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David Barr.The Globe and Mail

The last time small cap stocks were this attractive was during the 2008 global financial crisis, says money manager David Barr, who has been snapping up some of his favourite names he considers to be on sale as part of the broader market sell-off.

“This is an excellent time to be investing. There are periods of time where you can find high-quality companies at a very good price – and this is one of them,” says the chief executive and portfolio manager at PenderFund Capital Management Ltd. in Vancouver, which oversees about $2.2-billion in assets. Mr. Barr is responsible for about $500-million of those assets, including the firm’s flagship Pender Small Cap Opportunities Fund.

His firm has spent the past six months buying “high-quality names” for the portfolio, either as new buys or adding more to existing names. The fund’s top holdings today include Par Technology Corp., Spartan Delta Corp., Saturn Oil & Gas Inc., Sylogist Ltd. and Maxar Technologies Inc.

The fund has declined 26.8 per cent in 2022, as of July 29, compared with a drop of 5.6 per cent for the S&P/TSX Composite Index over the same period, all based on total returns. Mr. Barr notes the broad Canadian index has been supported by commodity prices so far this year and technology firms have been hit harder, with the S&P/TSX Capped Information Technology Index down 33.8 per cent year-to-date.

The fund has seen an annualized total return of 15.4 per cent since its inception in June, 2009, compared with an annualized total return of 7.9 per cent for the S&P/TSX Composite Index, also as of July 29.

The Globe and Mail recently spoke to Mr. Barr about what he’s been buying and selling and why he’s not giving as much advice to friends and family during the latest market downturn.

Describe your investing style.

We always try to find mispriced growth opportunities with a margin of safety. That means we look for companies that can increase their cash flow generating ability over the long term – and try to find them when they’re undervalued, so we’re not paying too much for that growth. We also try to find businesses with pricing power and that are capital light, which means we tend to shy away from resource companies (although we own some) and focus largely on technology, health care, consumer products and financial services.

Given the sharp pullback in recent months, how are you approaching the tech sector right now?

Historically, we usually hold about 60 per cent technology in the fund. About a year ago, we dropped that weighting to just under 40 per cent because it was hard to find mispriced growth opportunities in technology. Everything was priced for perfection. But now we’re back up to about 60 per cent. It’s going to take a while, but companies that demonstrate they’re able to grow profitably will be rewarded by the market.

What have you been buying or adding to the fund recently?

On the tech side, some of the companies we’ve been adding to the fund this year include Kinaxis Inc. and Copperleaf Technologies Inc. We think they’re two of Canada’s highest-quality publicly traded software companies. They both have sticky customer bases, and their customers aren’t that macro-driven, so they have a lot of durability in more challenging economic periods.

Another company we’ve been adding to is Thinkific Labs Inc. The stock is down about 90 per cent from its high last summer. It went public [in April, 2021] with a lot of fanfare. It’s a classic case of investors getting really excited and then really scared when the tide goes out a little bit. The company raised some capital to pursue a growth strategy, diluting its share base and amped up its spending. Investors are leery of these moves, particularly when it’s a small cap, but we have a lot of confidence in the management team. They were profitable pre-IPO and are taking steps to get there again.

What have you been selling or trimming?

We’ve been trimming a few companies that have held up well in this market environment to increase exposure to higher potential return ideas. For example, we trimmed Spartan Delta Corp. It had a strong runup with rising oil prices, so we took some money off the table when it was trading at around $15. It’s still one of our largest holdings.

Name a stock you wished you bought or didn’t sell?

Kinaxis is a stock I wish we’d bought a lot earlier. We were very close to buying it when it was $13, shortly after it went public in 2014, but I was being a bit too frugal on the price. [The stock is now trading at around $155.] We did buy it earlier this year, on a pullback, at about $140 per share.

What investing advice do you give friends and family?

Stay invested throughout the cycle. It can be challenging to stay committed to your portfolio when there’s a market sell-off. But being patient and focusing on the long term is the most important thing you can do to realize value in your portfolio over the long term.

I haven’t had to give this advice as much during the current downturn as I did when the markets dropped in 2020. I think people remember how fast the markets came back at that time and are a bit more okay with the volatility than they were a couple of years ago.

This interview has been edited and condensed.

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