Over the last year, the Pembroke Concentrated Fund (“PCF”) has declined along with the market, as a combination of inflation, interest rate, commodity price, and broad economic fears have pressured financial assets globally, particularly in the last 3-months. On a trailing 12-month basis, PCF modestly outperformed its benchmark, the Russell 2000 Index (“R2000”), while it underperformed the R2000 in the most recent 3-month period*.
* All performance metrics stated for PCF A-Class units in CAD. Detailed performance by class and currency listed below.
| 1-Month | 3-Month | YTD | 1-Year | 3-Year | Since Inception, annualized | Since Inception, cumulative | |
|---|---|---|---|---|---|---|---|
| PCF A, USD | 0.30 | -15.80 | -15.80 | -4.83 | 14.03 | 13.69 | 70.65 |
| PCF F, USD | 0.21 | -16.03 | -16.03 | -5.91 | n/a | 14.48 | 40.11 |
| R2000, USD | 1.24 | -7.53 | -7.53 | -5.79 | 11.74 | 8.16 | 38.65 |
| S&P 500, USD | 3.71 | -4.60 | -4.60 | 15.65 | 18.92 | 14.04 | 72.87 |
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.
Performance Commentary
Since its inception in January of 2018, PCF has compounded value at over 14% per annum compared to the R2000 at less than 9%. Over the prior 12-month period, PCF has declined roughly 5.5% when compared to the benchmark at 6.4%. The prior 3-month period, however, saw one of the best performances since the launch of the Fund.
In 2022, the PCF declined almost 17% through March 31 compared to the R2000’s 9% decline. Of particular note is that none of the Fund’s holdings experienced any significant operational deterioration in the year-to-date period. No dramatic earnings misses, strategic missteps, or news releases explain the stock performance.
So what does explain this noteworthy underperformance in the short-term? To start, the macro backdrop has not helped PCF. Rising inflation and interest rate fears tend to pressure higher-valued growth stocks in the short-term. PCF, by definition, is a portfolio of high-quality growth businesses that we believe can compound value over the long-term. Our stocks tend to trade at premium valuations over the near-term, reflecting their superior quality metrics and growth outlooks. Over the long-term, we believe our businesses are much more affordable than the market discounts.
Another factor at play is PCF’s sector exposures. The top-performing sectors in the first quarter were energy, utilities and materials—sectors where we have zero exposure. Conversely, the health care, technology and consumer discretionary sectors were among the worst performers and are segments where the Fund has significant weight. While the sector moves were dramatic in such a short period of time, they are typical of periods when investors fear economic slowdown and commodity inflation. Over longer periods, we believe our companies’ pricing power, high-quality business models, and growth prospects should enable them to thrive in various economic backdrops.
Our focus remains on selecting high quality growth stocks that can compound value over the long-term. This approach has rewarded Pembroke investors over our 54-year history, and we believe can continue to do so going forward.
Portfolio Management Commentary
We added several new positions to the Fund in the first quarter of 2022, the most significant of which were SPS Commerce and Sprout Social. Both businesses are well known to Pembroke. We believe them to be high-quality franchises with formidable competitive differentiation, growth potential and shareholder-aligned management teams. Otherwise, as detailed last quarter, we took advantage of market volatility on several occasions to reallocate capital when one of our high-quality businesses was punished by short-term factors. Generically, while short-term dislocations are seldom pleasant, the long-term potential gains from taking advantage of a myopic market can be significant.
We maintained a disciplined approach to risk management and sold one position when it hit its automatic stop loss trigger. While a mechanistic stop loss approach will occasionally result in poorly timed sales, over a long period of time, we believe this will protect capital and prevent more sizable drawdowns for the Fund.
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 generally show faster growth, higher margins, higher returns and are better financed and more aligned with investor interests, as compared to the market.
| Metric | Strategy | Russell 2000 |
|---|---|---|
| NTM Sales Growth | 14.7% | 13.6% |
| NTM Earnings Growth | 15.2% | 15.7% |
| Operating Margin | 9.7% | 5.0% |
| Free Cash Flow Margin | 13.0% | -0.4% |
| Price/NTM Earnings | 32.6x | 22.0x |
| Beta | 0.83 | 1.00 |
| Return on Equity (ROE) | 13.9% | 7.7% |
| Return on Invested Capital (ROIC) | 11.3% | 4.7% |
| Net Debt to NTM EBITBA | 0.1x | 2.0x |
| Market Cap (Weighted Average) | $7.7B | $3.4B |
| Insider Ownership | 7.2% | 4.0% |
Source: Pembroke, Bloomberg, Earnings and revenue data based on Bloomberg next twelve months consensus estimates. Standard deviation and beta calculated over a 1-year period. The beta of the portfolio is calculated against the Russell 2000 Total Return Index. Data as of March 31, 2022 in USD retrieved on April 5, 2022.
Two stocks that made positive contributions to returns of the Fund over the past 12 months
Monolithic Power Systems (“MPWR”) has increased 38% over the last 12 months, compared to an 8% decline in the Russell 2000 benchmark. MPWR has benefitted from the continued adoption of their smaller, more energy-efficient and price competitive analog power management solutions. Importantly, when the industry was short of supply, MPWR was long supply. This enabled them to win platforms that we believe will produce revenue today, next year, and even next decade in some cases, at margins levels generally accretive to corporate averages. Overall, we believe the company’s competitive moat is widening, while its market opportunity is expanding. Even though semiconductors are rightly bucketed with cyclical end markets, we believe MPWR to be a secular growth business that can expand its revenue and earnings base in the coming years, largely irrespective of the underlying economic environment.
Shares of Chart Industries Inc. (“Chart” or “GTLS”) increased 21% over the last twelve months, compared to an 8% decline in the Russell 2000 benchmark. Chart is uniquely positioned at the nexus of multiple clean energy technologies benefitting from generational demand tailwinds. Specifically, the company leverages proprietary technology to command high market shares in the liquefaction and transport of natural gas, hydrogen and other industrial gases. In addition, the company has similar technology and market positions in carbon capture and water treatment end markets. These are all markets we believe have robust multi-year, and in some cases, multi-decade growth trajectories. While GTLS experienced some supply chain disruptions late last year, they have executed well recently and have secured adequate production with the necessary pricing increases to offset inflation. The long-term thesis remains intact.
Two stocks that made negative contributions to returns of the Fund over the past 12 months
Shares of Stoneridge, Inc. (“SRI”) have declined almost 35% over the last year, driven largely by the well-publicized supply chain constraints impacting the auto and truck markets. However, the near, mid, and long-term fundamental thesis is unchanged. We believe Stoneridge remains a secularly growing, high-quality supplier of components that make commercial trucks and cars safer, more energy efficient and more connected. We believe the company is outgrowing its end markets and is at the beginning of new product cycles that put much of this growth in its control, outside of the economic cycle. Furthermore, we believe margin and returns expansion could be significant.
Trex Company (TREX US), a long-time Pembroke holding and manufacturer of composite decking products, had positive developments over the last year. Given strong demand for their products, the company announced the addition of a third production site, less than a year after the completion of a 70% capacity expansion project. Trex management wishes to stay ahead of demand and to accelerate share gains after operating in a capacity constrained environment in the last 18 months. Industry demand for decking products remains strong as more consumers embrace outdoor living. Additionally, Trex has been gaining market share at the expense of wood alternatives. Despite these positive developments, Trex’s stock has declined precipitously since December, along with other housing-related stocks. Investors fear that higher inflation and rising interest rates will hinder demand for home renovation products such as those supplied by Trex.
Disclaimer
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.
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.
