Manager Letter

ACE Fund: Manager Letter February 2015

February 28, 2015

 

 

28 FEBRUARY 2015
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AVENTINE CANADIAN EQUITY FUND

MONTHLY MANAGER UPDATE

EXECUTIVE  SUMMARY
The ACE Fund was up 5% in February with strong performance in the Technology and Consumer Discretionary sectors.  The top positive contributions came from Easyhome (EH-T, 5.6% weight) which rose 20% and Springleaf Holdings (LEAF-US, 3.8% weight) which was also up 20%.

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PERFORMANCE

 MONTH SINCE 3/31/14*
ACE Fund  (Class F) 5.0% 11.0%

NAV  PER  UNIT
AMG300 (Class F) $111.04

FUND  COMMENTARY

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.

TOP FUND HOLDINGS
Easyhome (EH-T) 5.6%
FirstService (FSV-T) 5.1%
Sandvine (SVC-T) 4.7%
Enghouse (ESL-T) 4.7%
New Flyer Industries (NFI-T) 4.6%
Airboss (BOS-T) 4.6%

METRICS OF AVERAGE COMPANY
Market Capitalization ($B) $7.5B
Expected EPS Growth 10%
Forward Price-to-Earnings 13.9x
Dividend Yield 1.1%
Return on Equity 10%

FUND OUTLOOK
Despite market volatility waning in the latter half of the month we chose to maintain a relatively defensive stance in the portfolio.  We continue to see macro risks on the horizon with respect to the price of oil, the eventual increase in interest rates in the US, and subpar growth in most of the world.  As mentioned above, we are currently holding 15% cash and an additional 5% in short/hedge positions.  In addition we continue to build and roll forward our portfolio insurance (put options) to absorb some volatility if it occurs.

While performance was boosted by several positive catalysts in February, we remain thrilled with the portfolio of great companies that we own at current valuations.  Looking out into the coming years we are confident that the Fund will benefit from many more such corporate actions and we are excited to share the news with you as it occurs.  As we said above, when you are buying undervalued businesses that are changing fundamentally for the better, either organically or via acquisition, good things tend to happen.

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.

                     Sincerely,

ACE FUND VS. BENCHMARKS – CUMULATIVE RETURNS
*The  Fund’s “Peer Index “ is the Scotiabank Canadian Equity Hedge Index (Equally Weighted).  Most recent monthly performance of this index is not always available at the time of publishing.
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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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