April 11th, 2016

It is with sadness that Pembroke announces the passing of Co-Founder and

Chairman Emeritus Ian Soutar on March 21st, 2016. We wish to express our

sincere condolences to the Soutar family and join them along with Ian’s many

friends in celebrating his wonderful life. The full annoucement appears in the

In Memoriam section of this newsletter.

ON THE ROAD AGAIN In this quarter’s On the Road we discuss two companies in the textile industry. The first one is Gildan Activewear (“GIL”), a 15-year Pembroke holding and manufacturer of t-shirts, sweatshirts, polos, underwear and socks. The second one is Superior Uniform Group (“SGC”), a newer holding that distributes apparel and uniforms in the U.S. to corporations seeking to better communicate their brands through the professional appearance of their employees.

During the course of Pembroke’s investment in GIL, the company has demonstrated a strong record of growth; becoming the largest garment manufacturer in the world with approximately one billion garments produced every year and employing over 45,000 people. The Company’s superior product value proposition has allowed it to beat out Fruit of the Loom and Hanesbrands in the screenprint distributor channel. Most people unknowingly have a Gildan t-shirt at home promoting something such as the United Way, University of Minnesota or U2 on the front with a Gildan label on the back collar. The revenues associated with this channel continue to flourish through international diversification.

1 On the Road Again

4 Just the Facts

5 Overview of the Quarter

13

Outlook

15

In Memoriam

 

 

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The Company has also embarked on two new growth initiatives: entering the branded retail channel and vertically integrating into yarn spinning. Gildan entered the $15 billion branded retail market during the last few years with its own brands and has seen early success; landing programs at Wal-Mart, Target, Macy’s, Dollar General and several other retailers. Similar to the screenprint distributor channel, the company is leveraging its low-cost manufacturing expertise to gain market share. Furthermore, the company’s focus on Environmental, Social and Governance factors make its products more attractive to retail customers. Gildan’s facilities in Honduras, the Dominican Republic and Bangladesh have been praised by many NGOs for their fair treatment of employees and environmental consciousness. Gildan is the only North American textile or apparel company in the Dow Jones Sustainability World Index. We believe it is still early days for Gildan in this channel and that the company will continue to raise the profile of its brand, gain shelf space and grow its sales.

The second new growth initiative began in 2014 when Gildan made the strategic decision to vertically integrate into the yarn spinning business. It has since accelerated its capital expenditure plans and invested $400 million to build new facilities and improve existing ones. It felt that its suppliers had not spent the necessary capital to augment the quality of their product offering. By running facilities with the most technologically advanced machines it is now able to source cotton directly from farmers and produce higher quality levels of yarn in a more consistent manner. Greater quality and consistency manifest themselves in cost savings later in the textile manufacturing process through lower downtime in the knitting step (higher quality yarn fiber is less likely to break) and less rework in the dyeing step (consistent quality results in less color variation).

The yarn spinning facilities are located in the southeastern part of the United States, in close proximity to the U.S. cotton farmers and ports as well as in jurisdictions with low-cost power supply. We recently visited two of the Company’s new yarn-spinning facilities near Charlotte, North Carolina and were fascinated by the scale of the operations (Gildan accounts for 25% of all U.S. domestically used cotton) and management’s focus on details. Meticulousness is paramount in a commodity business where one competes primarily on price. We have always been impressed with CEO Glenn Chamandy’s comprehensive knowledge of the intricacies of the textile process and we were glad to see that he had the same involvement in the newer yarn-spinning operation.

We believe that the decision to vertically integrate will further enhance Gildan’s cost advantage and competitive position. With the major capital expenditure plans behind them, the company can now use its free cash flow to raise its dividend, buy back shares and finance opportunistic acquisitions. Superior Uniform Group is a great example of what Pembroke looks for in a new

 

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investment. It is a small-cap stock with no sell side coverage and a significant management ownership. It has a business model that allows for self-financing growth initiatives, generates high returns on capital and has a sufficiently large addressable market to give them a long runway for growth. This investment is also an example of how Pembroke leverages the knowledge base in one market (the textile industry through Gildan) to lend perspective to, and assess the investment merits of, another business.

