2016 half-year review -- growth funds

Greg Dean's picture

Dear fellow fundholders,

With so much of the spring roadshow and our time with clients lately focused on conservative income and yield, I haven’t been out as often as I would like to discuss what has been going on in my portfolios. I am planning to visit many of you this fall as we have decided to re-open the Cambridge Canadian Growth Companies Fund to new investors effective July 20, 2016. The fund was soft-capped about two years ago. By specializing across styles and mandates, I have been able to get deeper and more global in the small/mid-cap asset class, providing the mandate with more capacity without sacrificing returns.

We have also realized that over the last three years, the fund had attracted some investors who were chasing short-term performance. Clearly, we can’t string together a decade of returns at 40%+ and we never suggested that it was possible. But with the funds’ assets now $250 million below the threshold where we capped it, and the investment team having more than doubled in size, we feel comfortable taking in new money in this fund and delivering for clients focused on long-term capital preservation and wealth creation.

So far, 2016 would be characterized by a big reversal of many momentum trades and themes from 2015. Commodities, the Canadian dollar, transports, and other cyclicals all have rallied 20-50%+ from, what we believed at the time to be, global recessionary levels.

This type of market is not ideally suited for us as we unfortunately can’t find a lot of great businesses in cyclical and commodity-oriented industries. However, we did find a few that, in late 2015 and early 2016, provided wonderful opportunities to start or increase a position. Several of these we have already shared – Finning, Old Dominion Freight, Tourmaline and Transforce.

Across our growth suite of funds (Cambridge Growth Companies Corporate Class, Cambridge Pure Canadian Equity Fund, and Cambridge Canadian Growth Companies Fund), the buying we did was in industrials and the decision to hold our positions in energy, when others were casting them aside, served clients well thus far. But, we have used the recovery in commodity prices and corresponding equities to reduce positions, as we believe commodity prices are now much closer to long-term fair value and the equities largely reflect this.

Another major development in the first half of the year was one of our largest holdings announced a transformational acquisition of a competitor, which has seen the stock rise over 50% this year. CSC announced it was proposing to merge with the enterprise services division of HP. The combined company will have over $25 billion in revenue and will have very significant cost synergies from real estate, data centres and headcount reductions. It truly is a once-in-a-career type merger. It remains among my largest holdings, as I believe the combined business in the hands of the current CSC CEO has a lot more value to create than the market is giving it credit for.

All we know for sure is as long as there is fear and uncertainty out there, then there will be opportunities in the markets. I am optimistic and our team has never been better positioned to capitalize over the long term.

  YTD 1 year 3 year 5 year Since
inception
Cambridge Growth Companies Corporate Class 1.9 -2.4 N/A N/A 9.8
Cambridge Canadian Growth Companies Fund 4.6 -4.0 9.9 18.7 17.6
Cambridge Pure Canadian Equity  6.5 -6.9 11.3 18.1 17.1
*As of May 31, 2016
Source: Bloomberg
         

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