2021 Q3 Manager Letter

September 30, 2021

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Quarterly Manager Letter
Current News and Updates

Q3 2021

Aventine Balanced Composite:  +0.9% +13.8%
Aventine Canadian Equity Fund:  +0.9% +22.3%
Aventine Dividend Fund (CAD):  +1.4% +11.4%

September 30, 2021 – Q3 Commentary

After a calm summer for global markets, we were reminded again in September that stock markets don’t always go up. Despite a volatile final month to the quarter, client accounts finished up 0.9% in Q3-21 and are up 13.8% YTD based on our Balanced Composite. This compares favourably to our benchmark of peers, a benchmark that consists of approximately 370 funds following a tactical balanced strategy, at 8.0% YTD.  The ACE Fund and Dividend Fund, which on average represent 22% and 17% of this Balanced Composite, contributed positively to the quarter, closing up 0.9% and 1.4%, respectively, in Canadian dollars. Our concentration and asset allocation were key to our success in Q3 as several of our highest conviction positions significantly outperformed the market, and we avoided some of the worse performing asset classes, such as long-duration bonds.

Our alternative asset allocation was negatively impacted this quarter due to our exposure to merger arbitrage. This strategy was primarily affected by weakness in the SPAC market and the termination of one of the largest professional services deals in history – Aon’s merger with Willis Towers Watson – which was called off on antitrust concerns. Deal dissolutions such as this are quite rare, and conventionally, managers have recovered their losses within a 3–6-month period. Encouragingly, both of our merger arbitrage funds were positive in September, while equity markets were down 4-5%.

Conversely, our alternative asset allocation benefitted from our investment in Farmland. Over the past year, we have spent considerable time analyzing and reviewing various Farmland strategies and the firm made its first investment in this unique asset class in Q3. As investment counselors, we focus on preserving and growing our client’s wealth over a prolonged time horizon, and Farmland possesses the long-term growth characteristics to achieve such objectives. Farmland will play an ever-more-critical role in society as trends such as the rapid growth of the world’s population, the diminishment of accessible freshwater, the decrease in arable landmass caused by climate change and urbanization, and the ever-growing consumption habits of consumers, strain our current food supply capabilities. We concluded that now is an optimal period for investment into Canadian Farmland. If you would like to learn more about this new allocation and how our investment takes advantage of farmland values without underlying commodity exposure, please reach out.

Core Equities

Our core equity strategy had a strong Q3, with the average position up 4.3%. High-quality stocks led the way as investors looked for more sustainable growth caused by a fear of a global economic slowdown in the summer months as the Delta variant took hold. There were no material changes to the portfolio however, our decision to hold and add to Topicus.com (TOI-TO) after its spinout from Constellation Software (CSU-TO) contributed very positively to the portfolio as the stock closed up over 45% in the quarter.

Topicus.com (TOI-TO):
With all the success of Constellation Software, investors are excited about the prospects of Topicus. The company is expected to benefit from a robust acquisition environment in the highly fragmented European market, a higher organic growth profile, and a smaller revenue base from which to grow in the vertical market software (“VMS”) sector. Interestingly, Topicus is still very integrated with Constellation Software which will help them continue to grow in the most profitable way possible – converting earnings into free cash flow.

The portfolio was held back by our high-growth positions, which have pulled back from the previous year’s highs due to expectations of higher interest rates and a rotation into more cyclical areas of the economy. We remain intrigued by the degree and scope of the correction, and we continue to look for opportunities in the current weak price environment.

S&P 500 vs. ARKK-US (“High Growth Equities”)

The chart above plots the performance of the ARKK Innovation ETF (as a proxy for high growth equities) vs. the S&P 500. After a strong rebound in Q2, high growth equities experienced a swift reversal in Q3 underperforming the equity market by ~16%. The primary cause surrounded fears of higher-than-expected inflation and a consistent rise in government bond yields, which have an outsized impact on the growth-oriented technology sector.

Aventine Canadian Equity (“ACE”) Fund


The ACE Fund closed the quarter in positive territory. Our constant attention to position sizing ensured that our big winners surpassed any material losers. An example was our sale of a long-time holding, Akumin (AKU-TO), and the recent addition of Park Lawn (PLC-TO), a stock which we have been following for years.

Akumin (AKU-TO):

The medical imaging market in the United States remains an attractive one that benefits from high margins and free cash flow, as well as demographic and structural tailwinds. Unfortunately, with Akumin we were reminded of the risks involved in supporting a new management team responsible for executing a consolidation-focused business plan. Previously, we have had success with this strategy with companies such as People Corp (PEO-TO), Boyd Group (BYD-TO), and Premium Brands (PBH-TO), which were also led by underfollowed and relatively unknown management teams. We must maintain conviction that the management teams of portfolio companies can be relied on to consistently make strong capital allocation decisions, and will be conservative in their forecasts and projections, as well as in their accounting practices. This grew to be an increasing concern with the management of Akumin, leading to our decision to exit our investment in the company over the past quarter.