The company was founded during the 1920s and has been managed by family members for five generations. While the business has been focused predominantly in the textile industry, the company has leveraged its existing call centre operations and now provides this as a service to third party customers.

Although Pembroke is often drawn to businesses that have large insider ownership and a continuity to their executive management team, family-owned companies can be problematic. We met management at their head office in Seminole, Florida, just outside Tampa Bay, to gain insight into their thinking and strategic objectives. The company’s nondescript headquarters is located in a building that is largely dominated by the company’s operations, with some office space carved out to house the executive team. Chief Executive Officer Michael Benstock has been the CEO for over 12 years and has made some difficult decisions that have either reversed the previous course of the business or altered the structure of the company. Despite having overseen domestic manufacturing, Mr. Benstock was willing to make the hard decision to outsource that function to lower cost areas, and he has also divested non-core businesses. The strategic rationale for his decisions indicates that the attractive margins and impressive returns on capital were not accidental.

Pembroke asked about the opportunities ahead to gain an appreciation for how the business will develop over time, and the avenues of growth that the management team will pursue. Although the U.S. uniform industry is not growing particularly quickly, we expect SGC to grow faster than the industry because of their scale, an increasingly vertically-integrated operating model, a focus on customer service and a commitment to apparel design. These factors allow the company to offer customers a high quality product at a competitive price. Understanding the size of the addressable markets, the potential growth for the company and the ability to internally finance the investments needed to execute on that growth increased our level of conviction.

SGC is an example of a growth company with the potential to remain in our portfolio for years. The time spent travelling to the company’s head office has not only helped establish a rapport and ongoing dialogue with the management team, it has also allowed us to gain a better understanding of the business and dynamics of the industry.

 

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JUST THE FACTS Before providing qualitative comments on the quarter, we present some quantitative information regarding our top five Canadian and U.S. holdings.

Top Five Canadian Holdings March 31st, 2016

Company Q1 Price Change

(CAD)

Revenue Growth,

Current Fiscal

Year

EBITDA Growth,

Current Fiscal

Year

Revenue Growth,

Next Fiscal

Year

EBITDA Growth,

Next Fiscal

Year

The Descartes 

Systems Group   ‐9% 3% 9% 11%  14%

Stella‐Jones  ‐11% 24% 23% 7%  8%

Lucara Diamond   23% 30% 36% ‐19%  ‐30%

Gildan Activewear  1% ‐3% 6% 7%  10%

DHX Media  ‐15% 16% 53% 10%  17%

Average ‐2% 14% 25% 3%  4%

Top Five U.S. Holdings

March 31st, 2016

Company Q1 Price Change

(USD)

Revenue Growth,

Current Fiscal Year

EBITDA Growth,

Current Fiscal

Year

Revenue Growth,

Next Fiscal Year

EBITDA Growth,

Next Fiscal Year

WNS (Holdings)  ‐2%  ‐1% 18% 9%  5%

BofI Holding  1%  50% n/a 17%  n/a

HMS Holdings   16%  2% 31% 8%  15%

Virtusa  ‐9%  25% 6% 50%  46%

Drew Industries  6%  12% 21% 7%  8%

Average 3%  18% 19% 18%  19%

Source: Consensus and Pembroke estimates

 

