2021 Q4 Manager Letter

December 31, 2021

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Quarterly Manager Letter
Current News and Updates

Q4 2021

Q4 2021
Aventine Balanced Composite:  2.7% 16.9%
Aventine Canadian Equity Fund:  1.4% 24.0%
Aventine Dividend Fund (USD):  7.6% 19.5%

December 31, 2021 – Q4 Commentary

While volatility continued to persist throughout Q4, client accounts finished up 2.7% in the quarter and 17% for the year based on our Balanced Composite, the highest annual return since inception. The ACE Fund and Dividend Fund also closed the year on a positive note, returning 1.4% and 7.6%, respectively, in Q4. This brought the full year return to 24% for the ACE Fund and 20% for the Dividend Fund, net of all fees. These returns are more impressive when one considers that these returns were achieved without any exposure to the energy sector, the highest performing sector last year.

The Balanced Composite performance benefitted from large weights in the two Aventine Funds and our decision to hold very little cash as we invested in dividend-paying equities and beaten-down real estate investment trusts as a fixed income replacement. In addition, we focused on structured notes and credit opportunities through external managers rather than traditional fixed income products. These strategies significantly outperformed the Canadian Universal Bond Index, which produced a total return of -2.5% in 2021.

When we reflect on the Macro factors that impacted asset prices in 2021, we believe there were 5 main drivers of markets:

(1) Domestic and global growth was accelerating
(2) Inflation was accelerating
(3) Corporate profit growth was accelerating
(4) Record level of monetary stimulus
(5) Record level of fiscal stimulus

This resulted in a goldilocks scenario for markets and acted to significantly dampen volatility throughout most of the year. As a result, Aventine captured significant returns as we ran both our equity strategies unhedged. However, a second-order impact of all the injected liquidity, including direct covid relief payments to the public, was that product demand shot up. In combination with significantly weakened supply chains due to the pandemic, this caused a steady and measurable increase in inflation, reaching levels not seen since the 1970s. As a result, towards the end of the year, there was a rotation in equity performance away from what had previously worked, notably the high growth tech names, towards the more cyclical and value driven sectors, including commodities. 

Aventine Canadian Equity (“ACE”) Fund

The ACE Fund had a very strong year and returned 24% net of fees, the highest annual return since inception.  There were several key drivers of this performance and as always, our concentration and position sizing were essential contributors.    

ATS Automation Tooling Systems Inc (ATA CN):

We have been vocal about our support for ATS Automation for quite some time, and the stock closed the year up 125%. The company operates in a market with significant tailwinds – developing and installing automated manufacturing systems for health care, industrial, and consumer applications. Throughout the year, the market seemed to begin to recognize this firm’s success and finally give the management team the credit they deserve. ATS performed eight acquisitions in 2021 and one so far in 2022. We believe that the increasing recurring revenue, and tailwinds from wage inflation, sets the stock up to perform well this year, especially given the significant valuation disconnect with US peers like Rockwell Automation.

Airboss of America Corp (BOS CN):
AirBoss was another strong performer for the Aventine Canadian Equity Fund, finishing up 190% in 2021. Many market participants throughout the year incorrectly defined AirBoss as solely a “pandemic winner” stock. After winning a significant number of new contracts in 2021 management has proven that they can continue to grow even as the pandemic recedes. This is especially true given their significant exposure to defense and military contracts, which now makes up approximately 50% of the business. The company has stated that they are currently bidding on contracts worth over $1 billion, by far the largest in company history, and well above street estimates. We believe more new contract wins are likely in 2022, including in military equipment, such as for their Blast Gauge product, a device that monitors explosions and the resulting impact on soldiers, as well as contracts to restock medical equipment for hospitals and medical professionals.

Haivision Systems Inc (HAI CN):

Haivision is a recent IPO on the TSX, listing just over one year ago, and a new addition to the Aventine Canadian Equity Fund. Although the company has just recently gone public, it has a rich and lengthy history.  Over the last decade, Haivision has been developing hardware and software solutions for the real-time video encoding market. They have developed an enviable technical leadership position in the video streaming sector and has shown consistent growth. Haivision has been generating significant return on capital by making seven acquisitions in the past several years, allowing them to increase margins as they cross sell new products and services to their existing Fortune 500 client base. What we like the most about Haivision, is that they are steadily increasing their recurring revenue from existing customers which now stands well over 25% of total revenue. The company also performs significant work for military institutions, which provides diversification and stability to the business. Furthermore, we expect the company to continue to be acquisitive which should drive the top line and margin expansion. With industry leading margins, high return on capital, and an undemanding valuation (7-8x EBITDA) we see considerable upside in 2022.

