Evaluating Pender Growth Fund's Strategic Position Amid Market Volatility and Attractive Valuations in Micro and Small Cap Stocks

In the ever-shifting landscape of global markets, the interplay between macroeconomic forces and asset valuations creates fertile ground for value investors. Pender Growth Fund Inc. (TSXV: PTF) has positioned itself as a compelling case study in navigating this terrain, leveraging a disciplined, bottom-up approach to capitalize on undervalued micro and small-cap opportunities. As of June 30, 2025, the fund's strategic alignment with macro-driven dislocations and its contrarian mindset offer a roadmap for investors seeking long-term capital appreciation in a fragmented market environment.

Market Conditions: A Goldilocks Scenario for Value Investing

The current macroeconomic backdrop is a mix of volatility and opportunity. Small-cap stocks in North America, particularly those in the Russell 2000 and Russell Microcap indices, remain historically undervalued relative to their large-cap counterparts. Despite a -1.8% year-to-date decline for the Russell 2000, these stocks trade at a significant discount to their long-term average price-to-earnings ratios. This undervaluation is amplified by a two-year earnings recession in the small-cap sector, creating a low-expectations environment ripe for recovery.

Geopolitical and economic tailwinds further tilt the scales. Deglobalization trends, driven by protectionist policies and supply chain reallocation, are favoring domestically oriented small-cap firms in industrials, defense, and technology. Meanwhile, a wave of public listings in AI, fintech, and climate tech is expanding the innovation-driven small-cap universe. These factors, combined with a structural advantage in active management—such as the Russell 2000's lower analyst coverage (5.7 analysts per stock vs. 16.4 for large-caps)—create a compelling case for patient, active investors.

Pender's Strategic Alignment: Contrarian Conviction in a Fragmented Market

Pender Growth Fund's investment philosophy is a masterclass in value investing and contrarian positioning. As of June 2025, the fund allocates 62.8% of its assets to publicly listed companies and 36.3% to private unlisted holdings, with a focus on high-conviction, long-term opportunities. This structure allows it to exploit inefficiencies in both liquid and illiquid markets, a critical edge in a macro-driven environment where liquidity premiums are widening.

The fund's recent portfolio adjustments underscore its contrarian approach. Additions like Coveo Solutions Inc. and increased stakes in Dye & Durham Limited and Sylogist Ltd. reflect a focus on companies with durable cash flows and niche market dominance. Conversely, partial exits from Kraken Robotics Inc. and Zillow Group Inc. highlight a willingness to cut losses in overhyped sectors. This dynamic rebalancing aligns with value investing principles, prioritizing intrinsic value over short-term trends.

Pender's subsidiary, Pender Software Holdings Ltd. (PSH), further amplifies its strategic edge. By acquiring and supporting established software businesses, PSH taps into the long-term growth of the tech sector while avoiding the speculative risks of early-stage startups. The 2024 acquisitions have performed in line with expectations, validating the fund's thesis of compounding value through operational support and strategic patience.

Performance and Resilience: A Test of Time

Despite a challenging first quarter of 2025 marked by macroeconomic uncertainty, Pender's long-term performance remains robust. The reporting net asset value (NAV) per share has grown by 30.3% over five years and 27.2% over one year as of July 2025. This resilience is underpinned by a disciplined focus on intrinsic value, as evidenced by the fund's share repurchase program under its Normal Course Issuer Bid (NCIB). With $1.5 million in total shareholders' equity added in Q2 2025, Pender's management has signaled confidence in its shares trading at a discount to NAV, a classic value investing signal.

The fund's contrarian stance is also reflected in its macroeconomic outlook. While acknowledging risks from inflation, interest rates, and geopolitical tensions, Pender remains focused on bottom-up fundamentals. This approach has allowed it to outperform its benchmark in volatile quarters, as seen in Q2 2025 when the fund returned 2.3% against a 3.4% benchmark gain. The ability to navigate uncertainty without sacrificing long-term objectives is a hallmark of its strategy.

Investment Implications: A Case for Strategic Patience

For investors, Pender Growth Fund exemplifies how a value-driven, contrarian approach can thrive in a macro-driven market. Its focus on small-cap and micro-cap stocks—currently trading at attractive valuations—positions it to benefit from a potential market normalization. The fund's active management model, combined with its diversified portfolio of public and private holdings, offers a buffer against sector-specific risks while amplifying upside potential.

However, risks remain. The fund's exposure to volatile sectors like technology and its reliance on macroeconomic catalysts (e.g., trade policy shifts) require a long-term horizon. Investors should also monitor the impact of rising interest rates on small-cap valuations and the fund's ability to execute its NCIB effectively.

Conclusion: A Contrarian's Playbook in Action

Pender Growth Fund's strategic positioning in 2025 is a testament to the enduring power of value investing. By combining a disciplined focus on intrinsic value with a contrarian lens, the fund has carved out a niche in a market increasingly defined by fragmentation and uncertainty. For investors willing to embrace patience and a long-term perspective, Pender offers a compelling vehicle to capitalize on the undervalued opportunities in the small-cap universe.

In a world where macroeconomic headwinds often overshadow fundamentals, Pender's approach serves as a reminder that the best opportunities lie where others fear to tread.