What is Pembroke’s view and what is Pembroke doing?

Prior to the Covid-19 outbreak, the global economy was struggling to make a sustained recovery. Trade tariffs, falling import and export activity, and slowing manufacturing were being combatted by central bank action while employment and consumer activity remained generally strong. Stock markets continued to rally in January, and equity valuations in some sectors and markets became elevated by historical standards even as bond markets and gold prices were beginning to indicate investor risk aversion. Against this uncertain backdrop, Pembroke’s investment team took several actions.

Within our US and Canadian growth mandates, we continued to reduce positions in January and throughout February that were at or above price targets, reallocating capital to other high-quality portfolio holdings that were below price targets. Within the GBC Global Balanced Fund, Pembroke’s Asset Allocation Committee met on January 22nd, and again on January 27th, and agreed to a tactical shift within our asset allocation, moving capital from equities to bonds and cash while remaining within our permitted corridors. In addition to our customary equity research, we are closely monitoring the Covid-19 situation. Our health care analysts are listening to health expert calls and reading relevant articles and research. We continue to monitor the economic ramifications of the virus.

The Covid-19 outbreak directly impacts consumer spending and therefore threatens the main engine that was supporting economic growth. As people around the world face border restrictions, delay travel, avoid gathering, and shun public transport and public spaces, global consumer spending will remain under pressure. It is too early to determine the magnitude of the virus’ impact on global trade and commerce, but we can already see the impact in many areas: factory closures in China, resultant delays or shortages in manufacturing supplies, reductions in air and sea shipping and demand for fuel. Whether these circumstances last for weeks, months, or quarters, is not yet clear.

The impact for companies is that their near-term earnings growth may be threatened. The longer the uncertainty and reduced level of travel and commerce, the greater the impact will be on earnings. Weaker companies, especially those with significant debt, may suffer distress. Stronger companies, especially those without debt, will gain market share through attrition, acquisition, or both. Pembroke’s portfolio companies have low levels of debt and many of the companies we have invested in have strong net cash positions; they are positioned to be acquirers. We will use any further market weakness to increase our holdings in our strongest businesses or other businesses that we have been patiently monitoring.

The long-term health impact and risks from coronavirus, especially in developed countries with strong healthcare systems, is unknown. Further, even if business slows as people, and companies, de-risk, many purchasing decisions will not be abandoned, but instead be deferred. During a health-related panic, for example, a buyer may opt to put off a new car purchase but will likely remain a buyer in the future. From an investment perspective, we do not invest time trying to identify when markets will bottom. Will markets react favourably to monetary or fiscal policies introduced by governments to mitigate the impact of the virus? Will they jump if the spread of the virus starts to slow or as we get closer to the release of a vaccine?

Because we cannot predict short-term market movements, we focus on the quality and valuation of the companies we own, and the opportunities presented by short-term volatility to add to these positions or acquire new holdings. Sometimes the daily fluctuations of the market make it easy to forget that the shares we own represent our ownership in real businesses; business that we have selected for their competitive strength and long-term growth opportunities. If the shares did not trade every day, we could focus more easily on the fundamentals of the businesses rather than the daily share price movements which can be as much a reflection of short-term fear as long-term potential.