Park Lawn (PLC-TO):
At Aventine, we tend to gravitate towards companies that can compound capital over long periods of time with organic and inorganic growth opportunities. We have always been drawn to the cemetery business, which tends to be recession-proof, inflation-protected, and highly fragmented. Currently, there are two major players within the industry – Service Corp (SCI-US) and Park Lawn (PLC-TO) – in addition to several private equity players. As such, the industry is still dominated by mostly independent operators, which comprise 89% of the market. We expect Park Lawn to continue its long track record of successful M&A by utilizing its pristine balance sheet – currently 1.2x Net Debt/EBTIDA. Park Lawn has completed $700 million in deals (31 acquisitions) since 2014 and has consistently generated strong returns on capital. While organic growth has been strong during the pandemic (~11.5%), which is set to normalize, the company has built a $130 million war chest through a bought deal to execute on their internal pipeline of potential acquisitions. We expect to realize several catalysts by way of announced deals and earnings surprises in the years to come, especially if management can live up to their guidance of closing $100-$150 million in deals annually in the $20 billion funeral and cemetery industry.  


Aventine Dividend Fund 


The Dividend Fund performed well during the market volatility of Q3, returning 1.4%. While we had very little portfolio turnover during the quarter, we made one significant portfolio amendment, substituting Linde PLC (LIN-US) for Activision Blizzard (ATVI-US).

Activision Blizzard (ATVI-US):
ATVI was a successful investment for Aventine, returning ~ +66% throughout our holding period. The company witnessed extraordinary success during the pandemic, due to the increased engagement of users with the company’s gaming products. However, as the world begins to transition to normalization, we expect to see a reduction in these engagement levels leading to decreased game purchases, memberships, as well as in-game purchases. Furthermore, these “in-game” trends are more prevalent in computer gaming, as opposed to consoles, which may not achieve such sustained levels of engagement or user growth post-pandemic. Additionally, we expect the company to face distractions from the current litigation announced earlier in the quarter. The complaint, filed by the California Government, focuses on harassment and discrimination complaints, and has already led to increased scrutiny of stakeholders and key employee departures. Combining the peak cycle narrative, the increased legal scrutiny, and a high valuation (P/S ratio of over 8x) meant that risks to the shares were firmly to the downside and we sold the position.

Linde PLC (LIN-US):
Linde is the world’s largest industrial gas company with a market cap of $153 Billion and revenues of ~$30 billion. The global industrial gas market is oligopolistic with 4 players comprising over 70% of total sales, with Linde possessing 30% market share.  Industrial gases belong to a group of gases that are commercially manufactured and sold for uses in other applications and thus revenues are extremely resilient. Linde’s end markets include Healthcare, Electronics, Food & Beverage, Chemicals & Refining, and Manufacturing. As a result, Linde’s volumes declined by only 2% in 2020. Furthermore, Linde’s steady history of price increases [2% for the past 8 quarters] reflects contracts and processes that are built to adjust for inflation. Consequently, the Company has a track record of best-in-class performance that has yielded an 11% EPS CAGR growth over the last 25 years.

Post the COVID peak, better activity trends across manufacturing and chemicals and metals customers provides confidence that 2021 EPS guidance is on the rise. Higher oil prices act to both stabilize portions of the project backlog and add life to a new push into clean-energy projects worldwide. In fact, Linde estimates a $100 billion global market in clean hydrogen will exist by 2030 and believes its 50 years of experience gives it advantages selling into this segment, which currently only represents approximately 7% of total revenue. Linde has grown operating margins by 480 bps over the last eight quarters while return on invested capital (“ROIC”) has increased from 13% in 2018 to 18% currently. With strong operational performance, a stable and growing dividend, and increasing demand across its end markets, we have been adding Linde to the Dividend Fund over the quarter.


We remain positive on the equity market. Recently however, the combination of high inflation expectations combined with growth headwinds from China, has resulted in a downside shift in the balance of risks to the global economic outlook. To us, a deterioration in the macro environment was always to be expected following the dramatic “V” shaped recovery from the 2020 lows. The once popular threat to the macroeconomic outlook posed by the Delta variant has given way to widespread uncertainty about the persistence of supply-chain disruptions. We believe that the current situation has been driven by a surge in demand as economies emerge from lockdowns. This demand was met with acute supply bottlenecks brought on by the pandemic and a lag in producer response. The question now is whether supply catches up to demand, or whether demand will be permanently adjusted down to match supply. 

Stagflationary periods are defined as two or more consecutive quarters in which core consumer price inflation runs at least 50 basis points above the consensus long-term expectations while real GDP growth registers 50 basis points or more below trend. While the recent surge in energy and food prices could act to slow growth, we do not expect it to cause a recession. In fact, we believe that even minor improvements in supply chain issues and inflation expectations could have an amplified impact on global markets and investor sentiment. As a result, we do not currently see permanent demand destruction as a likely scenario and will use equity market weakness to selectively increase exposure.

Thank you for your continued support of Aventine as your Investment Manager and Investment Counsellor. Please do not hesitate to reach out to learn more about any of our investment strategies.

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

Contact Information
Email Phone
James Telfser   jt@aventine.ca 416-847-1767 x501
Jim Pottow   jp@aventine.ca 416-847-1767 x502
David Pepall   dp@aventine.ca 416-847-1767 x511
Shannon Vadovic   sv@aventine.ca 416-847-1767 x510
Nicho Hart   nh@aventine.ca 416-847-1767 x514

Aventine Performance Update
September 30, 2021
Aventine’s Partners and their families are among the largest investors across each of our strategies. 

Aventine Balanced Composite
Inception: June 1, 2009

Aventine Balanced 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.  

Q3 YTD 2021
Aventine Balanced Composite  0.9% 13.8%
Annualized 3 Year 5 Year Inception
8.9% 7.9% 8.1%
The Inception Date of this Strategy is June 1, 2009.
Additional performance information and disclosures on composite construction is available upon request.

We encourage new clients to join Aventine by investing in our customized portfolio solutions which are 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. 

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