A History
of Delivering

After more than a decade, our flagship fund’s track record speaks to the superior risk-adjusted returns and tailored portfolio management we have been providing discerning Canadian investors

Jemekk Long/Short Fund

A multi-strategy approach for maximizing returns.

Serving investors since 2004, the Jemekk Long/Short fund is an all-cap portfolio with a multi-strategy approach designed to deliver superior risk-adjusted returns in all market conditions.

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Jemekk Total Return Fund

A refined approach aimed at greater preservation.

The Jemekk Total Return Fund is designed to leverage the strategic rigor and bottom-up approach of our Long/Short Fund, but with a more conservative, mid- to large-cap stance designed for lower overall volatility.

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Our Philosophy

We treat your money like our own, and we leave no stone unturned when looking for investments worthy of your attention.

At Jemekk Capital we continue our long tradition of focusing on the two pillars of investing; growing capital and protecting capital. We accomplish the first principle through our multi-strategy approach by focusing on bottom-up research to identify opportunities. For the second—protecting capital—we manage risk through judicious use of hedging and options-based insurance protection, in addition to the benefits achieved through strategic diversification.

Each of our funds has its own clear style and strategy; however, each stay focused on the core goals of protecting and growing capital within the context of each fund’s mandate.

Gerard Ferguson on BNN’s Market Call

July 10, 2017

Gerard’s top picks on BNN’s Market Call Tonight

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WHY US?

Jemekk Capital Management is a Canadian-based, employee-owned, private investment management firm with the aim of providing consistent, positive, absolute returns for its clients. We’ve designed our firm—and our investment strategy—to stand out to bring a sensibly different option to a market saturated with “me too” offerings.

Small = nimble

In Canada's relatively small securities markets, equities can rise and fall on relatively low volumes . With a small, engaged team and right-sized portfolios, we can investigate and respond decisively and quickly, taking advantage of our small size where larger funds may face liquidity challenges.

Sensibly different

From Nortel to Blackberry to Valeant, Canadian investors find themselves exposed to outsized risk when the index inevitably becomes imbalanced.  While our funds may invest in familiar companies, we typically demonstrate high 'active share' — a metric that reflects how different our portfolios look from the index.

Service without layers

Ultimately, the real value of working with a smaller firm is that the people you engage with are the people who actually work with your investments, every day. We invest alongside you, we value and depend on your business, and we're committed to clear communication and our mutual success.

Our Investment Team

Jemekk Capital Management is a Canadian-based, employee-owned, private investment management firm with the aim of providing consistent, positive, absolute returns for its clients.

Gerard Ferguson

Founder, Portfolio Manager

Gerard founded Jemekk Capital Management in 2004 by launching the Jemekk Long/Short Fund, which he still co-manages to this day. Before setting out on his own, Gerard was a portfolio manager and VP with AGF.

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Rick Ummat

Founder, Portfolio Manager

Rick Ummat joined Gerard Ferguson in 2008 as an Analyst. As a co-founder of Jemekk Capital Management, Rick co-manages the Jemekk funds in tandem with Gerard, bringing his bottom-up stock analysis skills to the team.

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Investing with us is easy…

Our funds are available to Canadian accredited investors. We simplify the process as much as possible, we communicate each step with clarity and transparency, and we’re right beside you throughout the process.

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Long/Short Commentary Q3 2017

Jemekk Long/Short Fund L.P.

Q3 2017 Commentary

 Following a weak Q2, the TSX reversed course in Q3 posting a strong quarter. Specifically, the TSX was up by an impressive 3.7% for the quarter resulting in a year to date return of 4.5%. The Jemekk Long/Short Fund did not match the pace of the index in the quarter posting a slightly negative quarter finishing Q3 with a return of -0.96%. The lion’s share of the underperformance for the Fund occurred in September. Although we are not pleased with how the quarter ended for the Fund we are still pleased that on a year to date basis the Fund is materially beating its respective benchmarks.

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Jemekk Long/Short Fund L.P.

Q3 2017 Commentary

 Following a weak Q2, the TSX reversed course in Q3 posting a strong quarter. Specifically, the TSX was up by an impressive 3.7% for the quarter resulting in a year to date return of 4.5%. The Jemekk Long/Short Fund did not match the pace of the index in the quarter posting a slightly negative quarter finishing Q3 with a return of -0.96%. The lion’s share of the underperformance for the Fund occurred in September. Although we are not pleased with how the quarter ended for the Fund we are still pleased that on a year to date basis the Fund is materially beating its respective benchmarks.

