. Pembroke looked past this short-term challenge given the company’s impressive profit margin profile, strong balance sheet and unimpaired long-term growth opportunity. In recent years, the company’s effective sales force, combined with its leading robotic offering, has allowed Globus to win share from large incumbents, such as Medtronic and Johnson & Johnson. In the first quarter of 2021, Globus reported a 22% surge in year-over-year sales in its US business, impressive given the overall market’s growth of mid-single digits. Customer interest in the company’s robot remains strong, and the opening of the US economy post-COVID is leading hospitals to make significant capital purchase decisions. Led by its founder-CEO, Globus continues to invest in the trauma segment as well, which represents an important new leg to its growth stool. Over the long-term, the company is also positioning itself to enter new areas, such as knee and hip surgery. Despite these investments, Globus continues to operate at strong EBITDA margins and has net cash on its balance sheet. The company ended the second quarter of 2021 as the largest holding in Pembroke’s US portfolios.

 Two stocks that made negative contributions to performance during the quarter

Shares in Danimer Scientific (“DNMR”) declined, and Pembroke ultimately exited the DNMR position in order to re-allocate capital to more favourable risk-reward positions. While Danimer is attacking the exciting objective of reducing the use of non-biodegradable plastics, the investment team grew concerned with the high capital requirements and significant operating risks over the coming years.

Shares in Sangoma Technologies (“STC”) declined in the second quarter as investors digested the company’s acquisition of Florida-based competitor Star2Star. Sangoma provides unified communications-as-a-service to its business customers, including telephony, collaboration software, and network connectivity. Prior to this deal, Sangoma management had an impressive record of acquiring niche competitors and technologies. Further, the company grew at a reasonable pace and operated at healthy profit margins. The acquisition of Star2Star was a step-out in terms of its size and valuation parameters. Investors, including Pembroke, now wait to see if the combined company can deliver accelerating growth and sufficient profitability to justify the acquisition price. Certainly, with recurring revenue representing over 70% of total sales and a larger sales force, the opportunity for growth is real.

Disclamer

Commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value, reinvestment of all distributions and do not take into account sales charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

Performance is reported for both PCF A-Class and F-Class units in Canadian Dollars, net of transaction costs and net of all other fees, excluding management fees. Management fees are charged directly to unitholders based on their assets under management, except for Class F units, which are charged to the Fund. Periods greater than one year have been annualized. The performance for the portfolio and benchmark index are measured using the “time weighted” rate of return methodology.

The Pembroke Concentrated Fund was converted from a pooled fund to a mutual fund on April 1st, 2020. For the period this Fund was a pooled fund, the expenses would have been higher if the Fund was a prospectus mutual fund. The above information is for the purpose of providing some insight into the performance of the Pembroke Concentrated Fund. Commissions, management fees and expenses all may be associated with mutual fund and pooled fund investments. Investment performance assumes reinvestment of dividends and capital gains and is net of transaction costs and net of all other fees, excluding management fees. Performance results will be reduced by the fees incurred in the management of the fund. No assurance can be given that an investor will not lose invested capital. Past performance is not indicative of future returns.

 

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