January 2025
Canadian equity markets posted strong returns in the fourth quarter of 2024, supported by a continued easing of inflationary pressures and the consequent reduction in policy rates by the Bank of Canada.
The outcome of the US presidential election also fuelled equity markets during the quarter, as the new administration is seen as more business-friendly in policy terms than its predecessor. However, the spectre of tariffs and other trade tensions looms over the Canadian economy, tempering some of the positive sentiment that prevailed during the period.
Beyond macroeconomics and geopolitics, enthusiasm and excitement around the rapid development and application of artificial intelligence is also driving investment, growth and disruption across the economy.
CANADIAN GROWTH STRATEGY
Pembroke’s Canadian growth strategy participated in the equity market rally in the last quarter. Our growth-oriented mandates delivered solid absolute and relative returns over the period, driven by the particular strength of holdings in the Industrials, Technology, Healthcare, Consumer Discretionary and Energy sectors. Only holdings in the Financial sector declined over the period.
The strategy also benefited from the acquisition of a software-focused IT solutions provider, Softchoice Corporation, at a significant premium to prevailing market prices. This is the third portfolio holding to be acquired by strategic or private equity buyers in 2024, highlighting the continuing valuation gap between public and private markets, smaller and larger issuers, and Canadian and global companies.
DIVIDEND GROWTH STRATEGY
Pembroke’s dividend growth strategy also participated in the market rally in the fourth quarter, adding to the strong gains seen in the first three quarters of the year. While a falling interest rate environment benefited yield-oriented equities throughout the year, the strategy also benefited from fundamental progress in its portfolio holdings in the form of earnings growth and dividend increases. Similar to our growth mandates, our dividend mandates benefited from the acquisition of Softchoice Corporation.
We continue to find new investment ideas to redeploy capital into attractive situations that offer investors a balance of growth and well-funded dividends.
CANADIAN ALL CAP STRATEGY
Pembroke’s Canadian all cap strategy was the top performer among Pembroke’s Canadian equity strategies in the last quarter, posting very strong absolute and relative returns. The strategy made gains across all of its industry group exposures, with particular strength in the Industrials, Energy, Technology, Financials and Consumer sectors.
The strategy’s focus on entrepreneurial growth and its more targeted portfolio structure differentiate it from broader Canadian indices.
POSITIVE CONTRIBUTION TO THE STRATEGIES
From a company-specific perspective, shares in MDA (MDA), a provider of satellite systems for communications, earth and space observation as well as space infrastructure, performed well in the fourth quarter. The company delivered solid financial results and provided guidance that highlighted attractive growth rates and visibility going forward.
MDA has benefited from a massive reduction in the cost of launching satellites, which has enabled both commercial and military applications that were previously prohibitively expensive. In addition, rising global geopolitical tensions are sparking a new space race, with governments rapidly deploying resources to bolster their national security and space sovereignty positioning.
We believe that MDA is on the cusp of generating significant free cash flow. Its shares are also modestly valued relative to its prospects, despite a significant rally in 2024.
NEGATIVE CONTRIBUTION TO THE STRATEGIES
On the downside, shares of Champion Iron (CIA), a developer and producer of low-contaminant, high-grade iron ore from Quebec’s Labrador Trough, were weak in the fourth quarter. This was in line with softening iron ore prices and demand concerns related to the Chinese steel complex.
While Champion’s short-term results have indeed been negatively impacted by commodity prices, rail capacity constraints and wildfire disruptions, we believe the longer-term prospects for the company are very positive. Champion is undergoing an investment program that will see much of its production upgraded to higher purity material, which commands a premium price and is used in electric arc furnaces. Efforts to decarbonize the steel industry are leading to a proliferation of electric arc furnaces, a fact that is supportive of longer-term pricing and demand.
Champion also has opportunities to expand its production capacity by further developing its rich geological iron ore endowment. The company’s agreement with two major steel producers to secure funding to advance the development of one of its earlier stage deposits illustrates this potential. We believe that Champion’s shares do not reflect the future development of the business and are therefore attractively valued.
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.
