2019 Q3 Manager Letter

September 30, 2019


Quarterly Manager Letter
Current News and Updates

Q3 2019

September 30, 2019 Commentary 

This quarterly letter marks our first combined commentary which will now touch on all the developments within our wealth management platform.  These commentaries will include a market overview, individual stock ideas, asset allocation ideas as well as other broad themes we are seeing play out in the everchanging marketplace.  We are still as passionate as ever about individual equities, which many of our readers have become accustomed to reading about, but we believe it is just as important to zoom out to ensure we provide thoughts on the bigger picture as this better reflects the expectation of all Aventine clients. 

As we review Q3, global markets are having another gut check. Over the past 3 months North American equity markets have been marred by an increasing level of volatility. Weak economic data continues to persist with the Institute for Supply Management’s (ISM) U.S. manufacturing purchasing managers’ index (PMI) coming in at 47.8 in September, the lowest reading since June 2009 (as shown in the graph below). Similarly, the non-manufacturing PMI also disappointed with a reading of 52.6 in September, well below expectations. Furthermore, there seems to be no near-term solution to global trade tensions, all of which are not helping sentiment. It is also interesting to note that we have marked five back to back negative revisions to monthly non-farm payrolls, a significant trend reversal after the longest labour market expansion in U.S. history. While there are some underlying positive trends in housing and consumer confidence, we worry about the negative drag from the above data points and how global markets will react.

We are, therefore, positioning our client portfolios and underlying strategies defensively with above average levels of cash, downside protection through short positions and put options, and an increasing allocation to U.S. Treasuries.  We feel comfortable with our positioning in this environment.  It was only a few months ago that weak U.S. economic data resulted in higher equity markets due to the expectation of lower rates and more dovish central banks. While it is too early to call a regime shift, it appears as if once again, bad news is bad news.

Not all areas of the market have been suffering, however. Our allocations to utilities and REITs have performed well in this environment. In addition, we continue to favour alternative asset classes, such as private credit and merger-arbitrage strategies which have been consistent performers through the cycle.  We have also added non-traditional instruments to the portfolio, such as mandatory convertible preferred shares, which have valuation floors in the case of further equity market deterioration.

Private Client 
We believe asset allocation is paramount when building client portfolios and to demonstrate less volatility while producing a steady stream of income and capital gains.  Our client portfolios following a “balanced” investment mandate are included in a composite which we refer to as the
“Aventine Total Wealth Composite” to track performance. A simplified asset allocation of the Total Wealth Composite can be seen in the graph below. 

As you can see, the Aventine Canadian Equity Fund (shown as “All Cap CDN Equity” above) and the Aventine Dividend Fund (“US Equity”) make up a component of the overall Total Wealth Composite.  If you wish to see individual performance figures of Aventine’s managed Funds, please contact us and we will be happy to provide such reporting. 

Aventine Dividend Fund 
During the quarter we successfully launched the Aventine Dividend Fund.  This strategy is yet another building block for our client portfolios, providing U.S. large cap equity exposure in USD.  We are focused on companies with a long history of dividend growth, solid competitive moats, high returns on capital and top-quality management teams.  Given our cautious market view our positioning has been conservative and we have capitalized on lower valuations over the past few days to enter positions in companies like Kimberly Clark, Hormel Foods, Nike, and Johnson & Johnson. As we expect this portfolio to have low turnover, entry points have a meaningful impact. We have been paying special attention to this.

Canadian Equities
Our Canadian Equity strategies were down over the quarter after realizing gains in the first 7 months of 2019.  The all-cap strategy was particularly weak as we suffered from short-term earnings-related losses in August.  We exited two positions during the quarter as a result of leverage concerns and the negative potential impact of falling rates.  We have initiated a position in a Canadian listed REIT who has exhibited an exceptional ability to allocate capital.  This Company has grown their book value in the mid single digits over the last 10 years while also reducing their share count by close to 20% over this period.  In the current environment, we will happily hold a name like that especially given the additional catalyst potential imbedded in the underlying assets.  Overall, while it was a volatile period, we are pleased with our positioning heading into the final quarter of 2019.

For the large-cap strategy, we added a position in Rogers Communications during the quarter which is trading near 52-week lows given fears of price deflation on the mobile side of their business.  We believe these forecasts are causing an overreaction on the valuation of the mobile business and will eventually correct back to historical levels. Given the 3.1% dividend yield and close to a 4-year low valuation multiple we are happy to enter here for a long-term hold as we wait for these fears will subside.

