2022 Q2 Manager Letter

June 30, 2022

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Quarterly Manager Letter
Current News and Updates

Q2 2022

Aventine Balanced Composite:  -9.6% -15.3%
Aventine Canadian Equity Fund:  -17.5% -26.0%
Aventine Dividend Fund (USD):  -11.7% -16.9%

June 30, 2022 – Q2 Commentary

There is an old Wall Street saying, “Don’t Fight the Fed”. While sweet-sounding in its simplicity, we find this statement to be seriously misleading, especially in the long term. Ironically, for the bulk of the past decade, investors criticized Central Banks’ inability to create inflation regardless of policy. Now, they question their ability to control their policy’s inflation. Regardless of how we arrived at this point, we believe that investors ought to look past the noise around central bank policy and instead examine a broader subset of market variables. After all, it is not central bank policy which impacts financial conditions, but the level of short-term interest rates.  Here, we believe that the market has already done much of the heavy lifting with regards to tightening financial conditions and in fact, evidence is growing that we may have already peaked in terms of short-term interest rates and inflation.

Examining this broader economic spectrum, we see many reasons to be incrementally positive and in response we are beginning to selectively deploy capital into the equity markets. After all, drawdowns provide ideal opportunities to build long-term positions as entry levels become increasingly discounted by outsized pendular swings in the market. If we look to the Great Financial Crisis for reference, within 3 years of the worst economic crash of our generation, earnings reached pre-crisis levels and have exceeded them since. While we acknowledge that we will likely see some continued weakness in the short term, the recent reduction in valuation multiples has again done much of the heavy lifting for resetting prices. As such, if earnings and forward guidance come in better than expected, we believe this will act as a big catalyst for the market.

All things being said, we recognize that at this stage of the market cycle, it is easy to get caught up in all the fear, however we encourage investors to remember the following quote from Warren Buffett in 2008, during the depth of the financial crisis:

What is likely, however is that the market will move higher, perhaps substantially so,
well before either sentiment or the economy turns up. So, if you wait for the robins, spring
will be over.
 S&P 500 EPS (1955-2022)

From a total asset allocation perspective, clients continue to benefit from a sizeable exposure to alternative and real assets, which naturally possess low correlations to public markets. These portfolio-defensive characteristics are most notable in our sizeable allocation to Farmland, which saw its valuation advance 2% in Q1, a return profile we believe will remain consistent through 2022. Additionally, clients have benefitted from an allocation to merger arbitrage strategies, which have remained flat year-to-date, and are positioned to capitalize on the resumption of normalized deal flow and pent-up demand through 2023.

Aventine Canadian Equity (“ACE”) Fund

The first half has been challenging for the ACE Fund, which has returned -26% so far in 2022. Comparatively, the heavily-energy-weighted TSX composite returned -11%, and Small Cap stocks, represented by the Russell 2000, returned -22%. For brevity, we will refrain from reiterating the attributable macroeconomic variables discussed in our Q1 letter and instead will use the upcoming paragraphs to discuss why we are looking through the overall weakness and have been allocating more personal savings to our strategy, in anticipation of moderating sentiment and subsistence of long-term growth.

First and foremost, it is essential to reiterate that our investment theses are centralized on owning shares of high-quality companies with excellent management teams and track records of prudent, intelligent, and innovative capital allocation. As our long-term investors know, we decided years ago to prioritize this strategy at the expense of ‘renting’ commodities and hyper-cyclical businesses, which we know to be highly speculative and volatile. This decision was a difficult one and often can be challenging to adhere to in the short term, especially when the sectors that one actively aims to avoid are the only ones generating positive returns, as was the case in the first half of 2022. However, in such times we often remind ourselves that our duty to our investors is not a quarterly responsibility. Instead, our charge is to preserve and advance investors’ capital over years, and the key to delivering outperformance over the long run will always come down to style discipline.

