ACE Fund: Manager Letter January 2015

January 31, 2015



31 JANUARY 2015
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The ACE Fund was down -0.5% in January as weak performance in the Industrial and Discretionary sectors offset gains in Staples and Health Care. The top positive contributions came from Concordia Health (CXR-T, 4.7% weight) which rose 18% and Clearwater Seafood (CLR-T, 4.8% weight) which was also up 18%.



MONTH SINCE 3/31/14*
ACE Fund  (Class F) -0.5% 5.8%


AMG300 (Class F) $105.76



  • The Month in Review
  • Trend-Following Investing
  • Outlook 

January: The Month in Review

The past few months have given Canadian investors plenty to think about, and January was no exception.  Similar to what we saw in November and December, the broad Canadian market ended January fairly close to where it began.  However this simple observation ignores the fact that there has been a tremendous amount of intra-month volatility.  An investor simply looking at their monthly returns could be excused for thinking that the past few months have been relatively unexciting, in so far as the S&P/TSX Composite Index (“TSX”) has been approximately flat each of the past 3 months.  In reality however, the market’s daily volatility has risen to levels not seen since the beginning of the European debt crisis in summer 2011.

The average monthly “range” (highest price less lowest price) of the TSX during this time frame has been 1,080 points or 7.2%.  This sharp jump in volatility is illustrated by the below charts.

We attribute this rising stock market volatility to acute concerns about the path of global growth as well as the consequence of increased volatility in other asset classes like interest rates, commodities and currencies.  Certainly we are all aware by now of the impact that crashing oil prices have had on Canadian equities, but significant moves in other assets considered to be relatively stable have also weighed heavy on investors’ minds.   After a period of prolonged stability, the very sharp, very short lived equity market corrections we have seen over the past few months seem to indicate that investor confidence is on the wane.  Investors, feeling less incentive to commit new money at market highs have also been quick to sell at the first sign of trouble.  For now, we believe that prices are being driven more by sentiment and momentum than fundamentals.

In the face of this volatility, our performance over the past six months has been solid. Despite the Fund’s unit price falling 0.5% in January, the ACE Fund has still gained 0.6% over the past six months, a period during which the broad Canadian market has lost 2.9% (including dividends).

Trend-Following Investing

In last month’s Commentary, we described our investment style as “Active Value” and characterized its three pillars as Quantitative Research, Fundamental Research and Risk Management. One of the important aspects of our Quantitative Research is to identify companies which not only have attractive valuations but also have both improving operating performance and market support.  While “market support” encompasses both analyst sentiment and technical analysis (such as tracking a company’s trading volume), at its core you could say that market support generally means we look to own companies that the market is rewarding by moving the price higher.

It is interesting to consider the market support characteristic in the context of the current environment where the prices of energy and other commodity-related companies continue to test for new lows.  We actually credit this part of our investment style for helping us to avoid losses towards the end of 2014 and expect this to be a key driver of downside protection for investors going forward.  By requiring companies to possess a quantum of “market support”, we are attempting to eliminate one of the most challenging behavioural biases – the desire to catch a falling knife.  What this means is that we are not tempted to risk capital in beaten up sectors or stocks until they shows sustained signs of coming back to life.  Conversely, on the sell side we are also overlaying a crucial element of discipline with respect to how and when we exit positions.  Not only did “market support” help us sidestep a large part of the energy decline, it allowed us to participate in the stocks which benefit from such an environment.

The charts below illustrate this process in action.  On the left is Trilogy Energy (TET-T) a company we owned for a time last year before selling it on deteriorating market support.  On the right is Airboss of America (BOS-T), an industrial company that replaced Trilogy in the Fund. Airboss, a rubber compounding company with strong global end markets, benefits from lower oil prices and a depreciating Canadian dollar.

The range of analytical techniques and investment strategies available to investors is vast and our individual preferences, with respect to how we pursue capital growth over time, is what makes a market.  In this, and prior, letters we have sought to outline how we believe our “Active Value” approach benefits from discipline, structure and a unique process of catalyst-driven value investing, improving market support and dynamic risk management.   While each of these individually represent important elements of our investment process, it is their functional coherence that gives us an edge.


Firstservice (FSV-T) 5.0%
New Flyer Industries (NFI-T) 5.0%
Easyhome (EH-T) 4.8%
Sandvine (SVC-T) 4.8%
Clearwater Seafood (CLR-T) 4.8%
Airboss (BOS-T) 4.8%


Market Capitalization ($B) $7.5B
Expected EPS Growth 10%
Forward Price-to-Earnings 14x
Dividend Yield 1.3%
Return on Equity 12%


Without question, the Canadian stock market has been battering investors with major levels of volatility for several months now.  We wish that we could provide comfort and tell investors that an end is in sight, but with overhanging economic concerns, fickle investor sentiment and commodity price instability, our expectation is for the bumpy road to continue a little while longer.  That said, we like how the Fund is presently positioned.  As of early February we are holding 15% cash and have downside protection on another 30% of the portfolio through options.   About 75% of our capital is invested in the Canadian stock market right now, and the primary theme across the portfolio is our focus on companies with upside leverage to lower energy prices and a weak Canadian dollar.

It should hopefully be clear by now that we are more concerned with investing in growing, well run and mostly overlooked businesses that possess clear value-unlocking catalysts.  We have no delusions that we can call the bottom in oil or the dollar (nor are we trying to).  However we find it both ironic and fortuitous that many of the companies on our watch list have been dragged down by market-wide factors which actually improve the earnings power of their core businesses!  Understanding this, we don’t automatically view continued volatility as a bad thing.  We have ample dry powder, and an opportunity to finally begin building positions in a number of companies that we have been watching for years that have rarely been cheaper relative to their future earnings potential.

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.



*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.

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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