Of note, our flagship
Pender Value Fund (PVF) has averaged 20.7% cash on hand since its inception from July 2013 to
October 2017. Cash levels have varied widely over that period, from a low
of 3.5% in October 2016 to a high of 39.4% in May 2015. Cash as a
percentage of the PVF at the end of October 2017 was above the historical
average at 25.3%. These figures represent historical data points from the
Pender Value Fund. Cash positions change over time and vary by mandate;
however, below we explain Pender’s view of the role of cash as a strategic
asset class within our investment process.
Deploying cash: when and how
We are patient opportunists. We are perfectly willing to sit on cash and
let it accumulate in the absence of compelling opportunities, because we view cash as a call option with no expiration date. In our
experience, when opportunities come along, they often don’t last very long,
so it is important to have the means to act quickly. Generally we believe
an investor should be as fully invested as possible, assuming one can find
enough compelling risk-adjusted ideas to own a diversified portfolio.
Otherwise, the rational default option is to hold cash.
We believe the track record across a number of our mandates provides
validation for this approach. The data show that cash levels in the PVF
vary widely depending on the market’s opportunity set. The chart below
follows the fluctuating levels of cash as a percentage of the portfolio’s
assets laid over the most recent cycle, and captures the Fund’s all-time
high and low cash balance weightings.
PVF’s all-time high in cash as a percentage of the assets occurred in May
2015, fairly near the TSX’s intracycle peak. Subsequently, the Canadian
stock market sold off in the second half of 2015 and bottomed in early
2016. During the market correction, PVF’s cash reserve came in handy and
was used to pick up bargains from our watchlist or increase weightings
amongst the “best ideas” from our investment team. By mid-2016, the cash
balance had fallen back into the low single digits as fears about a
potential hard landing for China subsided and the market began climbing
With markets once again currently surpassing previous highs, we find
ourselves selling more than we are buying, as during previous periods.
Securities are trimmed or sold after our targets have been reached, and
cash is the default option as we await the next mispriced stock. This is
particularly true amongst our lower quality “close-the-discount” ideas, which require active trading strategies to generate returns. In
addition, the cash uplift in the Fund can be partly attributed to recent
Not a market call
Mathematically, all things being equal, when prices fall, prospective
returns improve. Of course, the reverse is true as well. We believe changes
to cash levels should simply reflect this recurring rhythm of the market
when investing. Although PVF’s higher weighting in cash right now may look
like a market call, in fact it’s a product of our process. The ebb and flow
of a Fund’s cash levels should not be mistaken as an effort in market
timing. We don’t believe anyone can consistently time the market.
The stock market is a market of individual stocks, each of which has its
own unique path, ups and downs that are not necessarily in sync with the
broader markets. Rather than timing the market, we value individual
businesses and securities that we believe we understand well enough to give
us an investment edge, and then we act when stock prices are attractive
relative to our fair value estimates.
During periods of market volatility, new ideas that have been tracked on
our watchlist and those that fall in our circle of competence can be
snapped up at a “discount” to our estimated fair value estimate. At the
same time, we are frequently trading around our existing, high-conviction
holdings. Trading opportunistically around existing ideas tends to improve
the odds of success because we are already very familiar with our holdings.
Both watchlist and existing ideas hold a major advantage over other ideas
during a selloff; we don’t need to jump start research efforts. We already
have a qualified opinion whether the selloff was a buying opportunity or a
time to sell and move on because the facts have materially changed.
Our investable universe is narrowed down to a reasonable size through our
We have no opinion on the vast majority of stocks that are traded each
The good news is that sound investing does not require one to know
everything about all securities – an impossible task. But it requires an
investor to thoughtfully assess the success factors for a handful of
businesses better than the person (or more likely, an algorithm) on the
other side of the trade.
Finally, we believe that large cash balances should not be held at all times. To do so
serves as the financial equivalent of a security blanket, which acts as an
anchor on compounding wealth over time. Maintaining a high cash level
within relatively tight bands through all periods, without aggressively
deploying it when compelling ideas arise, is not an optimal
investment strategy, in our view.
Every position we hold is managed according to a unique investment thesis,
developed out of the bottom-up, fundamental analysis of that security. The
holding is actively managed according to that thesis; consequently, if the
stock reaches our target value, we find something better, or the facts
change, our sell discipline guides us to trim or sell. We feel no pressure
to be fully invested. We are patient opportunists. We are comfortable
sitting on cash until the next attractive opportunity in something we
understand comes around. The PVF’s track record shows that returns have
been enhanced because of the strategic deployment of cash as an asset
Felix Narhi, CFA, is Chief Investment Officer and Portfolio Manager at PenderFund Capital Management.
He works alongside David Barr, Pender’s President, in setting the
direction of Pender’s overall investment strategy. This article first
appeared in the
Pender Investment Insights blog. Used with permission.
Notes and Disclaimer
© Copyright 2017 by PenderFund Capital Management Ltd. All rights reserved.
Reproduction in whole or in part by any means without prior written
permission is prohibited.
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. Certain of the statements made may contain
forward-looking statements, which involve known and unknown risk,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.