Inaugural Aventine/TerraNova Partners Private Equity Allocation

It is hard to pinpoint exactly where we are in the business cycle, however we believe we are closer to the end than the beginning. As a result, we are introducing more late cycle strategies in our client portfolios. These include merger arbitrage, credit opportunities, and most recently, private equity.  These strategies all share similar return profiles but with different performance drivers and volatility characteristics. The result is a more stable portfolio with a lower equity market correlation.

With respect to the private equity allocation, we are very pleased to have begun providing co-investment opportunities to Aventine clients through our partners at TerraNova. Aventine and TerraNova have always had a close relationship, as both shareholders and officemates at Yonge/Bloor but this relationship has strengthened over the past 12 months. TerraNova’s deal flow has increased significantly with the recent addition of Anthony Sigel as TerraNova’s newest Partner.  Anthony is a private equity veteran with 25 years’ experience as Founding Partner and President of Kilmer Capital Partners Limited.

While private equity exposure is not appropriate for all our clients, we recently made a co-investment in TerraNova’s special purpose entity to acquire Carma Corporation. Carma is a manufacturer of sub-metering equipment and a provider of utility billing solutions to multi-residential, condominium, commercial and institutional building developers and owners.  Carma’s sub-metering systems and billing solutions enable customers to monitor energy and utilities consumption. We were pleased that Aventine clients were able to invest a significant amount of capital alongside TerraNova as they acquired this unique Canadian business with a runway of growth (press release here).  Congratulations to everyone at TerraNova, Michael Platt (incoming CEO), and the founders, the Williams Family!

Please do not hesitate to come speak with us anytime and we appreciate the confidence you have in allowing us to manage your savings for you.

Best wishes as always,
James, Jim, David and Shannon

We encourage new clients to join Aventine by investing in our Total Wealth Solution which is tailored to your specific goals.

To learn more about how our independent approach to managing wealth differs from traditional models please feel free to contact us anytime. 

Total Wealth Performance Update
September 30, 2019

Aventine’s Partners and their families are among the largest investors across each of our strategies. You can be assured in our focus and commitment to performance. 

Aventine Total Wealth Composite
Inception: June 1, 2009

Aventine Total Wealth is our core portfolio for separately managed accounts following a “balanced” mandate. It is an actively managed, endowment-style portfolio that offers investors diversified exposure to a broad variety of markets and asset classes. This diverse portfolio produces below average volatility and high income generation as we include asset classes such as private debt, mortgages, traditional and non-traditional fixed income, all-cap equities, alternatives and portfolio protection through prudent risk management strategies.  

September Q3 6 Month 12 Month YTD
Aventine Total Wealth Composite  0.7% -0.5% 0.9% -1.1% 7.6%
Annualized 3 Year 5 Year Inception
3.8% 4.2% 7.0%
Statistics Risk Sharpe
6.5% 0.92
The Inception Date of this Strategy is June 1, 2009.
Additional performance information and disclosures on composite construction available on our website: www.aventine.ca.

Recent Media Appearance

James Telfser on BNN Bloomberg


Aventine’s Managing Partner and Portfolio Manager, James Telfser, appeared on BNN Bloomberg’s Market Call on August 28th to discuss his market outlook.  Please click on the imagine below if you’re interested in viewing this short video clip. 

“We have a systematic process working behind the scenes that dictates what we do, rather than listening to the noise and headlines of the week.
– James Telfser

Click above image to view video (5:21 mins)

WEB: AVENTINE.CA     |     EMAIL: INFO@AVENTINE.CA     |     PHONE: 416.847.1767





This email communication is intended to provide you with information about the Aventine Total Wealth Strategy (the “Strategy”), the Aventine Canadian Equity Fund and the Aventine Dividend Fund (the “Funds”) managed by Aventine Management Group Inc. The Strategy and the Funds are distributed by prospectus exemption in various jurisdictions across Canada, please contact Aventine Management Group Inc. to discuss if you may be eligible to invest.  Important information about each Fund and Strategy is contained in its Offering Memorandum which should be read carefully before investing and may be obtained from Aventine Management Group Inc. upon request. The Offering Memorandum does not constitute an offer or solicitation to anyone in any jurisdiction in which such an offer or solicitation is not authorized, or to any person to whom it is unlawful to make such an offer or solicitation. All investors should fully understand their risk tolerances and the suitability of the Strategy and the Funds prior to making any investment. Rates of return presented for all periods greater than one year are the historical annualized compound total returns for the period indicated. For periods less than one year the rates of returns are a simple period total return. Rates of return do not take into account income taxes payable that would have reduced net returns. The performance presented for the Funds is the performance of the target series of F Class units. The value of the Strategy and the Funds is not guaranteed and will change frequently. Past performance may not be repeated. All credited third party information contained herein has been obtained from sources believed to be reliable at the time of writing but Aventine Management Group Inc makes no representations as to its accuracy.
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