ACE Fund: April 2016 Manager Letter

April 30, 2016

30 April 2016

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Aventine Canadian Equity Fund

Monthly Fund Manager Update – April 2016

Executive Summary


The Aventine Canadian Equity Fund (“ACE Fund”) portfolio looks as attractive as ever from a fundamental perspective.  The Fund today provides superior return on capital and earnings growth relative to the market (and average Canadian company) while trading at a significant valuation discount.

Company updates in the last few weeks continue to de-risk the Fund’s growth profile at the same time as our broader risk models suggest the market risk-reward remains skewed higher. In summary, we believe that new capital allocations to the Fund will be well rewarded.    

Fund Documents

Purchase Documents


Media Appearances

Performance Overview

Current Performance

1 Month 6 Months Year to Date
Aventine Canadian Equity – Class F +0.6% +8.8% -1.2%


Historical Performance

1 Year 3 Years* Inception*
Aventine Canadian Equity – Class F +4.5% n/a +8.5%
* Performance for periods >1 year are annualized.

Top Holdings

Concordia Healthcare (CXR-T) 7.3%
Clearwater Seafood (CLR-T) 7.1%
New Flyer Industries (NFI-T) 6.6%
Goeasy (GSY-T) 5.3%
Airboss of America (BOS-T) 4.9%

Metrics of Average Company

Market Capitalization ($B) $2.7B
Expected EPS Growth 22%
Forward Price-to-Earnings 10.7x
Dividend Yield 1.6%
Return on Equity 12%

Fund Commentary

By many measures April was a solid month for the ACE Fund.  First, our unit price rose by 0.6% which is almost exactly in line with our average monthly return since inception; second, we received additional visibility into the operating performance of a few of our most high conviction portfolio companies through earnings releases and new management disclosures; and third we welcomed several really sharp new investors into the Fund.   On this last point,  we feel very fortunate that the ACE Fund continues to build a very high quality long term investor base and we draw a great deal of encouragement from the fact that our investors regularly contribute to making us better fund managers.

Apart from ACE, we saw the broad S&P/TSX Composite (“TSX”) continue its resource-driven surge in April.  As we’ve noted in the past, we’ll never hold anything near an index weight to energy or materials in our portfolio.  Call us crazy, but we’d rather own operating companies with tangible assets, reasonably predictable cash flows and business plans that are more detailed than “borrow, drill, pump, repeat.”  Besides, through the combination of ETF holdings and strategies offered by mega-cap investment firms, most Canadian investors already have more than enough resource exposure. 

Portfolio Updates

Turning to the portfolio, the majority of updates we’ve been getting from management teams have been very positive.  Quarterly earnings performance has met or exceeded some lofty targets that we’ve set, although the stocks of a few companies haven’t traded as well as we would expect given results and guidance. Below we illustrate a couple holdings – FirstService Corp and Winpak – that occupied opposite ends of this spectrum in April.

We thought that FirstService Corp’s (FSV-T, +5.7% gain) first quarter report was excellent and we were really impressed in particular with the quality and tone of management’s commentary and outlook.  Many readers may recall this name as one we wrote about extensively last year during the spinoff of its Colliers (CIG-T) commercial real estate subsidiary.  While we exited our position in Colliers earlier this year we have actually been adding to our position in FirstService.  Between their property management division (recurring revenue, growth market) and their portfolio of real estate services brands (California Closets, Paul Davis Restoration, CertaPro Painters) FirstService can pursue a combination of organic and acquisitive growth across several verticals.  Some commentary from the call that stood out for us touched on their recent acquisition of Century Fire Protection, an end-to-end fire protection solutions provider for commercial, multi-family, education and healthcare.  We view this as the perfect type of complementary business platform that FirstService can build upon to deliver growth in coming years.

