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AVENTINE CANADIAN EQUITY FUND
MONTHLY MANAGER UPDATE
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The ACE Fund gained 1.8% in December on strong performance in several of the Technology and Industrial companies we own. The top positive contributions came from AirBoss (BOS-T, 5.3% weight) which rose 18% in December, and Sandvine (SVC-T, 5.2% weight) which was up 14%.
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PERFORMANCE
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MONTH |
SINCE 3/31/14* |
ACE Fund (Class F) |
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1.8% |
6.3% |
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December Highlights:
- The Month in Review
- Our “Active Value” Investment Process
- Portfolio Characteristics
- Outlook
December: The Month in Review
First of all, we wish all of our readers a very Happy New Year! We hope your holidays were filled with cheer and cherished family time. And perhaps less volatility than the TSX!
There is only one word to describe the Canadian markets in 2014 and that is: volatile. As managers of a fund with clear objectives to limit downside and reduce volatility, we use these types of markets as an opportunity to demonstrate our disciplined process in action. December stayed true to the volatility story right until the last trading day of the year. In December, the Fund posted a +1.8% return after all fees, compared to the S&P/TSX Composite Total Return (“TSX”) monthly return of -0.4%. Since inception on March 31, 2014, the Fund posted a +6.3% return after all fees, compared to the TSX return over that period of +4.2%.
Our insurance policies limited losses in the first half of month as markets broadly corrected, and we took advantage of these lower prices to add to our highest quality ideas. This additional exposure meant that the fund was fully invested as stocks recovered into year end and our participation in the rally helped generate the month’s positive result.
Also contributing to the Fund’s strong alpha for the month was AirBoss of America, an industrial products company which surged 18%. Positive sentiment was driven by several reports suggesting that a recent change in senior management should lead to additional acquisitions during 2015. Airboss Chairman Gren Schroch (who is also the firm’s largest shareholder, owning roughly 25% of outstanding stock) has proven himself quite adept at acquiring undervalued assets and we are very interested to see how the coming year unfolds for this company. Sandvine, which we have previously written about, surged 14% as the company announced further significant contract wins in December.
Our Investment Process: “Active Value”
During times of volatility and stress it is important that investors stick with a well-defined investment process. This process should be rigorous, repeatable, suit your risk tolerance and most importantly be followed (this last quality speaks to the discipline of investing).
When evaluating investment ideas, our Active Value Process relies on three unique research pillars, each of which has been instrumental in generating our positive net returns since inception. Individually, each research discipline has its shortcomings but they combine into a robust strategy that we leverage to take advantage of inefficiencies in the Canadian market:
- Quantitative Research allows us to evaluate and rank a large universe of potential investment candidates based on objective criteria which we believe indicate attractive valuation, market support and improving operating performance. Our goal with this stage of the research process is to identify companies undergoing positive changes, at the early stages of their valuation expansion, and highlight them as candidates for further fundamental research.
- Our approach to Fundamental Research is to analyze a company like we are acquiring the entire enterprise, not just a minority share block. We want to find companies that possess strategic positioning within their industry, credible management teams and are operating in industries with attractive dynamics – not just ones that look great “on paper”. Of particular interest to us are catalyst-rich stories, those companies with defined, near term value-unlocking events that we expect to generate material gains for shareholders regardless of the market’s overall direction.
- Risk Management strategies help dampen the fund’s volatility and preserve capital in falling markets. By incorporating portfolio insurance policies, such as options, into our investment process we are able to provide a buffer against large losses for a relatively small up front cost. We believe that capital preservation is key to long term outperformance and therefore this third pillar is a key element to our process – one that has been extremely helpful over the past number of months given the market volatility.
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Enghouse Systems (ESL-T) |
5.5% |
Linamar (LNR-T) |
5.4% |
AirBoss of America (BOS-T) |
5.3% |
New Flyer Industries (NFI-T) |
5.3% |
Easyhome (EH-T) |
5.2% |
Sandvine (SVC-T) |
5.2% |
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METRICS OF AVERAGE COMPANY
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Market Capitalization ($B) |
$7.4B |
Expected EPS Growth |
12% |
Forward Price-to-Earnings |
14x |
Dividend Yield |
1.5% |
Return on Equity |
10% |
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In year one of managing the ACE Fund, our process helped us to discover underfollowed and exciting names like Clearwater Seafood (CLR-T, +29%), Enghouse Systems (ESL-T, +24%) and AirBoss (BOS-T, +39%). It has provided us the discipline to stay underweight struggling sectors like Energy and Materials while participating in areas of market leadership like Technology, Health Care and Consumer Discretionary. We were not immune to the volatility caused in 2014 by geopolitical conflicts and macroeconomic imbalances but we stuck to our process, which helped us to make mostly good decisions at critical times.
While we are cautious on the market in 2015, we do see a number of company-specific opportunities that are expected to create value for our investors and we look forward to updating you along the way. In the meantime, our day to day objectives will remain simple:
- Execute our Active Value investment process with tenacity and discipline;
- Generate consistently positive absolute returns with a focus on capital preservation; and
- Capture upside within the Canadian Equity market.
Investors who are familiar with us know that we have substantially all of our investment capital invested in the ACE Fund and 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 endeavors and encourage new investors to allow us the opportunity to manage some of their savings alongside our own.
Best wishes for a happy, healthy and prosperous 2015.
Sincerely,
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