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OVERVIEW OF THE QUARTER

U.S. COMMENTARY

The U.S. equity markets had a rocky start this year with the S&P 500 falling 6.0% in the first five days. By February 11th, the S&P 500 was down 10.5% and the Russell 2000 was down 16.0% as investor sentiment turned sharply negative. Unrelenting price pressure on oil and the rising U.S. dollar clouded future corporate profitability and caused dislocation in the high yield credit market. However, a better-than expected earnings season, cautionary remarks from the Federal Reserve about slowing rate increases and resilience in the job market put a floor on stock prices. By March 31st the S&P was up 0.8% and the Russell 2000 was off only 1.9% - a good reminder of just how difficult it is to time the market! Pembroke trailed their benchmark, the Russell 2000 Index, by a small amount year to date, as mid cap stocks outperformed small caps and value significantly outperformed growth. We maintain that our patient long-term approach and focus on company-level fundamentals will ultimately be rewarded. The U.S. portfolio benefited significantly from the rise in HMS Holdings ("HMSY") share price. HMSY provides critical cost-saving services to state governments and commercial insurance companies. The company is contracted by 43 out of the 45 U.S. state governments that use an outside service provider to help recover improperly paid bills on behalf of Medicaid agencies. In late July 2015, the state of New Jersey awarded its contract to an HMSY competitor, sending the stock down sharply as investors feared that HMSY's near monopoly was under threat and that this would result in pricing pressure, the loss of additional contracts and a collapse in profitability. It was an irrational response to the loss of 6% of the company's overall revenue. Pembroke raised its position as others panicked. Why? First, a large balance of the remaining state business is under long-term contract. Second, one "data point" does not make a trend. Subsequent to the New Jersey decision, HMSY has won new multi-year contracts with New York, Florida, and Tennessee – and lost none. Third, HMSY may well win back the New Jersey business, as it did after Florida tried a competitor's services between 2008 and 2010. An owner then, Pembroke understands that sometimes States make irrational, politically-motivated decisions. Finally, and most importantly, New Jersey is a chimera, a tempest in a teapot that the market fails to recognize. The

 

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real driver of HMSY's future growth is the commercial business that management expects will grow approximately 20% in 2016 after growing at a similar rate in 2015. Revenue guidance for 2016 indicates that pricing in HMSY's state government business is not under pressure. The company enjoys a healthy balance sheet, should generate more than $75 million of free cash flow in 2016, and is still attractively valued even after rising 40.4% from its close on February 11th to $14.35 on March 31st. Shares in WebMD ("WBMD"), an online provider of healthcare information to consumers and doctors, have jumped nearly 50% since Pembroke’s initial purchase in September 2015. The company is benefiting from (1) the migration of advertising dollars from traditional mediums to the internet, (2) the high number of new drugs coming to market and (3) the need for drug companies to target very specific illnesses as drugs become more specialized, making the traditional mass media approach less appropriate. Since Pembroke made its investment, management has continued to demonstrate that it can execute against its growth opportunity while also delivering profit margin expansion. Expectations for several years of new drug introductions and increasing regulations about how doctors can be targeted for drug advertising position WBMD to grow revenue and profits at a healthy clip for the next three to five years. The result has been valuation expansion that more appropriately reflects WBMD's growth profile, high free cash flow, and strong brand name. From a mergers and acquisition standpoint, numerous holdings announced strategic acquisitions that bolstered their growth and competitive positions. A number of our management teams moved forward with their long-term plans despite turbulence in the public equity markets. Pembroke benefitted from the proposed takeover of Carmike Cinemas ("CKEC") by AMC Entertainment ("AMC"). Carmike is the fourth largest independent movie theatre chain in the U.S., and despite its strong fundamentals and solid consolidation track record, it was trading at a discount to its larger brethren. AMC took advantage of the valuation gap to make an opportunistic acquisition, demonstrating once again that the market eventually closes irrational valuation gaps. Though underwhelmed by the acquisition price, Pembroke exited its position due to the U.S. Department of Justice's prior meddling in the movie theatre sector. In the short-term, Pembroke notes that negative stock price action of small market capitalization companies does not necessarily reflect fundamentals. It may reflect something as simple as selling pressure applied by a single shareholder. Pembroke is satisfied with the revenue and earnings growth in its portfolio as a whole and is confident that time will take care of irrational price

 

