Pembroke Concentrated Fund Commentary


July 2023


Over the last year, the Pembroke Concentrated Fund (PCF) gained approximately 23%* compared to a 15% gain in the Fund’s benchmark, the Russell 2000 Index (R2000), with the fund gaining on an absolute and relative basis for the fourth consecutive quarter.

* All performance metrics stated for PCF A-Class units in CAD. Detailed performance by class and currency listed below.

1-Month3-MonthYTD1-Year3-Year5-YearSince Inception, annualizedSince Inception, cumulative
PCF A, CAD9.99 %3.33 %11.01 %23.17%8.91%9.48 %12.30 %87.45%
PCF A, USD12.91 %5.59%13.49%19.76 %9.94 %9.37%10.78 %74.08 %
PCF F, CAD9.89 %3.04 %10.38 %21.73 %7.65 %n/a9.57 %40.90 %
PCF F, USD12.80 %5.29 %12.84 %18.36 %8.66 %n/a9.59 %40.84 %
R2000, CAD5.24 %2.93 %5.66 %15.39 %9.76%4.32 %6.25 %38.87 %
R2000, USD8.13 %5.21 %8.09 %12.31 %10.82 %4.21 %4.80 %28.94 %
S&P 500, CAD3.63 %5.96 %13.31 %20.80 %11.72 %10.48 %10.26 %69.74 %
S&P 500, USD6.47 %8.30%15.91 %17.57 %12.81 %10.36 %8.76 %57.60 %

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, the PCF has compounded value at approximately 12.3% per annum, compared to the R2000 at roughly 6.3%. Both the first quarter of 2023 and the trailing one-year period were favourable from an absolute and a relative perspective. The PCF gained 3.3% in the second quarter and 23.2% over the last year, compared to the R2000’s 2.9% gain in the last quarter and 15.4% gain over the trailing 12 months.

The strong performance in the second quarter was driven by our investments in U.S. residential construction and technology businesses, slightly offset by headwinds in several of our business services and communication services positions.

Two stocks that made positive contributions to returns of the fund over the past 12 months

Installed Building Products (“IBP”), an installer of residential and commercial insulation and complementary building products, returned over 23% in the second quarter, compared to a 5% return in the Russell 2000 benchmark. At a micro level, IBP benefitted from a strong first-quarter earnings report (over 40% year-over-year earnings per share growth). This report exceeded expectations, but was also aided by improving residential construction conditions in the U.S. At a macro level, despite higher mortgage borrowing costs, demand for new homes remained brisk as a lack of existing homes for sale has pushed buyers to new homes. Furthermore, home builders have quickly reacted to changing market conditions by increasing incentives, selecting lower priced materials, and cutting prices. Pembroke remains excited about IBP over the long-term, as new home demand is well in excess of supply and should take several years to clear.

Trex Company, Inc. (“TREX”) is the leading supplier of composite decking products, which over time are replacing wood decks in residential environments. TREX shares appreciated almost 35% in the quarter, compared to a 5% return in the Russell 2000 benchmark. Driving this strong performance was better than expected first-quarter earnings results, which eased fears that the company’s proactive inventory management efforts, initiated in the second half of 2022, would either take longer than expected or were masking weak end market demand. Neither were true. The inventory cycle is progressing on schedule, and customer demand remains solid despite higher interest rates and recession fears. Pembroke remains focused on TREX’s growth opportunity over the long-term. as the leading brand in a market going from 25% composite, 75% wood decks, to 75% composite and 25% wood.

Two stocks that made negative contributions to returns of the fund over the past 12 months

The excitement surrounding artificial intelligence (AI) swept across financial markets in the second quarter of 2023. At the same time, investors started to worry that certain business models would come under pressure from AI’s capabilities. Two of Pembroke’s larger positions, Shutterstock (“SSTK”) and WNS Holdings (“WNS”), saw their stock prices decline despite their strong fundamentals, as a result of the possible threats posed by AI.

In the case of Shutterstock, which provides a platform for photographers to submit their work, and for advertisers, artists and designers to purchase it, the concern is that images will now be generated out of thin air and tailored exactly to the demands of end users. However, that possibility faces numerous obstacles.

First, artificial intelligence needs to be trained by a library of images. In fact, OpenAI, the leading AI-generative company, partnered with Shutterstock to train its models. Meta and other large companies are also coming to the company to leverage its library of images, music and videos in order to train their models. Second, copyright lawyers are salivating at the opportunity to hold advertisers accountable for using artwork while not paying for it. Shutterstock now offers them the possibility to purchase and edit art, or even to create their own art using OpenAI’s technology, while having the express legal right to use the output for commercial purposes.

Interestingly, Shutterstock owns all the images created by users on its AI platform that are not paid for, leading to significant growth in its library. Shutterstock, in other words, owns critical content that will enable the AI revolution to take hold. In the meantime, the company is managing through a slowdown in advertising spend, while still delivering modest revenue growth, earnings before interest, taxes, depreciation and amortization (EBITDA) margins over 27%, and robust free cash flow. The company just affirmed confidence in its competitive position and long-term growth outlook by announcing a $100 million share buyback. At less than seven times the projected EBITDA in 2024, Pembroke believes the opportunity in Shutterstock shares skews significantly to the upside.

The reaction of shares in WNS Holdings to the emergence of AI was very surprising. The company, which helps its customers move back-office processing work to low-cost geographies, has a long history of adopting new technologies to further enhance its advantages over in-house management of these tasks. In fact, the use of technology tends to increase the complexity of the services that WNS can provide, thereby expanding the company’s addressable market.

In other words, technology tools have historically been a catalyst for higher-value services and non-linear engagement models, which both benefit WNS. AI will undoubtedly be a tool used to bring speed and efficiency to various processes, allowing WNS to take on more work and deliver even more impressive cost savings than it is today. AI and generative-AI are tools, not solutions, and require firms such as WNS to combine them with domain expertise, analytics, process, as well as human talent and oversight.

Following the share price weakness, WNS also accelerated its share buyback program.. The company recently guided to almost 14% revenue growth for the current fiscal year and expects to maintain operating profit margins above 20%. Given the robust free cash flow, Pembroke has urged the company to consider further share buybacks.

Portfolio Actions

Trading activity was moderate in the quarter, with the portfolio shrinking by one position to a total of 18, as we exited Altus Group. While we remain confident in the Altus’s sustainable competitive advantage and long-term market opportunity, we are somewhat cautious on the near-term commercial real estate backdrop and wanted to add weight to our newest position, Core & Main. In addition, we trimmed some recent winners and, in our ongoing efforts to capitalize on short-term market volatility, added to underperformers.

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. While you pay a slight premium over the near-term, our portfolio’s faster growth rate typically reverses this dynamic. As we often say, the PCF is “near-term expensive, mid-term to long-term cheap.”


MetricStrategyRussell 2000
Price/NTM Earnings25.5x20.5x
NTM Sales Growth7.4%1.2%
NTM Earnings Growth16.4%13.6%
Return on Equity (ROE)13.5%7.1%
Return on Invested Capital (ROIC)12.7%4.3%
Net Debt to NTM EBITBA0.3x1.8x
Market Cap in $ Billions (Weighted Average)$8.35$2.87
Insider Ownership13.7%4.8%


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. Investment performance assumes reinvestment of dividends and capital gains and is net of transaction costs and net of all other fees, excluding management fees, except for the F-Class units which include management fees. Performance results for the A-Class units 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.


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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.