ACE Fund: December 2015 Manager Letter

December 31, 2015



31 December 2015
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Aventine Canadian Equity Fund

Monthly Fund Manager Update – December 2015

Executive Summary


The Aventine Canadian Equity Fund returned +12.7% in 2015, outperforming the S&P/TSX Composite Total Return Index (“TSX”) by 21%

Morningstar ranks us as the #1 Canadian Equity Fund in 2015.  The average fund in our peer group returned -6.1% for the year.

Fund Documents

Purchase Documents


Media Appearances

Performance Overview

Current Year Performance

1 Month 6 Months Year to Date
Aventine Canadian Equity – Class F +0.9% +3.9% +12.7%


Historical Performance

1 Year 3 Years* Inception*
Aventine Canadian Equity – Class F +12.7% n/a +10.9%
* Performance for periods >1 year are annualized.

Top Holdings

Concordia Healthcare (CXR-T) 7.1%
Goeasy (GSY-T) 6.0%
Clearwater Seafood (CLR-T) 5.8%
New Flyer Industries (NFI-T) 4.5%
Winpak (WPK-T) 4.4%

Metrics of Average Company

Market Capitalization ($B) $5.0B
Expected EPS Growth 39%
Forward Price-to-Earnings 14.4x
Dividend Yield 1.5%
Return on Equity 12%

Fund Commentary

December was another solid month for the ACE Fund and capped off an exceptionally strong year in which our +12.7% return was the best performance out of the 398 Canadian Equity funds in our Morningstar peer universe.   While the broader TSX struggled under the weight of falling resource companies and weaker financials, finishing the year down -8.3%, the ACE Fund found value in the areas of the Canadian market like industrials, healthcare and technology.

While we can’t expect to repeat 2015’s dramatic outperformance each year, as managers of the ACE Fund it only makes sense to try and capture every advantage we can versus comparable fund managers and passive index investors.  For instance, our unconstrained approach to sector allocation did not force us to own positions in crashing sectors of the market like energy or mining; our portfolio concentration meant that when we had big winners they really moved the needle at the Fund level; and our ability to short, buy put options and hold high levels of cash gave us the flexibility to ride out the rocky periods last year while also ensuring we had dry powder when opportunity arose.   We try to keep perspective and balance our desire to grow capital with our need to protect it, without over-thinking the minutiae.

Narrowing in on December, the Fund’s gain of 0.9% was assisted by a 29% surge in the price of Sandvine (SVC-T) after the company raised their revenue guidance for the fourth quarter and announced several new large orders.  Although shares have rallied 53% over the last three months, they remain 17% below the 52 week high and are a bargain in our view.  We continue to expect great business results from Sandvine given the evident trends in telecommunications and network usage.  If you are interested in more detail on this holding, James discussed it during his January 6th appearance on BNN Market Call Tonight with Catherine Murray, where it was highlighted as one of our top picks.

Our Investment Principles

As we reflect on the year behind and look head to 2016 we think it fitting to focus less on the results in the rear view mirror and more on the continuous thought process underpinning our investment approach.  While our letters over the past two years have touched on various elements of this process individually, below we present a summary of Our Core Investment Principles.