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action. Across the portfolio, Pembroke was only disappointed with the results and guidance posted by Advisory Board (“ABCO”). In many cases, poor recent price action reflects the market’s focus on the short term and its current preference for larger cap companies despite the asymmetric upside offered by some of our smaller cap positions. For example, shares in Actua (“ACTA”) have languished despite the software company’s guidance for 15%-20% revenue growth and positive free cash flow in 2016. Further, senior executives and board members recently purchased stock in the open market and we believe that the firm is considering all of its strategic options to crystallize shareholder value. The share price action of Encore Capital Group (“ECPG”) also reflects the market’s short-term perspective. ECPG, a debt collection company, has seen its shares suffer due to investor frustration that some of the major U.S. banks have been slow to sell large pools of receivables to the likes of ECPG. Until recently, the banks have been held back by regulatory changes, but that concern is subsiding. In the interim, the company continues to post robust earnings per share growth, sold a division to strengthen its balance sheet, is shrinking its share base and is well-positioned as a reputable acquirer during a time when banks are loathe to sell to small debt collectors. Pembroke believes the low valuation accorded to the stock provides significant upside potential and is not reflective of the company’s historical record or future prospects. Teligent (“TLGT”) is a generic pharmaceutical company with a rapidly growing pipeline of drug applications. In this quarter, the company received approval to launch two new generic drugs and several more are expected this year. However, the company’s stock price has been held back by two factors. The first relates to the collapse of Valeant Pharmaceuticals (“VRX”), which spurred a broad-based sell-off in the pharmaceutical and biotechnology sectors. While Teligent’s growth strategy is unrelated to Valeant’s challenges, its near-term stock price is affected by investors’ overall concerns about the pharmaceutical and biotechnology sectors. Teligent is bringing generic drugs to market at a low cost (to the consumer) and is growing organically; however, investors are painting it with the same brush as aggressive, debt-laden roll-ups that were raising prices to boost near-term profits. This is compounded by Teligent’s recent inclusion in the iShares Nasdaq Biotechnology exchange traded fund (ETF), which fell over 20% in the first quarter of 2016. Teligent is not a biotechnology company and certainly does not face the development risks of an early stage bio-pharmaceutical company trying to bring novel drugs to market.

 

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The second factor was management’s decision to aggressively invest in growing its pipeline of drugs that it plans to bring to market over the next three years. This decision lowered near-term profit expectations but enhances Teligent’s long-term value and certainly its value if it is acquired within the next year. This is the type of investment to which Pembroke is drawn – a firm that eschews short term profits for long-term strategic planning and the possibility of far greater future profits. Looking into next year, Teligent’s additional investments should be offset by rapidly growing revenue coming in at gross margins approximating 65%. The upside potential in the company’s shares, driven by rapid earnings growth and strong free cash flow looking in 2017, is significant for investors willing to look beyond the next few quarters. As the company’s pipeline of new drug applications converts to approvals during 2016, we expect that investors will start to recognize the opportunity.   

Advisory Board (“ABCO”), a healthcare and educational consulting company, delivered lower than expected revenue guidance for 2016. Management turnover at a recently acquired educational consulting company has challenged ABCO, but the real surprise came from a rapid slowdown in growth within its healthcare division. The disappointing outlook caught investors off-guard, as only a few months earlier management had outlined a strong growth opportunity within the healthcare space. ABCO has thousands of hospital customers, so its lack of visibility into the drop in end-market demand was not expected. Recent growth was supported by regulatory changes that drove demand for certain ABCO services, but management had expressed confidence that it could replace that revenue through successful cross-selling initiatives. Management’s announcement that it was restructuring its sales force added more uncertainty to the medium-term outlook, and Pembroke decided to exit its holding. While ABCO has a strong position within its core verticals, our belief is that it will take time for the company to resume its previously healthy growth trajectory.

