Real Fund Semi-Annual Report

Christian Anthony | CFA, Portfolio Manager

December 31, 2021

The Real Fund invests in assets exhibiting specific qualities that allow for long-term growth beyond inflation.


The Real Fund had a net return of 20.7% in 2021. Inflation was 16.3% as measured by our custom cost of living index and 4.8% as measured by the Canadian Consumer Price Index (CPI).

In 2021, we entered a rare environment of high inflation and low interest rates: many assets are priced to return less than inflation which certainly makes the generation of real returns more difficult. In this environment, we strive to grow real wealth by paying a reasonable or discounted price for companies that have pricing power in their product or service.  While there is no assurance on how this strategy plays out short-term, we believe it is the discipline required for generating long-term real returns.

This year, we achieved real growth because the companies we shifted to last year appreciated significantly in price. We were extremely active last year, shifting 56% of our portfolio when we saw ample opportunity.  Those shifts have added 30% to gross portfolio returns over the last two years; meaning what we bought has significantly outperformed what we sold.  This year, we were far less active, shifting 23% of our portfolio. These shifts detracted 3% from our gross portfolio return; meaning what we bought underperformed what we sold. Below we comment on some of our individual positions.


Compan­ies:  92% Weight

Below, we comment on three companies we added to last year that aided performance this year. We also comment on a company that detracted from performance.

  • Aritzia Inc. (+103% in 2021) has added 2% to gross portfolio returns over the last two years (4.3% in 2021). The fashion retailer is generating profits that are more than double pre-pandemic levels due to significant market share gains and successful expansion into the US. Despite this, shares dropped >60% at the beginning of the pandemic which allowed us to add to our position at a severely discounted price.
  • Goeasy Ltd. (+89% in 2021) has added 8% to gross portfolio returns over the last two years (3.9% in 2021). The subprime lender is generating profits that are >110% higher than pre-pandemic levels due to improved credit conditions, significant loan growth, and a lower cost of debt. Despite this, shares dropped >65% at the beginning of the pandemic which allowed us to add to our position at a severely discounted price.
  • Sleep Country Canada Inc. (+45% in 2021) has added 1% to gross portfolio returns over the last two years (2.5% in 2021). The mattress retailer is generating profits that are >45% higher than pre-pandemic levels due to growth in home improvement spending and market share gains. Despite this, shares dropped >50% at the beginning of the pandemic which allowed us to add to our position at a severely discounted price.
  • MAV Beauty Brands Inc. (-76% in 2021) has subtracted 1.3% from gross portfolio returns over the last two years (-2.2% in 2021). We failed to recognize that the hair product company was facing operational issues that would lead to loss of shelf space at its retailers, lower margins, and a meaningful erosion of profits.

HARD ASSETS:  4% Real Estate + 2% commodities + 0% Infrastructure

Below, we comment on a natural gas company we sold (most of) too early.

  • Peyto Exploration & Development Corp. (+225% in 2021) has added 3% to gross portfolio returns over the last two years (1.1% in 2021). However, this could have been 8.3% (5.1% in 2021) if we hadn’t sold most of our position in January this year. The natural gas producer is benefitting from significantly higher natural gas prices, a thesis we had when we initiated our position in March 2020. However, in January, we thought that higher oil & natural gas prices could drive higher drilling activity and higher natural gas production; potentially oversupplying the natural gas market. This has not occurred.

Currencies/Credit:  2% cash + 0% Bonds

After tax and inflation, we believe cash and most bonds are priced for prospective losses. We have continued to avoid investment in these asset classes.


What’s the same, what’s new

This marks the 18th investment outlook for the Real Fund.  After re-reading the prior outlooks, it became apparent we’ve had the same basic outlook for the last nine years. We’ll call this part “What’s the same”. However, observing what has happened in the world over the last two years, we believe there are significant new components to the investment environment. We’ll call these increments “What’s new”.

What’s The Same

  • All assets are expensive relative to history. Interest rates are inversely correlated to asset valuations (lower mortgage rate = higher house price), interest rates have dropped from a secular high 40 years ago and have been at historic lows for a prolonged period. This means all assets trade expensive relative to history: Equities trade at higher P/E’s, bond’s yield less interest, and real estate have lower cap rates.
  • Equities are undervalued relative to other assets. By analyzing individual assets over the last nine years, we have found better risk-adjusted value in equities versus bonds and real estate.

What’s New

  • We’re (likely) about to find out where interest rates go. Inflation is high for the first time in decades. Structurally higher inflation could lead to structurally higher interest rates and structurally lower asset valuations. On the other hand, if inflation turns out transitory and we survive all this chaos, it likely means low interest rates are here for a long-time.
  • A market of dispersion and stock-picking. We have recently been dealing with things we haven’t seen ever or in a long time: the pandemic, lockdown mandates, vaccine passports, raw material shortages, labour shortages, transportation shortages, huge shifts in consumer preferences, cheap loans, helicopter money, ESG, rapid technological advancements, the metaverse, high inflation, extreme political division, etc. When we haven’t seen something, it’s hard to know what impact it will have. When it’s hard to know what impact an event will have, it’s hard to price the value of a business. When it’s hard to price the value of a business, you have businesses that are mispriced. What has emerged is an inefficiently priced equity market, a market of goldmines and landmines. From our asset allocation section, in what other environment does an event happen that doubles the earnings power of a business, yet you can buy that same business for 65% cheaper?

Combining the old and the new, interest rates are very important (the old) and we are likely about to find out where interest rates go (the new). You have to own something, and equities are the most attractive (the old) and there is great dispersion and mispricing in the equity market (the new).

Final Remarks

As we write this report (mid/late January 2022), inflation is dominating financial headlines and the yield on a 10-year U.S Treasury has risen from ~1.6% to ~1.8%. This is being blamed for a meaningful early correction in equity markets with the S&P500 down >8% ytd.

While our investment outlook highlights that a possible meaningful increase in interest rates could lead to structurally lower asset valuations, this is not an increase we would describe as meaningful. Interest rates would have to rise to >4% before we would consider adjusting our equity valuations. While this could happen, it could also easily not happen. This current equity market correction could be a normal, healthy, and unpredictable part of long-term bull markets.

Further, dispersion is again significant with many of the more speculative assets correcting far more severe in price. This was a long time coming in our opinion. To us, this is the main component to take away from the market over the last two years: the mispricing of individual businesses. We believe it is the biggest opportunity and risk.

“Investment risk is measured not by the percent that a stock may decline in price in relation to the general market, but by the danger of a loss of quality and earnings power” – Benjamin Graham  

Pathfinder Asset Management Ltd. | Equally Invested™
1450-1066 W. Hastings Street, Vancouver, BC V6E 3X1
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Sources: Pathfinder Asset Management Limited

National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit for full disclosures.

*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).

Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.