Adapting to the age of disruption

Adapting to the age of disruption

Investing in the world as it is, not as you wish it to be


We are living in a period of accelerated change and need to stay flexible in our thinking. Some trends are temporary while others are more structural. More and more businesses are being disrupted by technological change as consumers dramatically adapt their behaviour and this has been further accelerated by Covid-19.

There was a lot of uncertainty and mispricing last spring. We held a number of holdings that we felt would do well in a post pandemic world, even though investors were pessimistic about their near-term outlook. We categorized our existing holdings into “the Good, the Bad and the Ugly.” Zillow (NSD: Z, ZG) and PAR Tech (NYSE: PAR) stock prices’ were indeed looking ugly this spring. Both were perceived as highly risky; however, we theorized that both had the potential to be beneficiaries of digital acceleration. Now the market appears to agree with this assessment and both stocks have more than tripled from the bottom to hit all-time highs. (NSD: JD), a more obvious pandemic winner as China’s largest ecommerce retailer, also hit all-time highs in early September. These positions were not short-term trades, and we expect to continue to “sit there” and hold core positions in all three companies.

Don’t just sit there, do something

In a previous commentary, we outlined some selling activity. This provided the liquidity to take advantage of an entirely new opportunity set. We were able to pick up some new promising positions at bargain prices that would not have been available prior to the pandemic. Importantly, we felt they would also be long-term beneficiaries of digital acceleration, including Square (NSD: SQ), Dye & Durham (TSX: DND), Stitch Fix (NSD: SFIX), Twitter (NSD: TWTR), and Interactive Brokers (NSD: IBKR). Many of these new holdings have performed exceptionally well so far.


After a strong start to 2020, the drawdowns in March were gut wrenching. Since then, we are pleased with the much stronger recoveries than we could have imagined at the time. In many cases the very same names that have been performing the best of late, making all time highs today, also had the worst drawdowns. It is remarkable to see how quickly markets pivot and investors revise their opinions about companies. Much of the humility that investors gained in March 2020 has been lost once again by the summer. It is an endless cycle. Plus ça change, plus c’est la même chose. (The more things change the more they stay the same.)

We remain particularly excited about some potential upcoming catalysts which could further boost momentum. As one of many casualties early in the pandemic, M&A activity came to a virtual standstill. This has been a big headwind for Pender because part of our strategy requires normal deal-making activity (see our track record of picking small-cap takeout targets). That headwind seems to be reversing. Big time. As “animal spirits” return to the markets, and potential acquirers can conduct their due diligence once again, enthusiasm for deals is quickly ramping up again. In aggregate, we believe many of our small and microcaps represent “juicy” takeout targets because their valuations are still relatively attractive, especially compared to the larger caps that have already run up. We believe investment bankers and deal-hungry executives are scrambling to make up for lost time. This heighted buyout activity could provide a strong tailwind for us over the next few quarters.

The central bank driven liquidity injection that ignited the large cap rally is now being followed up by a small cap rally. A few of our equity mandates have recovered to the top-performing quartiles of their respective categories, particularly in the small-cap mandates. It is a rare event when all our funds are firing on all cylinders – today is no exception. We are not satisfied by the performance of a few our funds, but we have made adjustments as noted, and are encouraged by the early progress.

There have been very few investment strategies that have kept up with the turbo charged returns of a handful of tech megacaps of late. The five largest companies of the S&P 500 are currently worth more than the entire S&P 500 during the last bear market in March 2009! The collective market cap of the Giant 5 (Apple, Microsoft, Amazon, Alphabet, Facebook) is $7 trillion+. They are undoubtedly great companies when measured by almost any metric. It has been a truly remarkable run, but from an investment perspective, generating, say, a 10% return on $7 trillion of market value is…well…a very big number. Great companies are not always great investments. The sky does have some limits. As an alternative, we find it fascinating to study these great companies and then apply the template of those learnings within our smaller-than-megacap universe to holdings that are also that are re-platforming their industries, as noted earlier. We believe owning a handful of great companies that are still in the earlier phases of their value creation journey increases their compounding potential for becoming great investments as well.

We can’t control stock prices. However, we control our investment process. And we can and must adapt to new methods and views that better represent how the world works.

“You have to play the cards that are there. You have to deal with the world as it is, not as you want it to be, or you wish it to be, or how you think it should be. That’s also another thing to bear in mind for people is that, don’t complain about the world, figure out a way to thrive in it.” – Michael Mauboussin

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 blog. Used with permission.

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