2022 Q1 Manager Letter

March 31, 2022

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Quarterly Manager Letter
Current News and Updates

Q1 2022

Aventine Balanced Composite:  -6.3%
Aventine Canadian Equity Fund:  -10.3%
Aventine Dividend Fund (USD):  -5.8%

March 31, 2022 – Q1 Commentary

2022 has begun with a dramatic shift in the mindset of the market. While the war in Ukraine was a shocking new input into our framework, its impact seems to be a continuation of factors started by the onset of the pandemic. Specifically, we began this cycle with supply chain driven inflation, which we expected to ease along with the impact of the COVID virus. However, the war in Ukraine and the impact of China’s “Zero Covid” policies have changed the nature of inflation to become more entrenched. In addition, we are seeing a further fracturing of supply chains which is reinforcing the notion that the security of energy, technology, healthcare, and data is both a political priority, as well as an economic one. The result has been a return of populism and geopolitical rivalry. Global trade is giving way to more regional trade blocs with similar ideals. At the moment, the market is solely focused on the path of inflation. As a result, investors will have to endure greater uncertainty in the medium term until the market gains clarity on Central Banks’ ability to quell inflation, and the resulting impact on growth.Against this backdrop, our alternative income, real asset, and merger arbitrage allocations performed well, especially relative to equities and bonds. While it was a negative quarter overall, these exposures helped keep volatility contained despite equity indices being down between -5% and -9% and bonds posting one of the worst quarters in history, down close to -6% at the index level.  While our risk model had us positioning more defensively since January, it was a particularly challenging environment for our equity strategies.

Aventine Canadian Equity (“ACE”) Fund

The ACE Fund returned -10% in the first quarter, underperforming the TSX, which returned 3% over the same period. Unlike in other quarters, where our returns were driven by company fundamentals, our returns this quarter were impacted primarily by macroeconomic events and industry exposure. The Russian invasion of Ukraine caused the market narrative to change dramatically, and significantly impacted inflation expectations. The result was a dramatic shift in asset allocations towards commodities, an area where by design we do not have exposure, and away from other sectors. For example, the TSX Energy Index returned 27% and the TSX Materials Index returned 20% in the quarter, while the TSX Information Technology Index returned -36% over the same period. While it was our lack of commodity exposure that predominantly caused the relative underperformance, there were a few notable company-specific events to highlight.


Enghouse Systems Ltd (ENGH CN):

A perfect example of the dramatic sector rotation which took place in the first quarter is the performance of Enghouse Systems. While the company reported in-line revenue for the fourth quarter, albeit with a slight margin decline, the stock shed 18% in Q1. We view the share price action as overly pessimistic. While the company’s strategy has been growth by acquisition, which has certainly slowed due to the pandemic, management has been constructive in the opportunity set going forward, and the company is performing well organically. In addition, Enghouse had recently announced that it was exploring strategic options and had engaged an advisor to evaluate various alternatives, including a potential sale of all or part of the business. We believe the YTD price returns for the stock are not reflective of the company’s intrinsic valuation as illustrated by the stock’s material discount to its asset replacement value.

Intertape Polymer Group (ITP CN):
During the quarter, Intertape Polymer Group received a buyout offer by an affiliate of Clearlake Capital Group LP for $2.6 Billion or $40.50 per share – an 82% premium to its share price on the date of the announcement. Intertape Polymer Group has been a long time holding in the ACE Fund and is a prime example of our ability to discover under-the-radar companies with tremendous potential. We first purchased ITP in March of 2017, recognizing that the firm was embarking on a multi-year bull market for its end products. Our thorough analysis and patience were rewarded as we exited the stock soon after the acquisition announcement.




Aventine Dividend Fund 


The Aventine US Dividend Fund had a tough start to the year, returning -6% through the first quarter, slightly less than the S&P 500 return at -5%. While the portfolio detraction was relatively broad-based, a few specific instances stand out.