CANADIAN COMMENTARY

The major Canadian equity indices moved higher during the first quarter of 2016. After a very poor showing in 2015, shares in many energy and mining companies rose as investors anticipated a floor in commodity prices and took advantage of attractive valuations. In particular, gold stocks rallied as the U.S. dollar began to decline and as investors fled the volatile equity and fixed income markets. In this environment, Pembroke's portfolio’s trailed their benchmarks after significantly outpacing them in 2014 and 2015. Pembroke remains cautious on the natural resource sector as much of the recent increase in share prices is based upon

 

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expectations - or hopes - of higher commodity prices rather than strengthening fundamentals. The team has added a small amount to certain well-capitalized energy and mining companies as well as related businesses that are attractively valued and well-financed but would benefit should oil or natural gas prices move higher. Meanwhile, we continue to focus on identifying solid growth companies and manage our portfolios on a diversified basis. Shares in diamond miner Lucara Diamond ("LUC") jumped in the first three months of the year, building on momentum from the fourth quarter of 2015 that was driven by solid operating results and the recovery of the second largest gem-quality diamond ever found (1,111 carats). The Lucara experience highlights the patience that is required to make successful investments in small capitalization stocks as Lucara shares bottomed at $1.42 in September before nearly doubling by the end the first quarter. Pembroke added to its position opportunistically during periods of weakness in the third quarter of 2015.

Lucara remains an attractive investment for Pembroke portfolios given its proven management team, attractive valuation, and pristine balance sheet. The company is making investments to improve the probability of recovery of large diamonds and to extend the mine life of its primary asset. Boyd Income Fund ("BYD-UN") operates collision repair centers serving insurance companies, individuals, and fleet operators in North America. The company continues to consolidate its sector and is signing contracts with large insurance companies. While the stock is not "cheap" on traditional metrics, the company's attractive return on capital, predictable revenue stream, and open-ended growth opportunity merits a premium valuation. In recent months, low gas prices combined with a reasonably healthy economy have resulted in more miles being driven, which results in more car accidents. While unfortunate, this increase in accidents benefits Boyd's business and has helped take the shares to new highs. Shares in Performance Sports Group (“PSG”) plunged after the company revised down its revenue and profit guidance. During the first quarter of 2016, Pembroke had reduced its position in the company based on currency headwinds within its hockey business as well as the company’s large debt balance. However; management’s efforts to drive cash flow higher in combination with insider buying led to our decision to maintain a small holding. In early March, PSG announced that its earnings would come in well-below expectations due to three main factors: 1) the bankruptcy of a large U.S. retailer that was a PSG customer, 2) the consolidation of several U.S. hockey retail customers – leading to excess

 

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inventory in the channel, and 3) an unexpected decline in demand for PSG’s high-margin baseball bats. Management’s inability to foresee, or even explain, some of these events, combined with an increasingly stretched balance sheet resulted in the position being sold. Shortly afterwards, the CEO was terminated. While PSG’s brands within hockey, baseball, and lacrosse have significant equity, the company’s debt burden and low level of near term profits puts it in a turn-around rather than growth position. Shares in real-estate brokerage firm Colliers International ("CIG") declined in the first quarter despite excellent fourth quarter results as fears took hold about rising interest rates affecting transaction volumes and access to capital in the commercial real estate industry. However; management sees ongoing strength in its end-markets. Further, the company has a strong balance sheet and generates robust free cash flow, positioning it as a leading consolidator in a highly fragmented space. In fact, the company's annual free cash flow of approximately $150 million positions it to make numerous accretive, strategic acquisitions. The Colliers brand and expertise allows the company to acquire small competitors and augment their growth and margin profile. The potential for large-scale mergers and acquisitions exists (as acquirer or target), as the top five players control less than 20% of the market globally, but Pembroke's investment is not predicated on a major consolidation event.

