ACE Fund: January 2017 Manager Letter

February 17, 2017


17 February 2017

Executive Summary


The Aventine Canadian Equity Fund (“ACE Fund”) had a strong start to the year, finishing the month of January up 2.0%

We expect a relatively rich catalyst calendar in 2017, as management teams in our portfolio companies start to execute on corporate activity such as mergers and acquisitions.

Just a reminder that the upcoming RSP contribution deadline is March 1, 2017.  In addition, the TFSA contribution limit for 2016 is $5,500, with total lifetime contribution room of $46,500.  The ACE Fund is eligible for all registered accounts (RRSP, RESP, TFSA, etc.), please contact us if you need any assistance.

Fund Information

Purchase Documents

Performance Overview

Current Performance

1 Month 6 Months Year to Date
Aventine Canadian Equity – Class F +2.0% +5.7% +2.0%


Historical Performance

1 Year 2 Years* Inception*
Aventine Canadian Equity – Class F +16.1% +10.6% +9.6%
* Performance for periods >1 year are annualized.

Metrics of Average Company

Market Capitalization ($B) $14B
Expected EPS Growth 29.5%
Forward Price-to-Earnings 13.3x
Dividend Yield 1.8%
Return on Equity 12.2%

Performance Statistics

Annualized Standard Deviation 11.5%
Annualized Alpha vs TSX 5.9%
Beta vs TSX 0.7
Correlation vs TSX 0.5
Sharpe Ratio 0.8

Cumulative Return

ACE Fund vs Benchmarks                                                               Fund Inception: March 31, 2014

Fund Commentary

January was a successful month for the ACE Fund with our unit price rising 2.0%, outpacing the broad market by 1.2% and our Canadian Equity peer group by 1.9%. We had a number of portfolio companies report during the month and as a result saw several of these holdings gain better than 10%. As we frequently note, the concentrated nature of our holdings means that the Fund will often trade differently from the market and investors shouldn’t over-emphasize the Fund’s results in any one month.  Instead we suggest focusing on the demonstrated ability of our investment approach to add value over longer periods of time, which continues to be very strong on both an absolute and a risk-adjusted basis.

Protecting Our Book

As the ACE Fund has grown in size we have found that it now takes longer to establish “full” weights of around 5%, especially in companies at the lower end of our investible market cap range ($100 million to $200 million).   Recognizing that a 5% weight in these smaller companies can often represent between 1% and 2% of the true “market float” (the freely trading stock not owned by strategic or institutional investors), we have thoughtfully come to the conclusion that it is no longer in the best interest of our unitholders to publish the Fund’s full list of holdings.  We have discontinued providing this information to databases such as Morningstar, Globefund and eVestment, and will likely be somewhat less promotional (ex-ante) about our investment thesis on some of the smaller companies we hold.

This is not to suggest that we intend for ACE to become a “black box” to either our current or prospective investors and we will happily discuss our positions and rationale once these investments have been concluded.  Additionally, we will continue to post the Fund’s semi-annual and (audited) annual financial statements with a full “Schedule of Investment Portfolio”.  We will also continue to make available to all current investors a full list of our Fund’s positions upon request.  As both the managers and as large unitholders of the ACE Fund, we strongly believe that part of our ability to generate superior investment results is related to our agility in being able to move into and out of positions (even our smallest ones) without friction. This is an asset to all unitholders and an advantage which we wish to protect.

An End to Our Catalyst Drought

It feels like we have been through a bit of a “catalyst drought” this past year.  While our holdings have been performing well from an operational standpoint we haven’t seen our management teams execute on very much “corporate” activity.  Our style generally does well in an environment where activities such as mergers, acquisitions, spin outs and other transformative transactions are on the rise.  We are happy to report that in early February this drought ended as RDM Corporation (RC – TSX) signed a definitive agreement to be acquired by Deluxe Corporation  (DLX-US) at a 14% premium.  While the premium was not as robust as we would have liked, we do recognize that RDM stock has been on a nice run lately (up 17% over the 90 days prior to the deal announcement).  We also recognize that a large part of RDM’s business is slowly declining due to the slowdown in demand for physical cheques.  RDM sells hardware and software for managing payments including scanning and electronically depositing cheques.  For those of you not familiar with the story, Deluxe is a large player in this space and will be able to cross-sell RDM customers many more products and create much more value with their scale.  We expect that after a relatively weak catalyst calendar in 2016 we should benefit from a recovery in corporate activity trends by Canadian mid-cap cyclicals, the Fund’s area of highest concentration.


If you have been following our commentaries over the past six months you will know that we have been constructive on the market and have been positioning the ACE Fund accordingly.  While there has certainly been enough political noise to cause your head to spin we have simply focused on the hard economic data, financial conditions and the markets technical indicators.  Our baseline view on the stock market is that we expect stocks to be higher at the end of the year than they are today, but that between then and now there will be periods of heightened volatility.

We currently consider the market to be extremely overbought from a technical standpoint at the same time as bullish investor sentiment is well into the 90th percentile and breadth is narrowing (the market is being propped up by fewer and fewer stocks each week).  This is dangerous territory for a value investor in the short term and so more of our research focus recently has been on finding great short positions to add to the portfolio.  We are looking at several fundamentally broken businesses which have benefitted from the general market surge since November and are trading at “nosebleed” valuations.  We also scaled into a long gold hedge in late January via call options on GLD, the US Exchange Traded Fund linked to the price of gold.  The political turbulence in Washington and Europe hasn’t yet had a market impact, but realistically we are only one tweet away from a major downside market catalyst and so we believe that owning some gold is wise during this period of heightened uncertainty.

As a reminder to all readers, the ACE Fund is available to for all registered accounts (RRSP, RESP, TFSA’s), so if you are considering a contribution this year and are looking to add exposure to some great catalyst rich Canadian companies, we would love to hear from you.

Best as always,

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.

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