Below is a statistical representation of the Fund to comparative benchmarks in Q3:

 

Q3 2017 YTD 2017 Since Inception
Jemekk Long/Short Fund -0.96% 8.51% 192.52%
S&P/TSX Composite 3.68% 4.45% 163.27%
S&P 500 (USD return) 2.36% -1.85% 60.56%

  *Benchmarks quoted in Total Returns

Canadian equity markets continued its see-saw trend in the third quarter swinging from a negative print in Q2 to a much more positive tone for Q3. After a rough first half of the year, Energy led the way in Q3 posting a 5.7% return as the top performing sector for the TSX. Consumer Discretionary and Financials sectors also contributed to the gains for the quarter while Health Care and Consumer Staples (primarily safety sectors) were the primary detractors. The rebound in the Energy sector was the result of a drumbeat of positive data points on crude in September which took the underlying commodity higher lifting most stocks in the group. After being down over 500 basis points in the second quarter, the TSX Small Cap index also rebounded gaining almost half those losses back, led by the higher preponderance of resource names in the index.

Turning to the US, the third quarter went the same way it has been headed all year – higher. The S&P 500 was up 4.5% in Q3 resulting in an impressive year to date return of 14.24%. Technology was the leader in the index and similar to Canada, Energy was a material contributor to performance while Consumer Staples was a laggard. As mentioned in previous letters we are surprised that the US markets continue to march higher at its current pace given the geopolitical backdrop. We are without a doubt witnessing a disparity between the state of the economy and the political landscape. We will save you from our personal views on the Trump Administration but we can identify real concerns that should shake the markets but do not. For example, the use of social media where we witnessed a twitter fight between Trump and members of the North Korean government discussing a potential war. Or reports of Russia using Facebook for its own political agenda essentially weaponizing Facebook. We believe these are real concerns the market should recognize and yet we continue to push all-time highs.  And now, focus shifts to the Trump tax reform, a driver of equity markets since election night in November 2016. The market is increasingly pricing in serious reforms, and in short order. We remain more cautions, to our detriment thus far, as we don’t share the same level of confidence (Trump Admin has not got anything done) which could cause the market to pause again like it did briefly in the first half of the year when markets last doubted the administration’s ability to get execute.

The Fund entered the quarter bullishly at 80% net long and exited at essentially the same levels.  However, within the quarter we reduced exposures (net longs and leverage) meaningfully going as low as 60% net long position at one point. Given the geopolitical risks and some new ones that we mentioned above coupled with the S&P 500 not posting a negative month all year with no 5% correction we reduced exposures heading into September (a statistically weak month) by layering on index shorts. This proved to be the wrong call and this “insurance” proved to be expensive as we saw the TSX up 300 basis points in September alone and the Fund missing most of this rally.

In Canada we believe the underperformance relative to the US markets may be narrowing as favorable data points from the Canadian economy emerge which has led the Canadian dollar to strengthen against the USD in the quarter (+4%).  This move has been helped by higher crude prices although is primarily due to favorable interest rate spreads with the US. The Bank of Canada went from being dovish to hawkish in a matter of weeks and began to hike rates unexpectedly. It was the combination of stronger than expected economic data points that showed the best GDP growth rate and employment creation in seven years and home prices ticking higher along with household debt which turned the BoC’s stance. So, as it stands now, both Canada and US are on a path of increasing interest rates and coincidentally estimates are for both to be 2% at the end of 2018. The US agenda was largely known (note we had expected three hikes this year and are on that path now) however the hawkish outlook for the BoC caught the markets off guard which led to the aforementioned strength.

Now, following our macro review of the quarter, we would like to introduce you to a new holding for the Fund which follows the recent trend of increasing our technology exposure;

HubSpot (HUBS) – A provider of cloud based marketing and sales software, HubSpot pioneered the technique known as ‘inbound marketing’ where the traditional path of a sales channel is reversed so instead marketers attempt to pull users to their content rather than push tactics such as advertisements. After establishing itself in the inbound marketing space, HUBS has now expanded its offering into a ‘full-stack’ digital marketing and sales provider by entering customer relationship management (CRM) and sales automation. We believe these additional offerings round out HUBS’ value proposition and sets the stage for its next leg of growth. Similar to e-commerce, we are very bullish on digital marketing and see it as a secular theme.

So, how does it work? One needs to bridge the gap between Awareness and Sales Conversion. In the middle are various platforms to achieve this. Going a level deeper, the goal is Attract, Convert, and Close a prospect ultimately turning a Stranger to a Promoter. Enter HubSpot. The company is involved in every step of this process attempting to seamlessly transition from one category to another. Inbound marketing pulls in prospects by offering helpful content and experience when a customer needs it. The HUBS platform includes but not limited to the following: social media, search engine optimization, blogs, website content management, CRM, and data analytics/reporting.

