Award-winning PenderFund manager has a knack for identifying tech ‘sellouts’

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For a Canadian tech investor, there's big upside to the "sellout culture."

The tendency of Canadian tech companies to sell in recent years rather than continue to build has provided one windfall after another to well-positioned money managers.

David Barr, chief executive officer of Vancouver-based PenderFund Capital Management, has seen 39 holdings in one fund he manages bought out since inception.

"That's a big reason we're talking right now," he said.

As manager of a tech-focused small cap fund, Mr. Barr was recently given a pair of awards for best-in-class performance.

U.S. fund-research firm Lipper Inc., a unit of Thomson Reuters, recently handed out awards to Canadian mutual funds and exchange-traded funds for superior returns in a broad set of categories over three-, five- and 10-year periods.

The Lipper Fund Awards recognized about 70 Canadian funds, including Pender's Small Cap Opportunities Fund, which beat all its peers in returns over the past three and five years. (As the fund launched in 2009, it was ineligible for the 10-year category).

That fund posted annualized returns of 22 per cent and 23 per cent, respectively, over those time frames.

One big key to success in smaller Canadian stocks over that time has simply been in avoiding resources, Mr. Barr said. "We don't like price takers, so we tend to shy away from commodities."

He said he got his start to investing in private equity, and approaches public markets with the same kind of sensibility. "That means thoroughly understanding the business and the industry, and supporting the right management teams. Particularly in the small-cap world, management teams are a lot more important to your thesis."

That approach has led him to concentrate on parts of the market with industry tailwinds and solid growth prospects, primarily in information technology and health care. Tech stocks account for nearly 40 per cent of the fund's equity holdings.

While there is a distinct shortage of large, homegrown-tech champions – the S&P/TSX composite IT sector index contains just 12 names – there are many stocks with less than a $1-billion market cap to choose from, Mr. Barr said.

"We build some of the best technology in the world."

The fact that the vast pool of U.S. technology stocks attracts by far more investor attention means that great domestic opportunities might go overlooked, he explained.

As an example, he gave QHR Corp., an electronic medical records company based in Kelowna, B.C.

The company had a sound value proposition, an emphasis on customer service and management that delivered on its promises. But QHR was less persuasive in communicating with the investment community, Mr. Barr said.

He purchased QHR shares between $0.40 and $0.60 a share, and it became the fund's single largest holding by the time Loblaw Companies Ltd. announced in August it would acquire the company for $3.10 a share, or about $170-million.

Now, the fund's single largest holding is in shares of Tio Networks Corp., a cloud-based bill-payment company from Vancouver. Tio is also a takeout candidate, Mr. Barr said. "Any time you have a company dominating a market, it becomes very attractive to acquirers."

Another of the fund's key weightings is in cash, which many investors would regard as a drag on returns.

Mr. Barr said he generally aims for a 20-per-cent cash weighting, based on a Warren Buffett-like attitude toward cash as a valuable tool to capitalize on future opportunities. "When volatility picks up, having cash protects on the downside a bit, but also we can go out and get a company we want to buy right away."

Fully invested managers looking to buy a discounted asset might first have to decide what to sell to free up the necessary cash.

"You're increasing your probability for error if you also need to figure out what to sell that day," Mr. Barr said.