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Q1 2021 Review: An Atypical Quarter Class F


byAndrew Garschagen


The Class F of the Pembroke Concentrated Fund (“PCF”) returned 0.43% in Q1 compared to the 11.31% return of the Russell 2000, and 4.87% for the S&P 500.  

 The following table provides a detailed look at PCF’s performance relative to the market:

Q-1 20211-Year3-YearsSince Inception
Pembroke Concentrated Fund - Class A0.7472.7419.7921.10
Russell 2000 Total Return in CAD11.3172.7113.8113.79
Pembroke Concentrated Fund - Class F0.4370.7326.03
Note: For Class A units, performance is reported in Canadian Dollars, net of transaction costs and net of all other fees, excluding management fees. For Class F units, performance is reported in Canadian Dollars, net of transaction costs and net of all other fees, including 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.
* Pembroke Concentrated Fund was converted from a pooled fund to a mutual fund on April 1, 2020. For the period this Fund was a pooled fund, the expenses would have been higher if the Fund was a prospectus mutual fund.
* Beginning of operations for the Pembroke Concentrated Fund - Class F is October 15, 2019.
*All performance metrics in this letter are expressed in CAD, net of transaction costs and all other fees, excluding management fees (except for Class F units which include management fees). The Fund’s inception date is 1/31/2018. Beginning of operations for Class F is 10/15/2019.

While we remain pleased with our long-term performance, the market’s unusual behaviour in Q1 is worthy of some discussion.  As we will demonstrate, our performance versus the market is largely due to the rally in low-quality stocks as opposed to any problems with specific holdings. 

To illustrate, the relative contribution of our top 10 winners was 654 basis points in the quarter, while our top 10 laggards only detracted 552 basis points.  Our worst laggard only represented a 114-basis point headwind; about the same as our best winner. 

So how dramatic is this junk rally?  The following chart details the Russell 2000’s Q1 performance by key Style Factor.

StyleFactor/Market DriverYTD Return
ValueSales/Price (1-Year Forward35.15%
Volatility90 Day Beta24.98%
LeverageNet Debt to Equity24.14%
Volatility1-Month Volatility12.08%
Variability5-Year Op. Income Variability10.95%
ProfitabilityEBITDA Margin %-10.99%
ProfitabilityROE (Prior 5-Years)-12.71%
ProfitabilityROIC (Prior 5-Years)-14.89%
SizeMarket Capitalization-15.04%
GrowthPrior Sales Growth %-19.64%

Source: Bloomberg; priced as of 4/1/2021; style factors of the Russell 2000.

The cheapest companies (seen in row 1, using a sales yield calculation) performed the best – up 35%, comfortably beating the Russell’s +12% move.  Other style factors that led the market’s gains were volatility, high balance sheet leverage, and low profit margins.  Said another way, the cheapest, slowest growing, most volatile, most indebted stocks performed the best.  Conversely, the style factors that lagged the market were high margins, high quality (as expressed through ROE and ROIC), fast sales growth, and larger market caps. 


Clearly, this unusual quarter was not favourable to quality growth portfolios like PCF.  Ours is a portfolio of high return, high margin, low leverage, fast growing, above average market cap stocks.  As one would expect, junk rallies tend not to last long, and cede leadership to quality. 

Portfolio Characteristics

Pembroke believes that a portfolio of stocks containing the following attributes, over the long-term, should better protect capital in down markets and outperform in up-markets.  Our holdings are faster growing, higher margin, higher return, better financed, more aligned, less volatile, and reasonably valued as compared to the market.   

MetricCommentStrategyRussell 2000
EV/NTM EBITDABetter Value21.9x22.5x
Price/NTM EarningsLower Value35.7x32.8x
Revenue Growth (%)Higher Growth17.1%13.8%
Gross Margin (%)Higher Quality44.5%26.9%
Operating Margin (%)Higher Quality9.6%0.6%
Operating Cash Flow Margin (%)Higher Quality15.9%9.8%
Return on Equity (ROE)Higher Quality8.4%0.9%
Return on Invested Capital (ROIC)Higher Quality7.5%1.5%
BetaLower Volatility0.771.00
Net Debt to NTM EBITDALower Leverage-1.1x4.1x
Insider OwnershipHigher Alignment8.0%4.3%
Market Cap (Weighted Average)Larger Value$5.84 B$3.71 B

Source: Pembroke, Bloomberg.  Earnings data based on Bloomberg next twelve months concensus estimates.  Beta calculated over a 1-year period.  Data as of March 31, 2020 in USD.




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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.