  1. We are value investors.  We look for companies which are undervalued relative to our assessment of their earnings potential or asset value, while strictly avoiding companies whose valuations we cannot understand or think are excessive.  This helps us to avoid “land mines” and also gives us the confidence to opportunistically add to positions during periods of volatility, knowing that we own sound businesses with a sufficient margin of safety.  When a company we own hits our target valuation multiple, a level at which we deem its margin of safety to have markedly diminished, we sell it.
  2. We invest with the grain. We believe that investors enjoy the greatest success when they are able to identify broad, sustaining trends in the markets and then align themselves to those trends.   This style of “investing with the grain” prevents us from attempting to catch falling knives – such as energy or materials stocks – which have weighed heavily on the performance of many Canadian investors over the past few years.  It helps us identify and focus on companies who not only benefit from a specific market environment (eg. a falling Canadian dollar or low oil prices) but who also consistently execute well.  It’s not enough to just beat the consensus expectation in the current quarter, we also want management who is moving out the goalposts for future periods.
  3. We invest with conviction. In order for investors to maximize the returns earned from our research ideas we limit our investment activities to a small number of the very best opportunities we see.  We believe that holding around 20 positions is optimal for us and it limits idea dilution that occurs if you hold many more securities.  When we have investments that dramatically outperform, we want these wins to be in large positions whereby the performance impact at the Fund level is evident.  Put another way, we don’t believe investors should be paying us for our 50th best idea, which by definition isn’t going to be anywhere near as good as our 20th.
  4. We seek to limit losses in difficult markets. We believe that the number one goal for rational investors is to avoid large losses and although we are a long-oriented investment fund we do govern our net exposure to equity market moves by actively managing our portfolio’s cash balance and hedge book (short positions, put options and related securities).  Our risk models have helped us to stay disciplined with how we allocate capital and adjust our net exposure effectively.  At various times the weight of evidence will encourage us to become either more aggressive or more defensive, but we will always be mindful of the downside.  Internal attributions show that our actions in this respect added a significant amount of value in both 2014 and 2015, and it’s important to note that while our cash balance during 2015 peaked at 25% in September and averaged about 12% for the full year our net exposure was often 75% or less.
  5. We want to own operating businesses with highly predictable cash flows.  Several investors have asked us if our great returns in 2015 were the result of aggressively shorting energy or materials companies.  Aggressive allocating our capital (either long or short) to commodity-price dependent investments is precisely what we don’t do.  Generally, we consider the economics of such enterprises as being far too driven by factors outside the control of management and therefore risky in a way we can’t specifically account for.  As a result, we keep or allocations to these sectors quite low, or as in 2015, near zero.  Resource investing can be potentially very lucrative if you are right, but the downside of missteps can range from painful to unrecoverable.
  6. We believe that active management adds value.  As equity investors our long term goal is to participate in the growth of businesses as minority owners.  However as active managers we must be prepared to take the action required to best position ourselves in a continually shifting market environment.  Our active approach, which contrasts with traditional value investing (patient and passive), emphasizes the importance of catalysts, management ability and shareholder sentiment, in addition to the customary value investment criteria.   Further we believe that structural changes in markets, such as ETFs, have led to increased correlations among many securities.  This means that in many cases prices will reflect overall market sentiment rather than independent company fundamentals, creating opportunities for mispricing which benefits the savvy active manager.


Looking out into the first few months of 2016 we anticipate that it will continue to be a difficult environment for stocks, with many of the themes from 2015 carrying over into the New Year.  Weakness in commodities is likely to persist, although with prices down over 75% in many areas it is likely we are nearing the market clearing prices required for some stability to return.  So long as commodities remain depressed we do not see much potential for a reversal in the Canadian dollar, although from such oversold levels a retracement of 5-10 cents could be triggered by even small shifts in the policy stances of the Canadian, US, Chinese central banks, or even OPEC.  We expect earnings growth from the Canadian banks to be flat at best which will be a headwind to their stock prices.  As a result, we expect few changes in the portfolio from an industry positioning standpoint – the low energy, low dollar tailwinds that benefitted us for the majority of 2015 are still present and we do not fix that which isn’t broken.

That said, we have been taking notice of several developments which give us reason to be cautious.  Several of our core holdings from 2015 have reached “peak valuation” in our mind, meaning that investors should be very cautious of chasing winners in the technology and consumer industries.  We have been selling down several positions recently which still look attractive to us fundamentally, but that have begun to violate our valuation thresholds.  In addition to valuations being high we see the macro environment more broadly as troubling: earnings growth is very poor, credit impairments are on the rise, sentiment is weak, volatility has returned, and so on.  It seems the negative impacts of lower commodity prices and repositioned foreign exchange rates are being felt globally, but the corresponding economic benefits that should theoretically materialize are wholly absent.

At the time of writing we remain of the mindset that this initial stumble into the New Year will be short lived, but Principle #4 above requires us to continually test this thesis.   We see the equity markets as being extremely oversold in Canada and the US, and due for a solid bounce, but beyond that we are less certain.   We have been using this incredibly fearful time in markets to put some capital back to work, but are also high-grading the portfolio – adding to only the highest quality, most undervalued and most liquid names.   We believe these actions will be rewarded as the year unfolds.

As we look at our portfolio from a catalyst perspective we find reason to be excited about 2016.  We believe acquisition activity will pick up in Canada with the lower exchange rate making domestic companies look very attractive to foreign buyers.  Many of our holdings also have activist shareholders who we believe will attempt to create value in this environment or even sell to an American acquirer.  Additionally, the earnings growth profile of our portfolio companies is vastly superior to the broad market’s, making our holdings that much more attractive in the face of weak economic growth.

Investors who are familiar with us know that we have substantially all of our investment capital invested in the ACE Fund and we believe the prospects for superior long term returns in this strategy are excellent.  We are thankful to those friends and investors who have shown us support in our endeavours and we look to build on the ACE Fund’s early success.  The Fund remains open to new capital and we are always happy to chat about the portfolio and our approach with any investors, old or new.

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. 
Copyright  © *|CURRENT_YEAR|* AVENTINE MANAGEMENT GROUP INC., All rights reserved.

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