Since the pricing of stocks in the small-cap segment is relatively inefficient, David Barr makes no apologies for a 22% cash weighting in the $78-million Pender Small Cap Opportunities A.
“It’s a huge advantage to have the capital available to deploy when a stock gets temporarily mispriced,” says Barr, chief investment officer at Vancouver-based PenderFund Capital Management Ltd.
Noting that the fund typically has about 20% cash on hand, Barr adds: “A lot of times a company will release a poor quarter, or miss on its revenue. But we think the business case is still intact. When we have a buying opportunity we have the cash on hand to buy companies we like, at prices that we think are great.”
That was the case in 2011, for instance, when cash accounted for about 35% in July and fell to 5% in October. “I was being strategic that year,” recalls Barr, adding that he took some profits in June and built up the cash. “In August, the U.S. had its debt re-rated and there was talk of the ‘fiscal cliff.’ There was a dramatic market selloff and I could take advantage of a lot of fire-sale discounts.”
That bet paid off as the fund returned 4.6% in 2011, compared to the average 11.2% loss in the Canadian Small/Mid Cap Equity category.
It’s a pattern that underscores the performance of the 5-star rated fund. In the 12 months ended March 31, it returned 33.1%, versus 22.8% for the median fund. On a three-year basis, the fund had an annualized 22.3% return, compared to 5.9% for the median.
A value investor, Barr has long favoured technology stocks, which account for about 50% of the fund, mainly because of their double-digit growth characteristics. “Looking at these companies through a value investor’s lens, you can get tremendous upside. If you buy them at the right time, you can manage the downside risks.”
One classic instance is Redline Communications Group Inc. (TSX:RDL), which provides broadband wireless communications to the oil and gas industry. “With oil prices spiking five years ago, it pushed a lot of companies to adopt more technology and pull the resource out of the ground more efficiently. But in order to utilize it, you need real-time communications. Redline provides that gear,” says Barr, adding that the firm’s equipment can work both in Arctic conditions and in the Sahara.
Barr had owned the stock three years ago and bought back in again early this year after Redline’s stock plunged following some mis-steps. Given its 30% growth rate, Barr sees significant upside from the current $2.70 share price.
“I come from a private-equity background,” says Barr. “When you run a fund you invest in only one or two names a year, so you really get to know them well. We have a similar approach in managing this fund.”
A Montreal native, Barr grew up in Prince George, B.C., and in 1996 graduated from the University of British Columbia with a BSc in cell biology and genetics. Although initially interested in medicine as a career, Barr was entrepreneurial by nature and ran a painting firm while at school. He also started a computer-resale business which assembled computers for fellow students.
“I did this for a while after I graduated but then realized that my passion was really in investing,” recalls Barr, “and specifically technology companies.”
Barr earned an MBA at the Schulich School of Business at Toronto’s York University in 2000 and returned to Vancouver to work as an investment manager at FutureFund Capital. That experience proved to be formative as he watched the companies survive the technology and telecommunications crash. “It really shaped who I am as an investor today.”
In 2003, Barr joined the PenderFund team when it acquired the FutureFund management contract. By 2005, he became chief financial officer and a partner in 2007.
Pender Small Cap Opportunities was launched in June 2009. Barr limits individual holdings to about 5.5% of the portfolio. Turnover has been quite low at 14.9% for the 12 months ended June 2013.
Barr uses the same value principles in managing the $16-million Pender Value Class A, a global equity fund which was launched last July. Its portfolio is a 50-50 mix of Canadian and U.S. companies that tend to have market caps of about $2 billion — versus $200 million in the Canadian fund.
Holding about 40 companies in the Canadian small-cap fund, Barr is cautious on taking positions. “We look for companies that have a history of compounding their capital at above-average rates. If they have a market with a lot of runway we think they can do it for an extended period.”
One such holding is Espial Group (TSX:ESP), which provides software solutions that enable the delivery of Internet protocol television. The firm’s advantage is that it gives cable firms access to technology at a fraction of the cost of previous devices. Barr sees more upside even though the shares have more than doubled in the past year.
“The game-changer for Espial is that this summer they signed their first contract with a tier-one North American cable provider with two million subscribers,” says Barr. “We see a lot of potential upside for this company in the next 12 to 24 months.”