HUBS targets the small – medium business (SMB) market only. As of now, HUBS has 34k customers although the total addressable market is estimated at 1.2mm customers. Leaving HUBS with plenty of potential upside. However, this space does not come without competition. In the SMB market there are numerous players but none with meaningful scale and the larger players such as Salesforce, Adobe, and IBM are focusing on the larger, enterprise market, largely leaving the SMB market to smaller niche players like HUBS. In addition, we view the competitive environment as increasingly favorable to HUBS since one of its direct competitors, Marketo, recently went private and announced a greater shift away from the SMB market into the enterprise market clearing the path for HUBS to further gain market share.

We are aware this is a high multiple tech stock with valuation baking in a lot of growth. As such we are monitoring the position carefully and staying on top of any industry news that could change the fundamental picture of the stock. We were pleased to hear at its recent user conference the company was confident enough to take its guidance numbers up along with announcing new and improved offerings and a new partnership with long time holding, Shopify, where HubSpot will have native integration with the SHOP dashboard. To us, HUBS has elements of Adobe, Salesforce, and Shopify and we look forward to seeing this tech stock grow but acknowledge execution risk remains high given its valuation metrics.

The strength exhibited in the third quarter has continued into Q4 thus far. As we head into Q4 we are mindful October is statistically a highly volatile month and as such we have increased our focus on remaining nimble and liquid to respond to macro and market risks as they arise. Although the market to date has brushed off many of the concerns mentioned above we remain prepared for either issues to escalate or the market to begin to care. With the VIX still hovering at unprecedented levels, and most likely headed higher, we see correlations lending itself to stock picking, an area where we have demonstrated to add alpha. So as Q4 unfolds and the constant debate of Growth vs. Value stocks or Sector Rotation positioning occur, we continue to search out and evaluate risk/reward opportunities with an increased focus on capital preservation.

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Total Return Commentary Q3 2017

Jemekk Total Return Fund L.P.

Q3 2017 Commentary

The TSX reversed its weak trend from Q2 and printed an impressive 3.7% for the quarter. As for US markets, the S&P 500 continued its torrid pace posting a 4.5% quarter now up over 14% on the year. The Jemekk Total Return Fund although still having a positive quarter was unable to keep pace with the momentum of its benchmarks and as such was up only 1.7% on the quarter. While we are not pleased with underperforming our relative benchmarks for the quarter, we point to our year to date returns being a more accurate picture of our performance. The strong gains for the TSX were led by Energy and for the S&P 500 it was both Technology and Energy.

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Jemekk Total Return Fund L.P.

Q3 2017 Commentary

The TSX reversed its weak trend from Q2 and printed an impressive 3.7% for the quarter. As for US markets, the S&P 500 continued its torrid pace posting a 4.5% quarter now up over 14% on the year. The Jemekk Total Return Fund although still having a positive quarter was unable to keep pace with the momentum of its benchmarks and as such was up only 1.7% on the quarter. While we are not pleased with underperforming our relative benchmarks for the quarter, we point to our year to date returns being a more accurate picture of our performance. The strong gains for the TSX were led by Energy and for the S&P 500 it was both Technology and Energy.

Below is an analysis of the Fund and some comparative indices in Q3:

Q3 2017 YTD 2017 Since Inception
Jemekk Total Return Fund 1.67% 9.75% 93.99%
S&P/TSX Composite 3.68% 4.45% 55.22%
S&P 500 (USD return) 4.48% 14.24% 134.05%

*Benchmarks quoted in Total Returns

 The Energy sector fueled the rebound in the markets in the third quarter. The move in the USD along with positive oil data in September helped crude return to bull market territory and lifted stocks in the sector, from oversold territory.  We should mention Consumer Discretionary also added to the strong gains from the TSX where major detractors were the more defensive Health Care and Consumer Staples sectors. Down south, in addition to Energy, Technology stocks continued to be bid up even after brief hiccups in September as shares of semiconductor companies fared best. The US markets also showed more breadth in returns as only one sector, Consumer Staples, posted a negative quarter.

A common theme all year is how resilient the US markets have been despite all the political rhetoric. The third quarter continued the strong growth exhibited in the second quarter.  We are surprised at how the major US indices continue to push all-time highs. The geopolitical risks we have mentioned in past letters do not seem to be abating, but are in fact increasing in frequency.  This quarter we are seeing more talk of a potential war where NK leaders and the Trump Administration are using Twitter as a battle ground. This is highly concerning as threats of a possible nuclear war are being discussed alongside the latest Kardashian tweet. Another material event exposed in the quarter was the alleged involvement of Russia influencing/spreading ‘fake news’ on Facebook for its own political agenda. With two billion people on Facebook worldwide the venue is not only massive but also the dissemination of said ‘fake news’ is instant. Facebook is now in front of this and working to control the matter. Continuing with tech stocks we wanted to mention the growing risk of Amazon taking over the world. In Q3 we saw AMZN buy Whole Foods, which was a surprise announcement at first but as the market digested the news the street switched from ‘why would they do this?’ to ‘why wouldn’t they do this?’. Our take, we are very bullish on e-commerce and have owned AMZN before and will most likely own it again. The disruption witnessed from AMZN is like no other. What’s interesting is how post the Whole Foods deal every industry is now on defence looking to not becoming ‘Amazoned.’ We too had to audit our list of holdings to see which industries could be displaced by this juggernaut.

