Highlights:
- February was the ACE Fund’s best month since inception.
- The value of “Catalysts” and where to look for them.
- Our cautious macro view doesn’t outweigh the positive outlook on our holdings.
February: The Month in Review
February was a very strong month for the ACE Fund. We finished the month up 5.0% compared to the S&P/TSX Composite Index total return of 4.0%. We are particularly pleased with this performance considering it was generated with only about 80% of our capital at work in the market. We carried an average cash weighting of 15% during the month and had an additional 5% deployed in hedges and short positions.
The Fund’s gains in February were broad based and we had large contributions from several major sectors. Interestingly, many of our biggest “wins” this month were driven by material, fundamental shifts in the businesses we own. While some of these developments occurred as we had been expecting, others came as a pleasant surprise. In all cases however, these events created a new baseline valuation for the portfolio company and with it, a significant increase in our target valuation.
Catalyst Investing
If you have been following our commentaries for some time you know that we are keen on investing in companies which have a high probability of realizing some sort of “catalyst” that will drive an increase in business value. A catalyst can be a large, positive earnings surprise, an announcement of a major new client or contract, a change in senior management, an acquisition, a divestiture, a merger, a takeover, or some other event that increases business value in a meaningful way. Over the years we have had great success with catalyst investing and February happened to be a month where we saw several play out in our favour.
Below we highlight why we believe that our investment style and research process give us an edge when it comes to catalyst investing:
- Investment Style: Undervalued, mid-sized companies with good management and improving operational performance often tend to become acquisition targets. Additionally the distinguishing non-financial qualities that we look for in a company (dominant market position, diversified customer base, barriers to entry, and so forth) are also extremely attractive to private equity funds and strategic buyers.
- Research Process: The cornerstone of our research process is simply to listen to the management teams of companies we own (or may soon own) and build a really solid understanding of their business and their business plans. We have found over the years that when management teams are consistently vocal about executing a major, value-creating transaction they generally follow through.
A few of the catalysts that were realized in February are listed below:
- Bellatrix (BXE-T, +41% in Feb) – Highly respected deep value hedge fund manager Seth Klarman of Baupost Group announced a 12% stake in this midcap Canadian energy name.
- Easyhome (EH-T, +20% in Feb) – Reported a +30% earnings surprise on most recent quarter after selling off over 25% due to the market misunderstanding their growth prospects.
- Springleaf Holdings (LEAF-US, +20% in Feb) – Won a competitive bidding process to acquire their major competitor, OneMain (a division of Citigroup), for $4.25 billion in a very accretive deal. We believe it will double Springleaf’s earnings over the next 2 to 3 years. Springleaf is up a further 30% so far in March after formally announcing the acquisition.
- FirstService (FSV-T, +13% in Feb) – Unlocked value for shareholders through a tax free split of the company into its two core businesses (Colliers & FirstService). They also announced accelerated growth plans for each business and increased guidance.
- Sandvine (SVC-T, +9% in Feb) – A significant overhang was removed for this business as information about the FCC’s decision on net neutrality was made public. Our thesis has always been that these rules will have a minimal effect on Sandvine’s revenue and growth prospects.
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