ACE Fund: December 2016 Manager Letter

January 17, 2017


17 January 2017

Executive Summary


The Aventine Canadian Equity Fund (“ACE Fund”) finished the month of December up 1.6% and ended 2016 up 5.9%.  

2016 was a challenging year for us overall, however, since inception (March 31, 2014) we have generated net returns after all fees that have almost doubled the S&P/TSX TR Index at 9.1% versus 5.5%.

Fund Information

Purchase Documents

Performance Overview

Current Performance

1 Month 6 Months Year to Date
Aventine Canadian Equity – Class F +1.6% +8.6% +5.9%


Historical Performance

1 Year 3 Years* Inception*
Aventine Canadian Equity – Class F +5.9% n/a +9.1%
* Performance for periods >1 year are annualized.

Metrics of Average Company

Market Capitalization ($B) $11.2B
Expected EPS Growth 34%
Forward Price-to-Earnings 13x
Dividend Yield 2%
Return on Equity 14%

Performance Statistics

Annualized Standard Deviation 11.7%
Annualized Alpha vs TSX Composite 5.5%
Beta vs TSX Composite 0.7
Correlation vs TSX Composite 0.5
Sharpe Ratio 0.7

Cumulative Return

ACE Fund vs Benchmarks                                                               Fund Inception: March 31, 2014

Fund Commentary

While December was a solid month for the ACE Fund it capped off what had been a rather disappointing 2016 for us overall.  Let’s just get it out there right off the top:  We were dead wrong on Concordia Healthcare, which ended up being one of the worst performing stocks of 2016, and we mostly missed a major rally in the resource sector.

Now before getting too apologetic, it’s important to remind readers that our investment process tends to lag when sharp market rotations occur and also underemphasizes commodity companies.  In short, 2016 was not our ideal environment but we ended the year well, rising 3.5% in the fourth quarter and 5.9% in 2016 overall.  Further, since inception (2 years, 9 months) we have generated net returns to investors after all fees and expenses of 27% versus 16% for the S&P/TSX Total Return Index.  In terms of risk/reward, ACE has generated an “Annualized Alpha” (risk-adjusted excess returns per year) of 5.5% and we believe that such performance likely places us among the top 10% of all Canadian Equity funds since inception.

2016 brought both challenges and growth for us professionally and there were many opportunities to remind ourselves that managing a top fund is like running a marathon.  There is your game plan – developing an overall strategy that gives you a long term advantage or edge; there is your physical pacing – consistently delivering a positive return on investment to maximize the benefits of compounding over time; and there is your mental execution – the discipline required to keep to your strengths and style when the going gets tough, while still being observant of the changing conditions around you. We see opportunities ahead in 2017 and have learned from the mistakes of 2016 – notably in terms of the red flags we missed (chief among them: questionable management character and over-levered balance sheets).  Great investing is a path not a point and we become better asset managers as we learn, grow and evolve.  Now with that perspective in mind, let’s consider the state of the markets.

2016 was a very unusual year for North American equity markets

Even if your knowledge of the financial markets is minor, you probably noticed that this was a volatile year for investing and that the volatility was felt across most asset classes.  Stocks, bonds, commodities and currencies all fell under periods of intense stress at various times during the year as several significant political and market events played out.  Few fund managers will forget this year, with the non-consensus outcomes of BREXIT and the US election and the market moves that followed, not to mention OPEC’s year-long roller coaster game of will they/won’t they cut production.  While we spend most of our time analyzing individual companies, 2016 was a year where “macro” flexed its muscle in unexpected ways.  It will be interesting to see if the rising socio-political trends of populism, protectionism and anti-globalization continue to divide the developed world and if so, how it impacts markets and our holdings.  At this point it’s too early to know for sure, but if you were to simply focus on the current economic data, financial conditions and market trends as a guide (usually not a bad place to look for an unbiased point of view) we are encouraged by what we see. 

The technical implications of 2016’s rally off the lows

As we closed out 2016, most major indices were at or near their all-time highs.  This is a pretty impressive situation considering that it looked as though we were headed for a full-fledged bear market back in February.  From a technical standpoint, the market looked very “broken” in mid-February, similar to how it broke down in advance of the 2000 and 2008 corrections.  Financial conditions were bad and worsening, credit spreads were high and widening, recession risks were spiking and realized volatility was near record highs.  Conditions such as these typically appear concurrent with market selloffs of 25% or greater, but the reversal off the February bottom was so significant it has only happened two other times in the past 100 years.   If we look at the chart below of the S&P 500 you can see that we actually broke below the 2015 low in February, a very bearish sign, but managed to close the year near an all-time-high and above last year’s high, a very bullish sign.  The only two other times that this pattern (called a “bullish outside year”) has occurred, 1982 and 1933, marked the end of big recessions and signalled the start of new multi-year bull markets for stocks.  The following years (1983, 1934) saw stocks rise 28% and 18%, respectively.

This would be encouraging enough on its own but the closing of the year was even more significant in that it pushed the S&P 500 to break out of a three-year consolidation which is shown in the chart below (thank you Ciovacco Capital). This suggests that the continuation of the recent upward trend is likely.