Under this mandate, we must remain ever diligent in analyzing the intrinsic value of our names and be confident to “put our money where our mouth is” when valuations dislocate from our target. Admittedly, over the past ten years of managing Aventine, our firm has experienced several market drawdowns, and in hindsight, we always look back and wish we had added even more to our positions when market sentiment seemed bleakest. Subsequently, we have dedicated ourselves to building a team and research process to be better equipped to have the confidence to take advantage of adverse market conditions, such as the ones we currently face.

In this latest drawdown, we continue to see a staggering amount of fear regarding interest rates, potential recession, and war. Subsequently, we have witnessed valuation multiples contracts by 25% at the portfolio level and, in some cases, by up to 50% at the individual stock level. These are the conditions when our research and commitment to our strategy allow us to take advantage and create long-term portfolio value. During the second quarter, we were busy adding to our core long-term holdings at very attractive valuations. Here we refer to businesses with secular tailwinds, cycle low valuations, and significant catalyst potential. A few examples are:

Enghouse Systems Ltd (ENGH CN):

Enghouse is trading at 9.6x expected EV/EBITDA, a level not seen since 2012.  We believe this decline to be largely attributable its tech-sector exposure, prudent capital allocation, and overemphasis on the year-over-year deceleration in earnings. We encourage investors to scrub unsustainable pandemic-related uplifts and instead analyze the business trajectory relative to the pre-pandemic (or normalized operative) base. In doing so, one can see that growth remains robust. In addition to this, ENGH has announced two acquisitions in the past month, marking the recommencement of their growth-by-acquisition strategy. We believe that as M&A valuations continue to trend back to more conservative levels, additional deals will follow, allowing the multiple to revert back inline with their long-term average. Such reversion could yield ~30%-40% returns in our view.

ATS Automation Tooling Systems Inc. (ATA CN):

ATS Automation is one of the most misunderstood portfolio businesses. While process automation investment trends continues to benefit from catalysts such as reshoring, productivity optimization, and high labour costs, the market continues to discount the breadth of such tailwinds, instead focusing on ATS historical correlation to GDP. In doing so, investors give inadequate appreciation to ATS’s evolved business mix, which is now more heavily weighted towards less cyclical sectors such as consumer products and health care. As such, despite a series of well executed acquisitions, growing earnings, and a record backlog, the multiple has contracted by 23%, which is significant considering its ~50% discount to peers heading into 2022. While, we acknowledge that the outlook is clouded by input costs and a potential pull back in spending, we continue to believe that core earnings will remain firm as ATS wins new contracts (like the $90mm CAD EV battery assembly system win in June), conducts further M&A, and continues to diversify its end-customer exposure to less cyclical sectors.  In doing so, we model for a 50% retracement in the equity value.

Spin Master Corp (TOY CN):

Spin Master Toys has dramatically exceeded expectations over the past four quarters with an average earnings surprise of ~150%. Spin Master has a pristine balance sheet (no debt) and over $1 billion in available liquidity for M&A. Backed by strong fundamentals we believe investors are simply “selling a winner” here. As a result, the valuation has contracted 30% providing an excellent entry point for a company entering a paradigm shift in the way kids play.

Overall, it has been a volatile first half for the ACE Fund despite our elevated cash position and market hedges. However, as previously noted, we have recently become more opportunistic on adding strategically the long side and continue to believe that the expected long-term returns of our portfolio have never been higher based on the discount to our valuation targets.

Aventine Dividend Fund 

Despite performing well on a relative basis, the Dividend Fund experienced a challenging first half of the year. While the S&P 500 was down 20.6% so far in 2022, the Dividend Fund was down 16.9% over the same time frame. As we mentioned in our Q1 commentary, the weakness was felt broadly throughout the portfolio, however we have begun to add to high conviction positions and add certain new names to the fund at excellent valuation multiples.