Diverging from FirstService was Winpak (WPK-T, -13.5%) which traded heavy (a euphemism for “lost money”) even though we were very encouraged by their earnings report.  We don’t expect many Canadians to be familiar with the name Winpak although you likely use their products every day.  Based in Winnipeg they produce rigid and flexible packaging for food, healthcare and industrial uses.  Despite what you might think about the sleepy business of food packaging Winpak has delivered one of the most impressive track records of shareholder value creation in Canada over the last 30 years (see total return stock performance chart below).  Their focus on smart capital allocation programs that support growth at a sustainable rate has enabled Winpak to gradually evolve into a preferred supplier for some of the largest food manufacturers in the world such as Hormel and Tyson Foods.  When shares fell subsequent to the earnings report we took the opportunity to increase our position size.  We were not alone as recent insider filings show that CFO Ken Kuchma was also “on the bid” and increased his position by over 7% last month.  Winpak generates significant cash flow and while they pay sizeable special dividends from time to time, they prefer to reinvest capital in the business – something we are very supportive of given their track record.  To this point, Winpak spent $25 million last quarter to expand their facilities on aggregate by over 435,000 square feet, a strong sign that growth will continue.


We consider both FirstService and Winpak to be world class Canadian success stories that have generated compound shareholder returns in excess of 15% per annum for the past 20 years.  Like a good value investor we will trim our positions of these companies if their stock prices trade materially above reasonable valuation multiples, but we are also going to be opportunistic acquirers of shares should we find them to trade at deep discounts to our estimates of intrinsic value.


Last month we wrote about the very strong positive outlook we have for the ACE Fund and noted that the current expected P/E multiple of our portfolio is significantly less than the market’s valuation multiple.  Additionally, our portfolio companies are experiencing faster organic growth and have a higher return on common equity than that of the “average” mid and large cap Canadian company.  While our projections for next year’s earnings in the portfolio show significant growth over this year, we could discount these projections by half and still hold a portfolio that is materially more attractive to us than the TSX Index.  There are some excellent undervalued, catalyst-rich, non-resource businesses here in Canada that have faced a scarcity of buyers over the past year as fund managers and other investors have retrenched into the perceived safety of expensive, large cap beta stocks.  This is fertile hunting ground for managers like us who are interested in buying high quality, improving assets on the cheap.  Looking out a couple years, the impact of even a partial normalization to these depressed valuation multiples would generate some pretty fantastic returns.

Clearly we continue to be very comfortable with our “bottom up” positioning in the portfolio as the current valuation and other fundamental metrics are very attractive for the basket of wide moat businesses we own.  From a top down perspective, we are encouraged by trends in credit, volatility and equities generally.  Importantly, we see that certain key market stressors over the past year – the US Dollar, Chinese Yuan, global financial system and oil – have relaxed.  So long as these threats remain cooperative and global financial conditions don’t tighten unexpectedly our positioning bias will approximate full investment.   

We encourage potential and existing investors to reach out to learn more about how Aventine can assist with your broader capital allocation and risk management objectives.  Based on the preceding letter, it probably goes without saying that it is a particularly attractive time to add to your ACE Fund investment based on the current setup for the TSX and our specific holdings.  As partners, we continue to add new capital of our own to the ACE Fund on a monthly basis. 

Performance Presentation

Fund Inception: March 31, 2014

This email communication is intended to provide you with information about the Aventine Canadian Equity Fund managed by Aventine Management Group Inc. This Fund is distributed by prospectus exemption exclusively to qualified investors in the provinces of Alberta, British Columbia and Ontario. Important information about the Fund is contained in its Offering Memorandum which should be read carefully before investing and may be obtained from Aventine Management Group upon request, or by clicking on the link at the top of this email. The Offering Memorandum of the Aventine Canadian Equity (“ACE”) Fund 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 this Fund 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 Class A and Class F Units of the ACE Fund is the performance of the target series of each class and the NAV Per Unit presented for Class A, Class F and Class I Units is the current NAV Per Unit of the target series of each class. The value of the Fund 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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