Investment Commentary and Outlook


As 2022 opened, global equity markets faced significant headwinds that led to major shifts in industry-specific sentiment. Rising inflation, and commensurately rising interest rates, are pressuring many stocks and sectors that performed strongly during the height of the Covid scare. At the same time, the tragic war in Ukraine has contributed to a spike in energy prices, which is hitting consumer pocketbooks. As for central bankers, they are pursuing a strategy that will likely slow economic growth in order to moderate inflation. Finally, supply chain disruptions also continue to be a major problem, with many hardware companies citing them as a factor inhibiting revenue progress.

The current circumstances are certainly not easy to navigate. This difficult backdrop led to a challenging quarter for growth companies specifically, while value-oriented strategies, especially those with a heavy allocation to the energy sector, fared better. The Russell 2000 energy sector rose 41% in the first 90 days of 2022, and in Canada, the major market index rose in the same period on the back of strong performance from the energy and materials sectors.

The current environment is challenging, and Pembroke’s growth equity funds struggled in the first quarter of 2022. It is at these very moments that it is important to be aware of natural human biases, from loss aversion to high-water marking. After strong results in 2020 and 2021, it is not unreasonable to expect a period of correction and consolidation.

In fact, it is healthy from a market perspective. Systemic excesses are eliminated and stocks re-base to reflect new realities, such as higher interest rates. We therefore encourage investors to focus their attention on the long-term. It is important not to get too happy during times of exuberance and build linearly rising returns into investment objectives. At the same time, it is necessary not to anchor at recent highs when markets take a step back to avoid becoming too negative. Taking a long-term view and maintaining a balanced investment strategy that makes sense for you, as an investor, is what matters.

At Pembroke, we continue to focus on the fundamental progress our holdings are making. Revenue and profit growth generally remain strong. Our management teams continue to invest in their competitive advantages, make acquisitions, and introduce compelling new products and services. Armed with strong balance sheets, they are well positioned to grow through valuation compression we may or may not see going forward.

Furthermore, markets tend to move ahead of economic circumstances. Therefore, the fear of rising rates has already led to corrections in many stocks, notably in traditional growth sectors, such as information technology, healthcare, and consumer discretionary. In other words, some of the potential pain from rising interest rates and a possible economic slowdown is reflected in current stock prices. If our businesses continue to meet their objectives, we believe many of them offer compelling long-term risk/reward profiles at current levels.

The pullback has also provided an opportunity to add to our positions in some existing holdings with exciting growth prospects, and to buy some new names we have followed for years, but which were trading at high valuations. Certainly, our focus on balance sheet strength remains paramount, and positive profitability or free cash flow is even more crucial today than it has been in the past five years. It is critical, in other words, that companies are able to fund their growth objectives without accessing outside capital during times of market uncertainty.

Nevertheless, the world will move forward, innovation will lead to a new generation of great companies, and money will be made by active investors who remain disciplined and look past the current challenges. After all, public market volatility, while frustrating at times, is also a source of opportunity for patient investors. Stay the course.




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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.