Pender Value is comanaged by Dave Barr and Felix Narhi. Barr, who also serves as president and CEO of PenderFund Capital Management, is a seasoned investor with over 15 years of experience, many of which were spent on private equity and venture capital investments. Narhi, who serves as the firm's chief investment officer, brought 14 years of U.S. equity expertise when he joined in 2013. The managers use an investment process that allows them to nimbly invest their unitholders' capital throughout a market cycle. Combined with his independent, contrarian streak, Barr has applied his knowledge to public markets with success, as the Pender Value fund boasts an impressive track record. We believe that this small-cap dominated fund will behave quite differently from any benchmark, and that long-term investors who have the risk tolerance for such an allocation in their portfolios will be rewarded over the long term.
Barr and Narhi are part of a nine-person investment team that appears well-resourced given Pender's focused hunting ground. The team's three portfolio managers share research but operate independently. Managers and analysts share research responsibilities and divide their duties by market cap. Barr focuses primarily on small- and mid-cap stocks, especially in technology, as well as special situations (such as distressed or bankrupt companies) while Narhi focuses on midcap and large cap names. As the firm has grown, it has enhanced its research capabilities. For example, Maria Pacella came aboard in 2017 with a long venture capital background. She will focus primarily on private investments, but Barr expects he'll benefit from her industry contacts and microcap research.
The team's investment approach is opportunistic, while remaining mindful of the importance of capital preservation. When valuing a company, the team estimates fair values across a range of scenarios and assigns probabilities to each one. Considering many possible outcomes, including a firm's potential takeover price, encourages realistic forecasts and improves Barr's ability to incorporate new information into his calculations without anchoring to a single fair value estimate.
The team targets two types of stocks. First, they prefer to buy companies they refer to as compounders: growing firms with competitive advantages that are trading at attractive prices for short-term reasons. 
Chipotle Mexican Grill (CMG) is an example; the team bought the stock during a rough patch where shares dropped by more than 50%, starting with multiple incidents with e-coli. The team was confident these were short-term issues and that the business had not materially changed, and the stock has since rebounded nicely from its low in early 2018.
Barr's experience in private equity also means he has a unique knack for identifying and owning firms that get acquired, which has happened 15 times since the fund's launch. So far in 2018, the fund has had two of its holdings taken out, including Avigilon Corp. which was bought by Motorola (MSI).
When it comes to the compounders, the team would ideally love to hold onto these businesses for as long as their thesis remains intact, but the current environment of higher valuations has made them more cautious and they have sold names that they believe are too richly priced.
The second type of stock the firm targets are stocks that may not be fantastic companies in the long-term but are trading at sizeable discounts to their fair value. Athabasca Oil (ATH) is an example of their success in this arena. The oil company's stock fell below $1 after a multitude of issues have plagued the company since its initial public offering. The team felt this was below the stock's fair value, and since their purchase earlier this year, it has nearly doubled. While luck may have played a part in how quickly their thesis came to fruition, the fact that the managers give themselves the flexibility to buy lower quality companies allows them to remain nimble and add value for their unitholders at times when markets are more expensive.
The Pender team's flexibility does not mean they will sacrifice on their valuation discipline however; the fund has held as much as 25% in cash as recently as the first quarter of 2018. When they do spot opportunities, though, the managers will not hesitate to put their cash hoard to use, as the fund's current cash weighting of below 10% demonstrates. Barr uses portfolio construction to control the risks inherent in either of the two types of stocks he owns, limiting compounders to 6% weights and discounted names to 4%. While they don't have or use the quantitative risk tools of some of their peers, the team's pricing discipline and willingness to hold high levels of cash offsets their lack of sophistication in the risk management arena.
Although Pender lists a 50/50 blend of the S&P 500 and S&P/TSX Capped Composite as their fund's benchmark, given their small cap bias we feel a 50/50 blend of the Russell 2000 and the S&P/TSX Completion Index makes for a more meaningful evaluation of Pender Value's performance. Against our benchmark, the fund's performance still stands out. From its inception on July 1, 2013, to April 30, 2018, the fund's F-series boasts an annualized 17.8% return, which easily bests the benchmark's 11.4%, with just slightly higher volatility. The fund's higher cash levels when markets get frothy is reflected in its lower upside-capture ratio of 76%, but also have resulted in meaningful downside protection, capturing just 80% of market declines -- a winning combination.
Pender offers the Value fund in all three distribution channels, and the fund's lower trading expenses (captured in the TER) make its total cost structure even more competitive. The commission-based and fee-based series of the fund both rank in the second quartile of funds in the Global Small/Mid Cap Equity category. DIY investors get even better value, as the D-series ranks in the top quartile.
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