Pembroke Concentrated Fund Commentary


In 2022, the Pembroke Concentrated Fund (“PCF”) declined in absolute terms along with the market, as a combination of inflation, interest rate, geopolitical and recession fears pressured financial assets globally. While 2022 disappointed in both absolute and relative terms, the fourth quarter represented PCF’s third straight quarter of relative outperformance when compared to the Russell 2000 benchmark (“R2000”). That being said, the PCF is trailing the Russell over the prior twelve-month period.

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

1-Month3-MonthYTD1-Year3-YearSince Inception, annualizedSince Inception, cumulative
PCF A, CAD-4.365.9-19.1-19.18.311.268.9
PCF A, USD-4.957.6-24.3-
PCF F, CAD-4.505.5-20.0-
PCF F, USD-5.097.2-25.2-
R2000, CAD-6.245.0-15.0-
R2000, USD-6.496.2-20.4-
S&P 500, CAD-5.516.3-12.5-
S&P 500, USD-5.767.6-18.1-
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 approximately 11.2% per annum compared to the R2000 at roughly 5.7%. While the fourth quarter of 2022 was favourable, with PCF gaining 5.9% compared to the 5.0% move in the R2000, the prior 12-month experience was significantly more challenging.

The explanation for this difficult calendar 2022 experience is largely macro-oriented. In fact, the average portfolio company topline revenue grew by more than 15%, and earnings per share by more than 20%. In addition to expanding its margins, the portfolio, on average, generated returns on invested capital and returns on equity in the teens. More specifically, when examining the portfolio’s absolute detractors from an individual stock perspective, PCF was not hurt by mis-executing companies, companies in any financial distress or companies with eroding competitive positions.

Rather, on balance, our companies suffered from significant valuation compression driven by the aggressive interest rate hikes from the US Federal Reserve, sentiment on the forward path of interest rates, and fears of a potential economic contraction.

An illustrative end market that created a 2022 performance headwind for PCF was residential housing. Businesses with either direct, indirect, or even general proximity exposure to housing suffered on a relative and absolute basis. This is obviously not shocking: the housing end market is one of the most sensitive to rising interest rates. When you add in perceived pandemic benefits, a short-term sentiment shift is reasonable. However, it is worth noting that these businesses have been among the top performing PCF holdings since mid-November.

The fund’s relative underperformance story in 2022 is different. By one measure, PCF’s relative underperformance versus our benchmark—roughly 4%, all of which was generated in the first quarter of 2022—is entirely explained by our sector exposure. More specifically, it is explained by the fact that we do not own stocks in certain sectors. The PCF mostly invests in technology, health care, industrials and consumer end markets, as these sectors more often contain businesses with superior growth prospects, sustainable competitive advantages, disruptive business elements and less frequent binary risk. Not owning energy, materials, financials or utilities, all sectors either rich in binary risk or devoid of growth or sustainable competitive advantages, cost us close to 5% of relative underperformance. As for our ability to pick stocks that perform better than their underlying sector, it added 1% to relative performance.

While there are inevitably quarters or years where we underperform markets, our more than 50-year history and PCF’s almost five-year track record demonstrate that over longer periods of time, Pembroke’s approach yields favourable results. Investing in companies with large market opportunities, sustainable competitive advantages, quality business models, strong financial positions and aligned management teams has produced positive results.

Portfolio Management Commentary

We added one new position in the fourth quarter of 2022 and exited two positions. The new position, Pure Storage (“PSTG”), is actually not at all new to Pembroke. We owned the stock previously, but exited during our COVID-related portfolio actions in March and April of 2020. However, we have stayed close to the business and added it to our core US growth portfolio earlier in the calendar year.

Since we last owned the stock, PSTG has continued to grow meaningfully faster than the market, expanded its competitive advantages, and shifted more meaningfully towards subscription revenue. Said another way, its quality and opportunity set has increased, while its valuation has remained reasonable. On a four-year view, PSTG is one of our most favourable risk-reward equations.

Our sales in the quarter were mostly specific to the Fund. We sold Tecsys (“TCS”) to minimize our distribution and tax burden for clients. There are no fundamental concerns with the company, and it remains a core holding in our Canadian portfolios. We also exited Chart Industries (“GTLS”), a decision on which we further elaborate below.

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 consistently show faster growth, higher margins, higher returns, and are better financed and more aligned with investor interests when compared to the market.