Goodyear Tire and Rubber Co (GT US):

The biggest detractor from performance in the Dividend Fund was our position in GT, which was down 33% in the quarter. As a new position in the Fund, this move was very disappointing. The negative performance was concentrated around the company’s Q4 2021 results conference call. After reporting blowout earnings and revenue for Q4 (sales up 40%, operating income up 60%), and after the stock climbed up as much as 8% pre-conference call, the stock ended the day down 20%. Management caused the nearly 30% intraday drop by announcing that they expect to be Cash Flow breakeven in 2022. The key to the weak cash flow guidance was raw material costs – management announced that these could represent an $800 million headwind in 2022. The company also expects an increase in capex this year to invest further in its EV tire division and rebuild inventory. Ironically, it was the company’s solid operational performance and success at deleveraging (Net Debt/EBITDA < 3x) which led them to be comfortable in investing in themselves for future growth – a trait we like in portfolio companies. We used the weakness in the share price to add to our position as it is one of the cheapest stocks in our coverage universe, trading well below Book Value.


Volkswagen AG (VWAGY US):

Another notable detractor from performance in the quarter was our position in Volkswagen AG, returning -16%. The global auto market has been perhaps the hardest hit sector when it comes to supply chain bottlenecks and component shortages. While we originally saw the market tightness easing in 2022, we now expect some of these issues to last longer than initially anticipated. In fact, Volkswagen management recently announced that the semiconductor shortage in the auto market is expected to last into 2024 – albeit with a waning effect. Furthermore, Volkswagen’s large plant locations (Germany, China) are suffering from increasing energy costs, as well as large scale pandemic lockdowns. Finally, the company has been hurt due to its higher-than-average exposure to Ukraine. On a positive note, it looks as though the Company is going to proceed with an IPO of the Porsche brand, which is expected to be worth approximately €90 Billion, matching Volkswagen’s current entire market capitalization. As a result, on a sum-of-the-parts basis, Volkswagen could be the cheapest stock we have seen in quite some time.

Brookfield Infrastructure Partners LP (BIP US):

On a positive note, our largest position, Brookfield Infrastructure Partners, was up 8% in the quarter. The management team at BIP are some of the best capital allocators that we have come across, and this is showing up in their stock performance, especially given the market volatility. The portfolio of assets at BIP are built for the type of macro environment we are currently in, given that the primary risks in the market revolve around inflation, commodity prices, and supply chain bottlenecks. To hedge against inflation, 70% of BIP’s revenues are indexed to local inflation. In response to commodity prices, the Company purchased several midstream oil & gas assets in the US in 2018, and while 80% of these assets are price agnostic, 20% are market sensitive. Finally, logistics infrastructure worldwide is under stress which puts a spotlight on their essential nature. When demand for infrastructure is high, BIP realizes higher tariffs and customers compete for whatever space/storage is available.











The continuing war in Ukraine and strong inflation numbers, combined with bond yields rising at the fastest pace in decades, and an inverted yield curve, created a major headwind for both equities and fixed income in the quarter.

Beyond geopolitical risk and extreme inflation numbers, there are signs that the worst may be behind us. While March headline CPI rose 8.5% year-on-year, core goods prices fell 0.4% (vs. a 0.4% rise the prior month) – the first decline in a year – driven by a drop in used-vehicle prices and a general moderation in several sectors. While much still rests on the future of food and fuel prices, this appears to be the first indication that tightening financial conditions are having an impact on consumer demand. Further, despite concerns over the yield curve’s recent inversion, a recession at this point seems unlikely with the unemployment rate at 3.6% in the US, and 5.3% in Canada, matching pre-pandemic levels.

Looking ahead, we believe that recent weakness in the market provides an opportunity for patient investors. The market has already done much of the various Central Bank’s anticipated tightening, and any negative surprise to inflation could result in a sharp equity market rebound and drive investor focus back to sectors where we tend to concentrate. While we expect market volatility to continue, we remain focused on fundamental company analysis to drive our exposure.  If we were to start fresh portfolios today, we would be thrilled with the entry valuations on almost all of our core equity positions.  We recognize that during periods where markets are volatile for more than a couple weeks it can be difficult to see through the noise, but we remain confident in our strategies, company-specific fundamentals, and the management teams we have entrusted to allocate our savings.

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 strategies. We are always excited to 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
March 31, 2022
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.  

Q1 2022
Aventine Balanced Composite  -6.3% -6.3%
Annualized 3 Year 5 Year Inception
8.2% 5.4% 7.5%
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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