Manager’s Quarterly Commentary – David Barr – Q2 2014 – Pender Value Fund

We have passed the one year anniversary of the inception¹ of the Fund and are pleased to announce that the one year return was 35.46%² as compared to the benchmark which was 26.47%³.

For the three months ending June 30, 2014, the Fund was up 1.83%² as compared to the benchmark, up 2.28%³.

While a one year track record is still too early to judge the strength of an investment strategy, the Pender Value Fund takes the same approach as the Pender Small Cap Opportunities Fund which now has a five year track record of performance in a variety of market conditions.

• ¹ Inception is July 2013.
• ² Refers to Class A units in the Fund.
• ³ 50% S&P/TSX Capped Composite Total Return Index, 50% S&P 500

Volatility & short term catalysts

One of the more interesting parts of managing a mutual fund is trying to address the general public’s fear of volatility. Internally, we talk weekly (if not daily) about how volatility is not the same as risk. Risk, for us, is the permanent impairment of capital. We hate to lose money. The reality in managing a fund like the Pender Value Fund is that volatility can dramatically impact the flow of investor capital both into and out of the fund.

In general, when stocks are really cheap, we don’t worry about volatility as there is a much higher probability of it being your friend to the upside. Conversely, when valuations get a bit stretched, like the environment we are in today, volatility can be your enemy and you need to try to protect capital.

Given the context of current market conditions, we are actively managing the portfolio, utilizing several strategies to try and minimize volatility.

• We use cash as a strategic asset class – that is to say we keep cash on hand to take advantage of price drops in stocks we like.
• We actively manage our position sizes based on getting a discount to intrinsic value.
• We look at uncovered parts of the market, including special situations, where selloffs aren’t always as dramatic.

An example of the latter approach in action is the Fund’s recent investment in Liberty Interactive (NASDAQ: LINTA). LINTA has a lot of the characteristics we look for in a long term core position. The main reason being the involvement of John Malone and his impressive long term track record of growing businesses and specifically his ability to allocate capital.

LINTA has announced it is splitting into two trading entities:

• Liberty Interactive Group
• Liberty Digital Commerce

This diverse set of corporate assets leads to a sum-of-the-parts valuation. By breaking the company into its two main operating businesses, both resulting companies should be valued by the market as operating businesses. When we bought LINTA our thesis was we were getting the eCommerce segment for free. Getting anything for free makes value investors like us smile.

With the spin out filed with regulators and expected to complete in the coming months, we believe we will realize a rate of return above our hurdle, as well as decreasing the volatility in the Fund should we get an overdue market correction.

Portfolio Updates

During the quarter we invested in five new companies and added to five existing positions. We exited from two companies, and decreased our holdings in three companies. We have nearly 27% cash on hand and our geographic weighting is split 60:40, Canada:USA.

David Barr, July 29, 2014

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in net asset value and assume reinvestment of all distributions and are net of all management and administrative fees, but do not take into account sales, redemption or optional 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. This communication is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter and is provided for your information only. Every effort has been made to ensure the accuracy of its contents.