Canadian Commentary


April 2024


Domestic equity markets rallied strongly at the beginning of the year, supported by a widening of valuation multiples, as investors anticipated the emergence of a more benign interest rate environment. Investors also took a bullish view of public company commentary on quarterly results and expectations for 2024.

Meanwhile, Canadian bond markets sold off modestly, as fixed income investors recalibrated their expectations for a slower pace of interest rate cuts in 2024 than previously forecast. Against this backdrop, Pembroke’s Canadian equity and balanced strategies posted strong absolute and relative returns.

Our Canadian Growth Strategy delivered the high single digit returns in the first quarter, driven by strong performances from holdings in the Industrials, Consumer Discretionary, Technology and Real Estate sectors. The strategy’s underweight to commodity sectors was a headwind in a period of rising gold and oil prices. Ultimately, company-specific performance and greater investor appreciation for companies with attractive long-term growth prospects underpinned returns.

Pembroke’s All Cap Strategy delivered strong absolute and relative returns in the first three months of the year, benefiting from contributions from the Consumer Discretionary and Financials sectors. The portfolio’s energy and gold holdings also contributed positively to performance over the period, although our weightings in these sectors are lower than in the TSX Composite. The breadth of the rally in the strategy was impressive, with only six holdings in negative territory for the quarter.

Pembroke’s Dividend Strategy had a solid start to the year, with healthy capital gains complemented by well funded and growing dividend streams. The mandate’s Industrials, Technology and Consumer Discretionary holdings outperformed, while Energy and Materials holdings lagged. The strategy also benefited from the acquisition of Tricon Residential by Blackstone Real Estate Income Trust, at a premium of 30% to its last close before the deal was announced.

Lastly, our Canadian Balanced Strategy posted attractive returns in the first quarter, led by the equity portion of the portfolio, which participated well in the market rally at the beginning of the year. While the strategy’s fixed income allocation delivered slightly negative returns over the period, a balanced and diversified asset allocation approach reduces volatility for investors with a more conservative risk tolerance profile or a short-term liquidity needs.

From a company-specific perspective, Hammond Power Systems (“HPS.A”) was a strong performer in our growth and dividend portfolios during the first months of the year. The company, a leading manufacturer of dry-type transformers serving the North American economy, reported strong financial results, which resulted in significant share price gains. Hammond is benefiting from a secular trend towards electrification, as efforts to address climate change through emissions reductions lead to increased demand for grid infrastructure.

The company is also well positioned to benefit from the rapidly developing Artificial Intelligence (AI) industry, which has massive computing requirements that are driving significant investment in data centre capacity and the electrical hardware needed to power it. As a result of these tailwinds, Hammond is enjoying record revenues, strong backlog growth, expanding margins and robust cash generation.

While the company’s shares have reflected these attractive fundamentals with substantial gains over the past three years, they remain attractively valued given the company’s strong position in the North American transformer market, free cash generation and secular growth prospects.

Shares in Richelieu Hardware (“RCH”), a leading manufacturer and distributor of decorative hardware and furnishings for kitchens, bathrooms, closets and other residential and commercial spaces, declined in the first quarter. The company is experiencing cyclical headwinds to organic growth, as consumers delay repair and renovation projects in an environment of reduced disposable income and high interest rates.

While these near-term challenges will take time to resolve, we expect the company to use its strong balance sheet and free cash flow generation to acquire competitors that are less well positioned to withstand the current cyclical downturn. In our 31 years as Richelieu shareholders, we have seen the Richelieu team skilfully and repeatedly deploy capital in an opportunistic, counter-cyclical manner. We are confident that Richelieu will emerge from this economic trough as a larger, more robust and more profitable company.



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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.