These are encouraging signals on a technical basis, but are made even more positive based on some of the key macroeconomic data that has been pouring in ahead of expectations.  See below for a series of charts including the JP Morgan Global Manufacturing Index, Citi Economic Surprise Index, Corporate Profits and High Yield Credit Spreads, all of which are confirming the recent moves in the markets.  We have heard numerous times over the last few weeks that the post-election “Trump Rally” has been fuelled by irrational expectations and has well overshot fundamentals, but we disagree and question what “fundamentals” the skeptics are looking at.  We see the strongest global growth in three years, coupled with all-time highs in consumer and business confidence.  Worries about China and Europe were a huge drag on markets at this time last year and now both are driving regional growth.  In our view, all the passing of the election did for investors was remove a major blinder to the strength in broad macroeconomic data which had been improving since July.  In other words, Trump (in true Trump fashion) is taking credit for market moves which would have mostly occurred under either election outcome.

Global Manufacturing PMI at levels not seen since March 2014.

US Citi Economic Surprise Index at levels not seen since 2013.

Corporate Profits have rebounded back into positive territory with momentum to the upside given an easy comparable from last year.

High Yield Credit Spreads well below average after spiking higher in February of 2016.  Lower spreads mean easier financing and less financial stress.

How 2016 played out in the Canadian Equity Markets

Maybe you are thinking, OK great, but what about the Canadian stock market?  Well, it wasn’t a wildly different story in Canada as the TSX has rebounded enormously since February.  As you can see from the table below the resurgence in Materials, Energy and Financial stocks powered the TSX to its biggest gain since 2009.  For Materials, it was all gold in the first half before base metals took the lead on the back of improving global economic data and the return of a heartbeat to inflation indicators.  As readers know, the vast majority of our Fund is invested in the non-commodity / resource / extraction sectors as the future cash flows of these companies just isn’t something that can be predictably forecasted. While this natural sector tilt benefited us in 2015, it unfortunately also meant that we weren’t invited to the rebound party in 2016. 

2015 2016 2 Year Annualized
ACE Fund 12.7% 5.9% 9.3%
S&P/TSX Composite Total Return -8.3% 21.1% 5.4%


Materials -21.0% 41.2% 5.6%
       Precious Metals -23.4% 20.3% -4.0%
       Base Metals -34.5% 54.4% 0.6%
Energy -22.9% 35.5% 2.2%
Financials -1.7% 24.1% 10.4%
Telecom 3.6% 14.7% 9.0%
Utilities -3.5% 17.7% 6.6%
Consumer Discretionary -1.5% 10.7% 4.4%
Consumer Staples 12.4% 7.5% 9.9%
Industrials -11.1% 22.8% 4.5%
Technology 15.6% 5.2% 10.3%
Health Care -15.6% -78.4% -57.4%

Current Positioning & Outlook

As we look out to 2017 we see reason for optimism, especially if you consider the positive impact that Canada will feel as a result of the positive global economic data we are seeing (see charts above) and the resulting bounce in commodities.  In addition, we believe that the longer a trade goes one way the longer the reversing trend takes from trough to peak which bodes well for us as Canadian Equity managers given that North American Investors were well suited avoiding Canada at the index level and investing in the US for the past three years.  It was one of the worst relative performance periods in the last 30+ years between Canada and the US.   We have just started to see the reversal of this trade now and we believe it is not simply a 6-month event. So despite remaining modestly underweight in the Energy and Materials sectors we do hold positions with sufficient torque to participate in such future TSX upside without assuming excessive risk for our investors.

Further confirming this is our market risk model which looks at trends in volatility, credit and equities.  This model has been flashing green since November and we have correspondingly increased our net exposure to stocks.  Supporting our positioning are various recession probability indicators we monitor – Scotiabank’s for instance currently sits at 6% (virtually non-existent), having been cut in half from higher levels early last year.

From a sector and stock specific standpoint we continue to add exposure to stocks with leverage to an economic recovery – financials, materials and industrials.  We have funded this trade by exiting a few of the core positions that you may have become familiar with over the past few years.  The companies that we’ve sold have been research-driven calls, where softening fundamentals were confirmed by both management meetings and our ACE Fund quantitative model.  As a result of the new positioning mentioned above we are off to a strong start to 2017 and will continue to keep investors current on our activities as the year progresses.

The Aventine Stable Income Fund

While the ACE Fund has been at the forefront of Aventine from a marketing perspective, we are very excited to let our readers know that we officially launched the Aventine Stable Income Fund in early January.  This is a multi-strategy income fund that offers fixed income exposure to bonds and preferred shares, generates enhanced yield from a covered-call dividend equity strategy and provides exposure to diversified income sources such as convertibles, closed end funds and equity linked notes.  We think that big changes are underway for income investors and the passive strategies which worked so well in the falling rate regime will disappoint in the future.  This is far less complicated than it might sound at first – we are simply taking a slightly different approach to generating income, one that focuses on assets classes which perform well an inflationary environment and strategies that offer high income predictability.  The Fund’s objectives include annualized net returns of between 7% and 10%, annual portfolio yield of between 3% and 6%, and low to medium volatility risk.  This Fund will pay out 5% per year monthly.

Stable Income is an excellent complement to the ACE Fund with virtually no overlap in holdings.  There is a significant lack of nimble income investors in Canada and we look forward to uncovering the many opportunities this market will afford us as we meet our clients’ financial goals for stable income.  If you are interested in rounding out your portfolio with the Aventine Stable Income Fund, please give any of us a call anytime, we would be happy to walk you through the strategy and structure of our new Fund.

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 in various jurisdictions across Canada, please contact Aventine Management Group Inc to discuss if you may be eligible to invest.  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 the ACE Fund is the performance of the target series of F Class units. 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 © 2017 AVENTINE MANAGEMENT GROUP INC., All rights reserved.

Our mailing address is:
#3400, 2 Bloor Street West, Toronto, Ontario M4W3E2

unsubscribe from this list    update subscription preferences