ACE Fund: Manager Letter April 2015

April 30, 2015



April 30, 2015
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Aventine Canadian Equity Fund

Monthly Fund Manager Update – April 2015

Executive Summary


The ACE Fund was down -0.8% in April as losses in the Financial and Materials sectors offset strong performance in Technology and Industrials. Since inception, the Fund has outperformed the S&P/TSX Composite Index including dividends (“TSX”) by 3.5% on an annualized basis, returning 12.3% compared to 8.8%. Annualized volatility of 7.2% compares favourably to the TSX at 8.3%. For April, our top positive contributions came from Sandvine (SVC-T, 4.5% weight) which was up 15% and Badger Daylighting (BAD-T, 4.5% weight) which was up 11%.

Fund Documents

Purchase Documents

Performance Overview

Net Asset Value per Unit

AMG250 (A) AMG350 (F) AMG450 (I)
Aventine Canadian Equity Fund $112.42 $113.34 $116.71

Current Year Performance

1 Month 3 Months Year to Date
Aventine Canadian Equity – Class F -0.8% +7.2% +6.6%


Historical Performance

1 Year 3 Years* Inception*
Aventine Canadian Equity – Class F +11.5% n/a +12.3%
* Performance for periods >1 year are annualized.

Top Holdings

Easyhome (EH-T) 6.1%
Sandvine (SVC-T) 4.5%
Badger Daylighting (BAD-T) 4.5%
Interfor (IFP-T) 4.5%
Concordia Healthcare (CXR-T) 4.4%

Metrics of Average Company

Market Capitalization ($B) $6.7B
Expected EPS Growth 21%
Forward Price-to-Earnings 14.2x
Dividend Yield 1.1%
Return on Equity 13%

Fund Commentary

  • After several months of strong returns the ACE Fund declined 0.8% in April as some of our key holdings consolidated their recent gains.
  • The Fund’s performance is currently ranked in the top decile of Canadian Equity funds over each of the 3-month, 6-month and 1-year time periods by Morningstar.

A Resource Bounce Drove the Canadian Market in April

April saw a bit of a buying panic in many resource names as industrial commodity prices began to stabilize and the price of oil traded higher on speculation of rising demand and falling supply later this year.  The resource sectors – Energy and Materials – collectively account for roughly 35% of equity market capitalization in Canada and the share price gains in this corner of the market powered the TSX Total Return Index to a 2.4% rise in April.   We have been underweight resource names for some time now and despite the recent surge in prices we aren’t convinced that much value exists in the sector outside of forestry and a few catalyst-oriented opportunities.

As the below charts show, the commodity prices which ultimately drive earnings for most resource companies remain broken, for lack of a better word, although there are signs that a bottoming process may be under way.  The fundamental view we hold is that commodity prices will broadly settle into new, lower trading ranges, and we’d like to get a better handle on what cash flow and earnings look like in this sector before committing new capital.  Recent price moves may represent significant percentage gains off of the “lows” but we would highlight that investors who held through the crash have actually recovered less than one-quarter of their losses from the highs last year.  Avoiding large losses in the first place gives you a great advantage – you aren’t forced into taking excess risk to get back to even.

Wealth Maximizing Portfolio Management

The core objective of our investment process is to identify under valued and under followed Canadian companies that are exhibiting sustainable operating improvements and increasing market support.  Many value managers have a process focused on mean reversion; they buy beaten up stocks as they fall, hoping to catch a bottom on the belief that prices (or valuations) will tend to mean-revert to some average level over time.  Our process, while still value-oriented, is more trend-follower than mean-reversionist in nature.  Yes, we love finding cheap and well run companies, but instead of trying to call bottoms by stock or sector we wait for clear fundamental evidence that a previously unloved company has turned the corner operationally.

This requirement may prevent us from capturing the full multiple expansion a company experiences during its recovery, but it also keeps us away from “value traps” or stocks that look undervalued but continue to get cheaper.  While capital has begun to flow back into the above mentioned resource sectors based on early signs of improving fundamentals, we are not ready to call this trend sustainable and view the near term risk-reward as skewed to the downside.  That fact notwithstanding, we think we own some fantastic companies in the Technology, Consumer Discretionary and Industrial sectors, each of which are exceptionally well run and organically growing at a superior pace.  We don’t see the need to sell companies with relatively low business execution and valuation risks just to add some commodity volatility to the portfolio.

The investment team here talks a lot about what we call “wealth maximizing behaviour.”  In essence this concept involves doing more of what adds to the wealth of our investors and less of what takes away from it.  Theoretically this couldn’t be simpler, but investors both professional and amateur often botch it in execution.  Humans have the biological tendency to want to buy what goes down and sell what goes up, when often they should be doing exactly the opposite.  Investors who sell their winners to rebalance capital into losing stocks or sectors as they fall actually reduce their ability to outperform over time because their biggest positions are often their worst performing.   We take the approach of rewarding investments that increase in value with additional capital and expect, over time, our largest positions to generally be our best performing.

Last month we wrote about a number of catalysts that were realized by portfolio companies in Q1 and while these all contributed to our performance during that time period, many of them consolidated in April, hurting our return.  Many of these catalysts were transformational in nature and had a substantive positive impact on our investment theses.  We see an opportunity for superior return on capital in each of these companies and have been buyers of the below names through April, on balance.

April Performance YTD Performance
Concordia Healthcare (CXR-T) -1% 81%
Springleaf Holdings (LEAF-US) -8% 44%
FirstService (FSV-T) -4% 33%
Tricon Capital (TCN-T) -2% 16%


We have been analyzing a number of new names for the portfolio in the past month and have found some great businesses, management teams and exciting growth prospects, but are finding it increasingly difficult to swallow the valuations that the market is placing on these businesses.  We are quite alright with having a number of names on the backburner as we are quite excited about the prospects of our current holdings, especially as earnings season here in Canada unfolds.

While valuation levels have risen for a number of companies in our cross hairs (and for the broad market in general) we would draw attention to the 12-month Forward Price-Earnings ratio for the Fund which sits at just over 14x on an equal weighted basis versus the TSX at over 17x.   Lower is better of course, but we are also projecting greater than 20% earnings growth in our portfolio companies over the coming year versus the TSX at roughly flat.  It seems that we have a lot to be excited about after all.

In closing, we don’t believe that energy or metals prices are poised to run significantly higher over the medium term, but expect continued growth in other areas of the economy and markets.   The focus of the ACE Fund remains on owning a portfolio of great companies with superior earnings potential over the next twelve months, yet are still cheap and under followed.  Thanks as always for your continued support and we invite those readers interested in investing some of their capital alongside the Aventine partners in the ACE Fund to get in touch and set up a meeting.

Performance Chart

Since Inception: March 31, 2014
The BTH Fund Portfolio Strategy Corporate News
Our growth oriented North American equity fund, investing in companies with strong momentum in earnings and revenue growth, positive management guidance trends, and superior share price performance. Periodic investment strategy insight from our Chief Investment Officer. Focuses on the big picture global economy, asset allocation, and risk management strategies to preserve capital in volatile markets. While we mostly distribute our thoughts on the financial markets, sometimes our activities at the firm level are important enough to share with our clients, friends, colleagues and other stakeholders.

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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