The Class A of the Pembroke Concentrated Fund (“PCF”) returned 0.74% in Q1 compared to the 11.31% return of the Russell 2000, and 4.87% for the S&P 500. This brings PCF’s cumulative return since inception to 83.37%, compared to 50.54% for the Russell 2000 and 52.91% for the S&P 500*.
The following table provides a detailed look at PCF’s performance relative to the market:
Q1 2021 1-YEAR 3-YEARS Since Inception, Annualized Since Inception, Cumulative
Pembroke Concentrated Fund – Class A 0.74% 72.74% 19.97% 21.10% 83.37%
Russell 2000 Total Return Index 11.31% 72.71% 13.81% 13.79% 50.54%
S&P 500 Total Return Index 4.87% 38.59% 15.81% 14.35% 52.91%
*All performance metrics in this letter are expressed in CAD, net of transaction and all other fees, but gross of management fees. Fund inception date 1/31/2018.
While we remain pleased with our long-term performance, the market’s unusual behaviour in Q1 is worthy of some discussion. As we will demonstrate, our performance versus the market is largely due to the rally in low-quality stocks as opposed to any problems with specific holdings.
To illustrate, the relative contribution of our top 10 winners was 654 basis points in the quarter, while our top 10 laggards only detracted 552 basis points. Our worst laggard only represented a 114-basis point headwind; about the same as our best winner.
So how dramatic is this junk rally? The following chart details the Russell 2000’s Q1 performance by key Style Factor.
| Style | Factor/Market Driver | YTD Return |
|---|---|---|
| Value | Sales/Price (1-Year Forward | 35.15% |
| Volatility | 90 Day Beta | 24.98% |
| Leverage | Net Debt to Equity | 24.14% |
| Volatility | 1-Month Volatility | 12.08% |
| Variability | 5-Year Op. Income Variability | 10.95% |
| Profitability | EBITDA Margin % | -10.99% |
| Profitability | ROE (Prior 5-Years) | -12.71% |
| Profitability | ROIC (Prior 5-Years) | -14.89% |
| Size | Market Capitalization | -15.04% |
| Growth | Prior Sales Growth % | -19.64% |
Source: Bloomberg; priced as of 4/1/2021; style factors of the Russell 2000.
The cheapest companies (seen in row 1, using a sales yield calculation) performed the best – up 35%, comfortably beating the Russell’s +12% move. Other style factors that led the market’s gains were volatility, high balance sheet leverage, and low profit margins. Said another way, the cheapest, slowest growing, most volatile, most indebted stocks performed the best. Conversely, the style factors that lagged the market were high margins, high quality (as expressed through ROE and ROIC), fast sales growth, and larger market caps.
Clearly, this unusual quarter was not favourable to quality growth portfolios like PCF. Ours is a portfolio of high return, high margin, low leverage, fast growing, above average market cap stocks. As one would expect, junk rallies tend not to last long, and cede leadership to quality.
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 are faster growing, higher margin, higher return, better financed, more aligned, less volatile, and reasonably valued as compared to the market.
Metric Comment Strategy Russell 2000
EV/NTM EBITDA Better Value 21.9x 22.5x
Price/NTM Earnings Lower Value 35.7x 32.8x
Revenue Growth (%) Higher Growth 17.1% 13.8%
Gross Margin (%) Higher Quality 44.5% 26.9%
Operating Margin (%) Higher Quality 9.6% 0.6%
Operating Cash Flow Margin (%) Higher Quality 15.9% 9.8%
Return on Equity (ROE) Higher Quality 8.4% 0.9%
Return on Invested Capital (ROIC) Higher Quality 7.5% 1.5%
Beta Lower Volatility 0.77 1.00
Net Debt to NTM EBITDA Lower Leverage -1.1x 4.1x
Insider Ownership Higher Alignment 8.0% 4.3%
Market Cap (Weighted Average) Larger Value $5.84 B $3.71 B
Source: Pembroke, Bloomberg. Earnings data based on Bloomberg next twelve months concensus estimates. Beta calculated over a 1-year period. Data as of March 31, 2020 in USD.
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.