INTERNATIONAL EQUITY COMMENTARY Pembroke’s international equity portfolio, the GBC International Growth Fund, posted a negative return for the first quarter and trailed its benchmark, the Morgan Stanley Capital International (MSCI) All Country World ex USA Small Cap index. The Fund’s emphasis on high quality growth companies broadly detractor from relative performance as these higher quality companies with relatively strong earnings trends lagged the market. The market’s leadership was concentrated in low valuation stocks. Stock selection was a positive contributor in Consumer Staples, Energy and Industrials but negative in Consumer Discretionary, IT, and Materials. On a sector basis Financials were the most detrimental especially in the UK REIT holdings that came under pressure on concerns about the British European Union membership referendum. Materials stock selection was adversely affected by the Fund’s exclusion of Metals & Mining companies which rallied strongly.

 

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Financials sector exposure was moderated to a neutral weighting versus the benchmark, primarily as a result of liquidations in the Banking and Capital Markets industries. This was offset by an increase in Industrials exposure to a modest overweight position, driven by new positions in transportation-related companies. The Fund’s Europe ex-UK and Latin America overweightings were increased while Japan, UK and Emerging Asia exposures were reduced. The Fund’s Emerging Markets exposure approximated 19% at quarter end, below the 22% benchmark weighting.

FIXED INCOME COMMENTARY The GBC Canadian Bond Fund posted a positive return for the first quarter

though slightly behind the benchmark FTSE TMX Canada Universe Bond index.

The returns for the entire quarter masked some substantial volatility contained within. Equities and high yield debt were hit hard in January as the global capital

markets panicked over slowing growth in China. Renewed concern about some

European banks was also a factor. The preference for quality caused

Government bonds to outperform corporates through the middle of February.

The markets then calmed themselves as risky assets recovered and commodity

prices increased.

The portfolio modestly underperformed its benchmark index. A shorter duration

than the index was a detractor in a declining yield environment. Offsetting this

were some security-specific contributors: Depfa ACS bought back their bonds

at a premium to their current prices and long dated GTAA and Eurofima

positions appreciated with falling long yields.

The GBC Canadian Bond Fund maintains a higher yield than its benchmark but

with lower duration and therefore less sensitivity to interest rate increases. The

investment grade portfolio ended the quarter with a yield to maturity of 2.2%

and an adjusted duration of 4.5 years.

DIVIDEND COMMENTARY The balanced GBC Growth and Income Fund had a very strong beginning to 2016. The Fund was up sharply since the end of December and outperformed its benchmark.

 

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The asset mix remained relatively unchanged with approximately 32% of the portfolio invested in fixed income. This component is primarily invested in securities rated “A+” that, on average, have a collective yield to maturity of 2.2% and adjusted portfolio duration of 4.5 years.

Income is generated from dividends and interest. The gross yield is currently an annualized 3.7%. The growth component of the portfolio stems primarily from the 35 dividend paying companies that are expected to appreciate in value over time. Thirteen names, representing 39% of the equity exposure, are also held in Pembroke’s standard growth portfolios. The holdings unique to this portfolio are generally less volatile, pay meaningful dividends, and are expected to grow their earnings at a more moderate rate. Companies are selected based on having an attractive well-funded, sustainable dividend as well as reasonable growth opportunities. Management quality and aligned interests with shareholders are also key investment considerations.

The strong performance during the first three months was encouraging as it was a result of broad contribution from the majority of holdings. The two most notable performers included Wi-LAN (“WIN”) and Alaris Royalty (“AD”). Wi-LAN is an intellectual property licensing and technology development company that has an expansive library of technology patents. The shares rose during the first quarter as the company announced several patent license agreements which demonstrate the value of their intellectual property portfolio. This is a relatively new investment in the Fund. The stock had declined sharply during the fourth quarter of 2015 after the company reduced its dividend and Pembroke used that weakness to initiate its position.

Shares in Alaris Royalty performed strongly in the first quarter, driven by a solid fourth quarter earnings report and the deployment of capital into investments with new royalty partners. While Alaris shares were weak in 2015 due to challenges at a small number of portfolio companies, in aggregate, Alaris' business partners have been executing well. Furthermore, management sees attractive opportunities to invest capital in the current capital market environment, given recent dislocations in credit markets. Alaris' dividend is well funded and we expect it to grow over time as management continues to source new investment opportunities.