KKR & Co Inc. (KKR US):
During the quarter, we added significantly to our position in KKR & Co Inc. KKR is one of the world’s leading private equity investors and as such has a tremendous ability to raise capital at low relative interest rates and deploy that capital across sectors and geographies. This leads to continual cash conversion and significant growth. For example, in Q1 the firm raised $26 Billion in overall fundraising and management highlighted infrastructure and real estate as key drivers. In fact, real asset strategies have accounted for just over half of the $132 Billion of total fundraising and the $88 Billion of capital deployment over the last 12 months. It is this ability to continually scale their platform which stands out and should continue to support management fee growth over time, but also generate carried interest for the firm. Additionally, the portfolio companies have generated ~10% of capital markets fees over the past couple of years and should continue to support growth here as well. Despite the broader equity and fixed income market headwinds in 1Q, the Core PE portfolio appreciated by 3%, showing the relative strength in the firm’s underlying investments. We believe that KKR is doing an excellent job of taking advantage of adverse market conditions and setting itself up for significant long-term growth.
Celanese Corp (CE US):
During the quarter we initiated a position in Celanese Corp. Celanese is a global chemical and specialty materials company. It produces engineered polymers that are used in a variety of high-value applications, as well as acetyl products, which are intermediate chemicals for nearly all major industries. Its product portfolio serves a diverse set of end-use applications including automotive, chemical additives, construction, adhesives, medical, energy storage, filtration, food and beverage, paper and packaging, and textiles. CE’s business is an ideal addition, given its industry leadership position, robust free cash flow generation, and consistent dividend growth. The Company currently trades at near-decade lows on all valuation metrics primarily due to concerns over its acquisition of Dupont’s Mobility and Materials segment. From an EV/EBITDA perspective, Celanese trades 3 standard deviations below its long-term historical average, and 10% below its peer group. We believe this dislocation provides an ideal opportunity to capitalize on our multi-year investment thesis, in which we will see a reduction in business cyclicality, the addition of best-in-class products to CE’s offering, and numerous revenue and cost base synergies from expanded operational scale and product scope.

Celanese Valuation Metrics:


Global stocks and bonds are in the grip of the worst selloff in at least three decades as increasing chances of a US — or even global — recession are spooking investors. At the same time, sticky inflation has left little room for the Federal Reserve to apply brakes on monetary tightening. This toxic combination presents markets a trading challenge not seen since the late 1970s. However, nearly all the equity drawdown year-to-date has been valuation multiple based. The risk then is that EPS (based on rates, oil, dollar, etc.) could see a large move lower over following 12 months. Should there be a next leg lower in equities, it will clearly be EPS driven.
Despite such risks, the market, especially the small cap indices, seems to already be pricing in a recession, just as we anticipate inflation turning the corner. There are also certain market indicators which are painting a more encouraging picture. While volatility, as measured by the VIX, remains at a relatively high level, the VVIX Index – which measures the implied volatility in VIX options, also known as “volatility of volatility” – has fallen to the lowest level since October 2019. This means traders are increasingly expecting smoother sailing ahead as the market is trying to see beyond the current toxic mix of high inflation, economic downturn and earnings downgrades.

As a result, we at Aventine are focused on making sure our portfolios are well positioned to achieve growth through the cycle, by adding to high conviction positions and gradually increasing our 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 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 647-695-8063
Jim Pottow   jp@aventine.ca 647-694-6262
David Pepall   dp@aventine.ca 647-557-6382
Shannon Vadovic   sv@aventine.ca 647-697-3533
Nicho Hart   nh@aventine.ca 647-557-2487

Aventine Performance Update
June 30, 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.  

Q2 2022
Aventine Balanced Composite  -9.6% -15.3%
Annualized 3 Year 5 Year Inception
4.2% 3.3% 6.5%
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.

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





This email communication is intended to provide you with information about the Aventine Balanced Composite  (the “Composite”), the Aventine Canadian Equity Fund and the Aventine Dividend Fund (the “Funds”) managed by Aventine Management Group Inc. 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 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 Composite 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 Composite 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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