Aventine Dividend Fund 

The Aventine US Dividend Fund had a solid year returning just under 20% net of fees. This figure is all the more impressive when you consider that it was achieved with very low volatility.  The performance of the S&P 500, or as we called it last year, the S&P 5, was driven primarily by five stocks which together represent approximately 25% of the index market cap. In contrast, the Dividend Fund is a balanced and diversified mix of large cap equities that delivers top and bottom-line growth in nearly any market environment. The Fund benefited from strong performance across a number of holdings. However, a few names stood out throughout the year.

Agilent Technologies Inc (A US):

Agilent is a leading analytical measurement company. The company sells instruments, consumables, and services to identify, quantify and analyze molecular properties. The company is a market leader in an oligopolistic industry where the top 5 participants account for 75% market share. The company has a solid management team who tend to under promise and over deliver – a trait we look for in our holdings. The company provides its devices and services to the pharmaceutical, chemical & energy, food, and educational end markets, all of which are growing. Agilent returned 35% for the Fund in 2021 and did so with low volatility. We continue to hold Agilent and are excited about its future prospects.

Palo Alto Networks (PANW US):
Palo Alto is the world’s preeminent provider of cybersecurity and offers both hardware and software solutions. Many times, throughout 2021, we woke up to headlines of a new cyber attack aimed at a corporation or government, which caused a renewed focus on protection. Moving forward, this is likely to be a recurring trend. The company is also a direct beneficiary of the increasing geopolitical tensions globally. Spending on cybersecurity is no longer a discretionary expense and its share will continue to grow. The firm managed to grow revenue 25% in 2021 and the stock returned 41% for the year. We see no reason why this trend should not continue.

Medtronic PLC (MDT US):
Medtronic was a notable detractor from the portfolio, closing the year down 12%. Medtronic is one of the world’s largest providers of medical devices globally. The stock was significantly impacted throughout the year by the continuously evolving impact of covid and its variants, as well as supply chain issues. As both the delta and omicron variants resulted in increased strain on medical systems globally, people began to put off elective surgeries and other procedures, resulting in significantly weaker demand. As we believed the uncertainty was too great, we exited the position, which consequently made room for our newest portfolio addition, Goodyear Tire and Rubber.

Goodyear Tire and Rubber (MDT US):
It is undoubtedly clear that the global transition towards electric vehicles is well underway. We believe that one under-appreciated beneficiary of this transition is Goodyear. With sales of electric vehicles now surpassing those of internal combustion engine (ICE) vehicles in a number of geographies, particularly Western Europe, we believe this trend is set to continue globally. What many people do not know is that the weight of electric vehicles is significantly higher than that of their ICE vehicle counterparts. As a result, electric vehicles require a higher compound tire due to the increased load, especially under acceleration and braking. These higher compound tires sell for approximately 30% more than their combustion engine counterparts and produce a significantly higher margin. Goodyear has been ahead of this curve and has already reconfigured their production lines to accommodate this new tire demand. The stock trades at a mid-single digit P/E and EV/EBITDA and we expect it to rerate higher along with their improved margins over time.


What a difference a year makes. If 2021 was characterized by the market’s willingness to invest in highly volatile assets, 2022 is proving to be the opposite. The primary risk to the market remains a policy mistake by the Federal Reserve or anything that causes a sharp and unexpected move in real or nominal rates. The market believes that the Federal Reserve is behind the curve and is predicting the Fed to raise interest rates over 4 times throughout the year. We view this figure to be too aggressive, especially given our view on inflation. We believe that supply-side dynamics are to blame for the current inflation readings and that the figures should begin to ease from here, loosening the political pressure on the Fed. However, we remain focused on the yield curve, and any sense of a coming inversion would cause us to reduce risk significantly across our strategies. This could be caused by an overly hawkish Federal Reserve combined with slowing growth. We believe the Federal Reserve does not want to force growth below trend (growth is slowing anyway) and does not want to force inflation lower (inflation will drop anyway) and the Fed can do very little to control used car prices. Traditionally it is the credit market that leads the equity market into a recession, and we do not see any evidence of this as the implied default probability for high yield issuers remains near cycle lows. In order for equities to perform well however, we believe the market needs evidence of sustained earnings growth – a scenario we see as likely and look for this thesis to be validated with Q4 and full year earnings results later this month.

The most effective investment strategy over the past decade has been to follow easy monetary conditions, and in this regard, we are beginning to see a decoupling between North America and the rest of the world. The ECB has signaled that tapering is not on the horizon as they can’t risk destabilizing the peripheral countries, and China just recently lowered its overnight lending rate for the first time since the start of the pandemic and is preparing for further stimulus. As a result, going forward, we are looking for companies with global exposure, especially in markets where financial conditions remain undemanding or are easing.

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 our investment strategy. We are always excited discuss our clients’ accounts with them, and how we may be of greater value.

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
December 31, 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.  

Q4 2021
Aventine Balanced Composite  2.7% 16.9%
Annualized 3 Year 5 Year Inception
13.0% 7.6% 8.2%
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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