The two stocks that detracted the most from performance during the first quarter were Horizon North Logistics (“HNL”) and Cervus Equipment (“CVL”). Horizon North Logistics is a company facing a very challenging operating environment. Being exposed largely to the energy market, customers are constrained for capital and delaying or cancelling projects. In addition, with an unclear outlook on liquefied natural gas projects in Western Canada, the near

 

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term prospects for HNL look very murky at best. Pembroke made the decision to exit the position and is no longer a shareholder in the stock.

Shares in Cervus Equipment were weak in the first quarter as the company reduced its dividend on the back of a challenging agriculture market and weakness in Western Canadian economies. While the company has made efforts to diversify its revenue base with the acquisition of Peterbilt dealerships in eastern Canada, the headwinds faced by difficult agriculture conditions and weakness in energy-sensitive economies proved to be strong. Management is focused on optimizing the company's cost structure, and the new dividend rate looks to be sustainable even in light of a subdued operating environment.

Pembroke continues to find attractive new opportunities for the GBC Growth and Income Fund. We invested in three new holdings during the first quarter. These additions came from three vary different companies spanning the material, consumer discretionary and financial sectors.

We are encouraged with the start to 2016 and outlook remains constructive given the sound fundamentals being reported by most of the Fund’s holdings. Travel by the portfolio managers remains a constant; both to monitor existing holdings and search for potential new investments. We continue to make appropriate changes to stock and sector weights and have sold one investment since the beginning of the year in order to buy new names that offer a more attractive combination of yield and growth.  

OUTLOOK AND CONCLUSION Pembroke remains sanguine about its North American equity portfolios. Last year some of holdings were tarred by unfounded controversies, in some cases by nefarious short players. BOFI Holdings ("BOFI"), for example, was accused of wrongdoing by an employee terminated for poor performance. Shorts jumped on the lawsuit to undermine the company and its management team and drove the stock down nearly 50%. BOFI has systematically proven that its business is sound despite the allegations. It hired a top law firm to conduct a thorough internal review of its policies and procedures and received a clean bill of health – something a law firm would not issue if there was a hint of liability. The company delivered strong fourth quarter results and also announced a $100 million share buyback and a successful issue of subordinated debentures. BOFI bottomed at $13.47 but closed the quarter at $21.34 as investors re-focused on the company's growth opportunity and industry-leading return on equity.

 

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Similarly, Pembroke was pleased to see a California judge vacate a state prosecutor’s murder charge against AAC Holdings (“AAC”) and its President. AAC, an operator of addiction treatment centers, is consolidating its sector, opening new facilities, and professionalizing an industry badly in need of such leadership. Judges are normally loathe to dismiss charges, especially felony charges, as it may appear to usurp the role of the jury and the authority of the state, so Pembroke views this as a very positive development. The company can now move forward with its strategic plan unencumbered by the charges. Although shorting and rumor-mongering using on-line media is part of the investment industry today, and makes Pembroke’s job more difficult, the firm continues to focus on management incentives, company-level performance, and critical financial metrics such as free cash flow. The firm takes short reports seriously and gives them due consideration, but does not run blindly from controversy. We may, at times, exit a position while the “storm” blows over. However; that can be an expensive proposition and the timing of getting out and back in is fraught with danger. Better to back management teams whose interests are aligned with those of shareholders and whose firms are in sound financial shape with attractive valuations. The controversies that emerged over the last year - HMSY, BOFI, and AAC - have actually provided buying opportunities. Overall, the portfolio managers continue to poll our management teams for signs of broad economic weakness or challenges within their industries. To date the U.S. has weathered difficulties in emerging markets, slow-to-no growth in Europe, and falling growth rates in China. Low interest rates continue to make equity valuations attractive on a relative basis. The investment team believes that in a world starved for growth and return, well-managed firms should fare well as confidence returns to the equity markets. Pembroke both hopes and expects that a number of positions will see more rational valuations for their business models as their growth opportunities come into clearer view. We expect that Canada will continue to struggle with low commodity prices, but some of that pressure will be offset by strength in manufacturing and aggressive federal government spending. In both Canada and the U.S., the investment team continues to conduct in-depth research on companies and travel extensively to meet with current management teams and new opportunities.

