ACE Fund: Manager Letter August 2014

August 31, 2014



31 AUGUST 2014
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The ACE Fund returned +1.2% in August with gains concentrated in the Energy and Technology sectors.  Our largest contributions came from Essential Energy Services (ESN-T, 4.0% weight) and Green Plains Renewable Energy (GPRE-US, 2.5% weight) with each rising 19% during the month.



MONTH SINCE 3/31/14*
ACE Fund  (Class F) 1.2% 6.4%


AMG300 (Class F) $106.42


The ACE Fund unit price rose 1.2% in August, bringing the total return since inception on March 31st, 2014 to 6.4% after all fees.  This is consistent with our stated objective of delivering positive absolute returns with low volatility.

August was an exciting month for us, as there were several material events within the portfolio.  Specifically, we had the positive rebound of Essential Energy Services (ESN-T,, a company that was highlighted last month as having fallen to an excessively deep discount versus our estimate of value.  Apparently the market agreed with our assessment and the stock gained 19.2% during the month.  The Fund also benefited from our newest US position, Green Plains Renewable Energy (GPRE-US,, a producer of ethanol and biofuels that gained 18.6% on the month.  These gains were offset by Canam Group (CAM-T,, which lost 14.5% in August after a quarterly earnings report that disappointed the market.

Recall that when shares of Essential Energy swiftly dropped 17% in July we were happy buyers of the stock and we view the current correction in Canam shares as an equally attractive opportunity to add to our position.  With this pullback, Canam is trading at a significant discount to both its own historical valuation as well as its peers. In fact, we find the value in Canam shares so compelling that it has become the Fund’s largest position (5.3% weight).

We believe that Canam has a very visible runway for growth and is in an excellent competitive position within their steel joist and bridge building business.  We believe that the current share price represents an excellent entry point for this solid Canadian company given the current strength in non-residential construction (as per the Architecture Billing Index; below, left) and the tremendous growth in Canam’s backlog over the past 2 quarters (below, right).

Our analysis suggests that the composition of the company’s shareholder base is presently undergoing a substantial shift.  Short term investors have headed for the exits, creating opportunity for long term holders like the ACE Fund who are focusing on the company’s future cash flow generation. The trigger for this flight of investors has been the company’s failure to meet earnings expectations during the last two quarters.  We recognize the potential for some short term pressures (i.e. hiring new people to tackle the backlog) but these are directly related to the company’s record high pipeline. Owning a piece of Canam today allows us to participate in the growth of this company’s cash flows, which we believe will increase significantly over the next couple of years.  Additionally, we expect the market to increase the multiple at which it values Canam as the company grows in scale, scope and capabilities.  To give you a sense of the projects Canam is currently winning, it was recently awarded contracts to provide steel components for the replacement of both the Tappen Zee and Goethals bridges in greater New York City.  These are long (>4 years), high profile projects that were awarded at a time when the company’s backlog was already at record highs.

An old adage about stocks suggests that “when groceries go on sale, people load up, but when stocks go on sale people run away”  This saying highlights a interesting element of investor psychology and one that provides valuable insight into our methodology.  Another way of looking at this type of behavior would be to ask yourself whether you prefer to invest “with the grain” or “against it.” The answer, for us at least, is “it depends”.

Investing With The Grain

Supply and demand plays an important role in the discovery process for stock prices.  We believe that improving operating performance, an interested and enthusiastic stock market following, and a positive technical outlook are all characteristics that increase demand for a company’s shares, thus encouraging their price to rise.  Most of the time when we make an investment it is because we have identified an undervalued company for which all of the above criteria apply.  So at our core, one could say that we are “with the grain” investors.

Investing Against The Grain

When a company’s share price declines sharply it can be for any number of reasons: a material deterioration in business fundamentals, a negative shift in sentiment, a big holder needing to liquidate, or some combination of these and other factors.  The most important thing for us in this situation is to determine if we were wrong in our original estimation of value, or if our original estimate should be negatively revised in light of new information.   Our desire to preserve capital is strong and in many instances our original thesis may miss the mark. If we believe this to be the case, then we will become sellers and look for better opportunities elsewhere with our capital. However there may be certain instances where we feel that we have a very deep understanding of a company’s business and assets, and are extremely confident that our estimation of its value is accurate.  It is at these times that we will energetically invest “against the grain”.

What determines whether we invest with the grain or against it in each case is where the company’s stock price is relative to our estimate of its value.  As value investors, we view companies as assets which possess an intrinsic worth or value that is derived from its ability to generate cash for its owner.  Successful value investing requires holding a strong conviction that our assessment of value is correct and concentrating our capital in those assets for which our conviction is highest.  This is how we viewed Essential Energy Services in July and how we view Canam Group presently.  These are just two of the non-consensus investment ideas which we believe will contribute superior, positive and uncorrelated returns to the Fund over a moderate holding period.

Our discipline is designed to help us find companies whose share prices represent the highly attractive investment opportunities over the next 6-12 months and then acquire shares so long as price is attractive compared to (a) our estimate of value and (b) other opportunities in our universe.  Our process allows us to build a deep fundamental understanding of portfolio companies and gives us the conviction to both invest with the grain as well as “stock up” if the products we like go “on sale”.


Canam Group (CAM-T)) 5.3%
FirstService (FSV-T) 4.5%
Enghouse Systems (ESL-T) 4.5%
Magellan Aerospace (MAL-T) 4.4%
Open Text (OTC-T) 4.4%
Sandvine (SVC-T) 4.2%


Market Capitalization ($B) $3.8
Expected EPS Growth 20%
Forward Price-to-Earnings 11.0x
Price-to-Cash Flow 9.0x
Dividend Yield 1.2%
Return on Equity 14%


The strong performance of the Canadian market recently has given us reason to remain somewhat cautious.  Our current cash weighting sits at 9% of Fund assets and our hedge positions (a combination of shorts and options) provides downside protection on an additional 19%.  With our remaining capital we continue to hold long positions in a broadly diversified set of attractively undervalued companies.  There has been a relentless shift towards large cap, non-cyclical yield stocks in Canada and we have been very reluctant to follow that trend due to high valuations.  This large-cap preference has come at the expense of some smaller market cap companies we own, companies that we expect to prosper greatly in the final months of 2014.   We think that the next couple of months will be very exciting for us as the companies in which we have built up positions report their third quarter results and the market has a chance to reconsider their stock valuations of these businesses.

If you have any questions or comments, please feel free to contact us at our personal emails or through  We hope that you will continue to follow us and consider allowing us to manage some of your own savings alongside our own.


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. A monthly investment strategy bulletin 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.

* Inception of the Aventine Canadian Equity Fund is 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 2014 Aventine Management Group. All Rights Reserved.

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