April 20, 2012

Manager’s Quarterly Commentary – David Barr – Q1 2012

Written by David Barr

Well, that is certainly preferable to last year’s volatility and market performance. The markets are off to a much better start this year with the S&P/TSX Composite Index up 3.66% in the first quarter. The Fund* has followed suit and is up 15.65% for the quarter ending March 31, 2012. Since inception the Fund* has an annualized return of 21.30%, compared to 10.30% for the benchmark, the S&P/TSX Capped Composite Total Return Index.

Is the M&A Market Heating Up?

As I write this, four of the companies in the portfolio have publicly announced that they are engaged in various stages of a “strategic reviews”. Last year, four companies in the portfolio were acquired so this marks an even stronger start to the year. I believe the combination of cheap money (low interest rates) and an improving stock market are providing companies with the capability and confidence to grow more aggressively through acquisition.

On April 4th one of the companies in the portfolio, 20:20 Technologies, announced that it has “initiated a review of strategic and financial alternatives to enhance shareholder value”. The share price has responded accordingly and now trades around $4.00 per share, up from the $3.00 range earlier this year.

If you attended the Pender Investment Conference last October, you may remember that I highlighted 20:20 Technologies, a key holding in the fund, as having a catalyst profile. In summary, the investment thesis I presented was:

  • The company is significantly undervalued, relative to what I believe an industry consolidator would offer for the company, based on revenue and cash flow, but most importantly, its maintenance revenue.
  • A catalyst was likely to occur as the result of Crescendo Partners building a significant equity stake in the company in 2010 but being unable to secure approval to replace certain directors at AGM.

Portfolio Updates

We had another active this quarter as we bought 6 new holdings, added to 6 positions, decreased the weighting of one position and exited from one company. We continue to position the fund with a high level of cash, 19% at March 31st, to take advantage of timely market opportunities. The top 10 positions in the fund make up 49% of the portfolio, demonstrating our belief that it is better to allocate capital to the ideas that carry your highest conviction rather than to your 200th best idea.

David Barr,
April 20, 2012

* Refers to Class A units in the Fund