Unlocking Value in Volatile Markets: Pender Growth Fund's Contrarian Play for Risk-Adjusted Returns

In a world where large-cap equities dominate headlines and investor sentiment, the Pender Growth Fund Inc. (TSX: PTF) is quietly building a portfolio of undervalued opportunities in small-cap and micro-cap technology sectors. By leveraging strategic acquisitions, hedging tools, and a contrarian mindset, Pender has positioned itself to deliver compelling risk-adjusted returns—especially as macroeconomic headwinds test investor resolve.

A Portfolio Built for Contrarian Alpha

Pender's recent acquisitions and portfolio shifts reveal a deliberate strategy to capitalize on overlooked assets. In late 2024 and early 2025, the fund acquired four private software companies through its subsidiary Pender Software Holdings (PSH), including POWR Inc. (eCommerce plugins) and Assured Software Ltd. (restoration industry software). These moves align with Pender's focus on cash-flow-positive businesses with scalable operations—a stark contrast to the speculative valuations plaguing many high-growth tech names.

The portfolio's 59.6% allocation to public companies as of Q1 2025 may seem conventional, but dig deeper:
- Top public holdings include Kraken Robotics Inc. ($11.1M fair value) and Zillow Group, Inc. ($2.5M), both trading at discounts to intrinsic value.
- Private holdings (37% of assets) include stakes in General Fusion Inc. (nuclear fusion tech) and WELLSTAR Technologies Corp. (healthcare IT), which offer asymmetric upside with limited downside risk.

Risk Management: Hedging the Unhedgeable

While contrarian investing carries inherent risks, Pender mitigates volatility through tactical hedging. In Q1 2025, the fund deployed put options on Nasdaq and Russell 2000 indices, contributing over 50 basis points to performance. This isn't just about protecting gains—it's about preserving capital during market downturns, allowing the fund to buy even cheaper assets when fear dominates.

The reduced Management Expense Ratio (MER)—dropping to 2.44% in Q1 2025 from 3.13% in 2024—further boosts net returns. This efficiency is critical in a low-growth environment where every basis point counts.

Why Now Is the Time to Act

The fund's Q1 2025 net loss of $6.8M is a temporary stumble in a long-term story. Consider:
1. Valuation Discounts: Many of Pender's holdings are priced for perfection in a recessionary world. For example, Sangoma Technologies (telecom software) trades at just 2.3x revenue, despite steady cash flows.
2. Strategic Flexibility: With $10M in cash and a renewed Normal Course Issuer Bid (NCIB) allowing up to 10% share repurchases, Pender can capitalize on further dislocations.
3. Macro Tailwinds Ahead: While inflation and interest rates remain risks, Pender's focus on cash-generative software businesses is recession-resistant.

The Contrarian Edge

Pender's playbook is classic value investing:
- Buy what others avoid (e.g., Vecima Networks was sold due to customer concentration, but similar firms could rebound with sector recovery).
- Bet on management teams with skin in the game (PSH's 86% ownership by Pender ensures alignment).
- Use leverage wisely—$7.5M in convertible loans to PSH are priced at 8%, a low-cost bet on upside.

Final Call: Invest Before the Turn

The market's obsession with growth at any cost has left small-cap tech stocks in the dust. Pender Growth Fund isn't just surviving—it's setting up to thrive when sentiment shifts. With a $116M shareholders' equity base, a proven track record of turning contrarian bets into winners, and a portfolio primed for rebounds, this is a rare opportunity to buy fear and sell facts.

Action Item: Allocate to PTF before the undervalued names in its portfolio catch the attention of mainstream investors. The risk-adjusted reward is too compelling to ignore.

Disclosures: Past performance does not guarantee future results. Pender's focus on illiquid and volatile assets carries unique risks. Consult a financial advisor before investing.