 

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IN MEMORIAM

Pembroke Announces Passing of Co‐Founder and  

Chairman Emeritus Ian Soutar  It is with great sorrow that we announce the death of Ian Alexander Soutar on March 21st, 2016. Mr. Soutar co-founded Pembroke in 1968 and served as its President and Chief Executive Officer from 1988 to 2000. He is remembered as a true friend, leader and passionate growth stock investor. Ian was the consummate engaged individual who never tired or contemplated retirement. Ian graduated from McGill University in 1958 with a Bachelor of Engineering degree and was an Athlone Scholar at the London School of Economics. He received his Chartered Financial Analyst designation in 1967. Throughout his distinguished career, Ian was a willing and guiding hand to his family, friends, colleagues and the community at large and acted as a mentor to young entrepreneurs. He served in various leadership roles at McGill University, The Study School Board & Foundation, Mountainside United Church, the Brome Lake Land Foundation, The John Dobson Foundation, the Eric T. Webster Foundation and the Montreal Association for the Blind Foundation. Ian was a Governor Emeritus of McGill University where he established the Helgi Soutar MBA Fellowship and the Soutar Fund for Career Enhancement. He received a Career Achievement Award from Morningstar in 2013 and the Alumni Association Award of Merit from McGill in 2015. We wish to express our sincere condolences to the Soutar family and join them along with Ian’s many friends in celebrating his wonderful life.

The Partners and Employess of Pembroke Management & Pembroke Private Wealth Management

Ian A. Soutar, CFA

1936-2016

 

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THE FIRM Pembroke Management Ltd. was founded in 1968 and is based in Montreal. Pembroke’s business and investment philosophy is rooted in the concept of ownership. Owners do what is in the long-term interests of their customers and stakeholders to maximize their own wealth. For this reason, Pembroke will more often than not back management teams that either own significant stakes in the companies they manage or whatever they own represents a significant part of their personal wealth. Furthermore, Pembroke tries to not take unnecessary risks in its investment portfolios because the Pembroke partners are large shareholders in the firm’s funds. The result is a powerful alignment of interests.

Pembroke is registered as an Investment Advisor in Quebec, Ontario, British Columbia, Alberta, Manitoba, the United States, Denmark and Ireland. The firm manages segregated portfolios for institutional and high net worth clients. Pembroke Private Wealth Management is a subsidiary of Pembroke Management and is a mutual fund Manager and Dealer for the GBC family of mutual funds and the Pembroke family of pooled funds.

PEMBROKE PRIVATE WEALTH CONTACT For additional information regarding Pembroke Private Wealth Management

please call us in Montreal at 514-848-0716 or 800-667-0716 or in Toronto at 416-

366-2550 or 800-668-7383, or refer to our website www.pml.ca.

 

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DISCLAIMER The purpose of Pembroke Perspectives is to provide insight into our investment

philosophy, our current strategy, and how we manage our portfolios. Pembroke

Perspectives is not intended to provide specific information about the firm and

its activities. Any individual securities mentioned in this report are for

informational purposes only. Holdings are subject to change at any time. Factual

information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Information

and opinions expressed are those of Pembroke Management Ltd. Information is

current as of the date appearing in this material only and subject to change

without notice.  This information does not constitute, and should not be

construed as, investment advice or recommendations with respect to the

securities mentioned nor does it constitute an offering of securities or an offering of any kind. This version of Pembroke Perspectives has been prepared for non-

accredited investors.

Published on April 11th, 2016