MetricStrategyRussell 2000
Price/NTM Earnings Growth22.0x20.2x
NTM Sales Growth9.8%8.4%
NTM Earnings Growth14.3%8.7%
Return on Equity (ROE)15.0%7.9%
Return on Invested Capital (ROIC)13.7%5.0%
Net Debt to NTM EBITBA0.3x2.0x
Market Cap in $ Billions (Weighted Average)$6.70$2.80
Insider Ownership7.3%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 December 31, 2022 in USD retrieved on January 25, 2023


Outlook Commentary

2023 is off to a choppy start, as investors await signs of perhaps the most anticipated recession in decades—assuming it materializes. While job cuts dominate headlines, they are focused among large technology businesses that were among the most aggressive hirers during the pandemic. Meanwhile, actual employment statistics continue to grow, and economic activity as well as company reports remain benign. That being said, you can only “fight the Fed” for so long. If central bankers want to engineer a recession to temper wage growth, they will eventually succeed.

As bottom-up investors, we avoid dramatic market calls and focus on the specific future opportunities of our individual portfolio companies and their risk-reward equations. Importantly, the portfolio is well-positioned heading into 2023. Our companies largely control their own growth destinies and are expected to grow revenues upwards of 10% this year (despite recession fears), expand margins further, and generate substantial free cash flow growth. Zooming out to a multi-year view, we are very optimistic about the portfolio’s future.

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

Shares in Stoneridge Inc. (“SRI”) gained over 9% in 2022 compared to a greater than 20% decline in the Russell 2000 benchmark. Following a challenging 2021 for SRI, during which supply chain constraints limited production and boosted costs, the company was able in 2022 to both grow production and sufficiently raise price, so that earnings before interest, taxes, depreciation and amortization (EBITDA) should grow around 60%, compared to a decline of about 40% in 2021. SRI has executed well during the pandemic, and our original thesis remains intact. Specifically, the company’s differentiated exposure to secularly growing auto and truck technology should enable growth well in excess of its end markets, while consistently expanding margins and returns. We remain optimist about its product cycle particulars and foresee multiple years of solid growth as vastly depleted inventories normalize.

Shares in Albany International (“AIN”) returned over 12% in 2022 compared to a greater than 20% decline in the Russell 2000 benchmark. The company’s leading position in machine clothing continued to yield sizable and stable free cash flow generation, while its commercial aerospace business—depressed by the pandemic and Boeing 737 MAX production-related issues—posted several quarters of sequential improvement. Importantly, the aerospace recovery remains in the early phases, and should drive solid growth in the coming years. Furthermore, the company’s differentiated technology continues to win market share on existing commercial and defence platforms, and position the company well for future platforms. As such, AIN remains a core holding in both the Concentrated Fund and our US Growth Fund.

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

Chart Industries (“GTLS”) spent much of 2022 as a top-performing stock for our US growth strategies. In fact, prior to its ill-advised acquisition of Howden Group announced on November 9, 2022, GTLS was up 50% for the year. Investor response to the proposed deal was severe and swift. The stock declined 52% from that November 9 high and ended the quarter down 37%. While this move might seem extreme, we believe the market has it right. This acquisition, expected to close during the first half of 2023, will leave GTLS with irresponsible debt levels, particularly given the macroeconomic backdrop. The company is spending $4.4 billion on an asset of moderate quality that necessitates additional equity (at now materially lower prices), brings excessive debt (above five-time leverage at close) and will require significant management bandwidth. The margin for error is now low, the execution risk is high, and the team is distracted at a time when they should have focused on their plentiful growth opportunities. As such, we sold our position following the acquisition and reallocated the capital.

Shares in Paycom, Inc. (“PAYC”) declined 25% in 2022, compared to a 20% decline in the Russell 2000 benchmark. While the results for the fourth quarter of 2022 are not yet announced, Paycom is expected to grow revenue and earnings per share (EPS) for the year by 30% and 32% respectively, while posting returns on equity and invested capital in the mid to high 20s. Furthermore, the company has continued to launch new products, open sales offices and execute well on its growth strategy. From a fundamental perspective, 2022 was not disappointing. That did not stop investors from compressing the company’s multiple and increase its discount rate, as fears of inflation and a persistent high interest rate environment pressured valuations across the broader software and growth sectors. That being said, Paycom remains one of our highest quality and highest conviction names going into 2023.



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. 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.


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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.