Switching to the political front – all eyes are on the Trump Administration to put forward its new Tax Reform Policy. Although the market is leaning towards a favorable outcome we are less optimistic judging by his track record of execution. So, the next time we report to you in early January we will be discussing Q4 and will have an answer to whether the Trump Administration has made a meaningful push to papering up his new policy.

Specific to the Fund, we entered the quarter 60% net long and finished at 75%. However, as we entered September exposures got as low as 45% mostly by adding to our short book. We felt this was prudent to do as September has been a highly volatile month and felt the geopolitical events occurring coupled with the US markets at all time highs suggested caution. This ultimately proved to be overly conservative and led to the Fund missing most of the September move. As mentioned, both the US and Canada posted strong quarters but almost all the performance for the TSX was in September led by the aformentioned move in Energy. Gains from our Technology and Consumer Cyclical book helped but the Fund was not positioned to capture the strong move in the market.

Last quarter we introduced Activision Blizzard (ATVI) to you highlighting our positive stance on the gaming industry and how ATVI, from our analysis, was positioned best to benefit. When we first worked on this sector we looked at it as a competitive environment where other gaming publishers sought to steal market share from others – we were somewhat wrong. This isn’t an entirely zero sum ‘game’ if you will. Since adding ATVI to the Fund, we have continued to do work on the industry and found gamers are loyal to their favorite games and all major players in this industry are experiencing a secular growth theme. In other words, each gaming company does have some overlap on its offerings but for the most part offer a unique product exclusive to that brand.

Why do we want more exposure to the gaming industry? From our analysis, the gaming industry has changed dramatically over the past decade. What was once lumpy business models with low predictability of cash flows entirely tethered to the success of one launch has transitioned to foreseeable, high margin, cash generative growth stories with more diversified business models less dependent on hardware sales. We believe the key drivers of this change are but not limited to the following: (1) sustained player engagement; (2) shift from hardware to digital consumption; (3) subscription based model lending to more predictable cash flows; and (4) model diversification as seen by the gaming co’s entering the movie space.

What about growth and valuation? We believe we are at the middle stages of growth and earnings should drive the next move in the group. As for valuation, on a year to date basis the gaming complex is up 2.5x that of the Internet names. Despite this outperformance the sector is trading at 23x 2018 EPS and forecasted EPS growth for the next three years is 26% annually.  So, on a growth adjusted basis, valuation for the group still appears compelling. Furthermore, we feel gaming stocks are still relatively underowned and as investors become more aware of these companies the stocks could have another leg up.

Given our positive macro view for gaming stocks we decided to add Electronic Arts (EA) to the portfolio as well. Why do we like EA? When we first looked at the company we knew it was largely known for its strong sports franchises and gave little credit to its other games. We have now learned the sports franchises are gaining meaningful momentum in the e-sports arena and the company’s non-sports games are highly coveted. One hotly anticipated game is Star Wars Battlefront 2, which is expected to do very well. Along with favorable industry dynamics highlighted above that should benefit both ATVI and EA, specific reasons why we chose EA are as follows: (1) strong margin expansion for EA from 32% to over 40% as the shift to digital continues; (2) valuation discount abating for EA as historically the company was valued lower because it licensed its IP but now EA is establishing Battlefield as a tier one franchise focused on live service engagement and EA has two other potential franchises on the way which we feel are being overlooked; (3) strong balance sheet with cash on hand of $4.5b and cash flowing $1b a year provides ample dry powder for buybacks or acquisitions.

We are bullish on the gaming industry and see material upside to the group going forward. This is not a sector where one company can take all. We like the cash flow predictability and margin upside along with both ATVI and EA aiming to be the major players in e-sports, a topic we discussed with you last quarter. As mentioned previously about all industries put on watch by Amazon going after Whole Foods, we are confident the gaming group is safe from becoming Amazoned rather AMZN has made investments to partner with these incumbents.

The fourth quarter has begun where the third left off, moving higher. Against the backdrop of rising valuations, economic data has continued to surprise to the upside as evidenced by the strong PMI numbers.  With the S&P 500 trading at reasonable levels, things look relatively stable. Earnings are expected to increase double digits and should provide the next catalyst for higher equity prices, a healthy move in bull markets. For the balance of the year we see the TSX outperforming its US comps as the valuation spread seems too high to us and some of the later cycle sectors that dominate Canada begin to contribute. However, we remain cautious, as always, as macro crises and volatility remain visible in the horizon.  Thank you for your continued support.

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