2020 Q4 Manager Letter

After such a tumultuous year, we are pleased to have such a strong finish to 2020. Despite the Covid-19 pandemic getting progressively worse around the world, both the S&P 500 and the TSX Composite hit all-time highs.  The bond market also finished at its highs as measured by credit spreads, suggesting that this positive momentum should continue. Those investors who moved to the sidelines during the March lows are surely questioning the wisdom of markets and their correlation to the real economy.

So why, during this economic disaster underpinned by excessive government spending and recovery packages that will saddle future generations, are stock markets soaring?

One quote that comes to mind is from Bernard Baruch, a highly successful financier from the early part of the last century, who wrote: “The main purpose of the stock market is to make fools of as many men as possible”. Trying to link the fluctuations of the stock market to economic conditions will often make sensible people look like fools, particularly in times when asset prices are being artificially inflated. It is clear there is a level of exuberance in this market with valuations of certain IPOs, Special Purpose Acquisition Companies (“SPACs”) and many emerging sectors reaching levels not seen since 1999.

As we have been stating for several quarters, low interest rates, combined with historic levels of fiscal and monetary support, have led to excessive premiums on companies projecting above average growth.  We have had numerous clients call us this year looking to raise cash, yet the risk-free rate of interest is now well below 1%.  This lack of options for a positive risk-free real rate of return will continue to push investors out on the risk curve into equities and alternative income solutions.  This scenario will also bring out speculators who will continue to inflate stock prices.  We see certain areas of the market which concern us but would also caution against trying to time a market correction.

At Aventine we continue to diligently rely on our asset allocation procedures. Our process preserved capital well during the steep 18% market decline in March 2020. We were able to provide uncorrelated returns with our basket of alternative investments and allocation to real assets, while also participating in much of the upside in the stock market due to our high allocation to quality stocks. We continue to allocate to uncorrelated asset classes such as “merger arbitrage” and credit opportunities, two strategies that returned 38% and 11%, respectively, for our clients in 2020.   

Overall, our Balanced Composite, a group of our client accounts which have an average risk tolerance, gained 10.6% in 2020. Our internal Aventine strategies performed very well with preferred shares, all-cap equities and U.S. equities leading the way.  Specifically, our two internally run equity funds, which make up a large percentage of our client accounts, performed very well in the last quarter of 2020.