ACE Fund: Manager Letter July 2014

July 31, 2014



31 JULY 2014
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The ACE Fund posted a slightly negative return (-0.1%) during the month of July.  Our portfolio drifted slightly lower on very little news or volume.  The gains in July were driven by quarterly reports from some of our largest holdings (Open Text,  Easyhome and Firstservice), but were offset by weakness in energy.



ACE Fund  (Class A) -0.2% 4.9%
ACE Fund  (Class F) -0.1% 5.1%
TSX Total Return Index 1.4% 7.9%


AMG 200 (Class A) $104.88
AMG 300 (Class F) $105.13


Despite the ACE Fund’s unit price remaining relatively flat (-0.1%) in July, underneath the surface there was much more excitement.  The summer months can be very volatile and difficult to decipher given the lack of liquidity in the market, particularly for our small-mid cap positions.  We believe that it is often best to just hold steady on your long positions until you hear news that matters instead of selling because “someone must know something”.  We have been using the current round of quarterly reports as our guide and have had over 80% of our holdings reporting in the last three weeks.  August so far looks to be a very promising month as the operational results released by most of our positions have exceeded market forecasts.  Looking at the Canadian market overall we have been very encouraged with the results this quarter as earnings expectations have been exceeded by an average of 5.2% which represents earnings growth of 22% year over year.
With respect to our individual positions, we had very favorable quarterly reports and operational updates from both Easyhome (one of the stocks we have featured on our website as a “top pick”) and from Open Text which drove their stock prices up 19.0% and 18.4% on the month, respectfully. On the negative side, despite no news from the company and only positive news from the industry, we witnessed the shares of Essential Energy Services decline 17% in July. This was particularly frustrating as we remain very bullish on this company’s prospects over the next few years (we did take advantage of the decline to acquire a few more shares).  As of the date of this update and subsequent to the month end, Essential has now reported their second quarter results and the stock has since rallied over 16%.

We are always actively looking for new ideas and have recently added a new US name to the portfolio, an ethanol producer named Green Plains Inc., which we believe can take advantage of the current depression in corn prices (-16% in 2014) to generate extraordinary profits over the next few quarters.  They have also proven to be an excellent consolidator within this industry and we believe that it is likely they will use this period of high free cash flow to add capacity.  Just this morning they announced a 100% increase to their dividend and a large share buyback which is always welcome news.  Similar to our short position in Potash Corp, which we recently covered for an 8% gain, this investment is more “tactical” in nature as we watch to see how industry and regulatory events play out within the ethanol market in the US. For now though, it appears that all of the inputs are lining up perfectly for continued strength in the stock.

Also, for those so inclined we have produced the Fund’s first set of Financial Statements, for the semi-annual stub period ending June 30th, 2014. You may access these from the link in the “Downloads” section at the top right of this email.  The ACE Fund produces statements for unitholders twice a year, an unaudited set of semi-annual statements at June 30th and an audited (KPMG) set of annual statements as at December 31st.


We remain somewhat defensive in our positioning of the overall portfolio with a current cash weight of 10% and the long term treasuries call option (outlined last month) still in place.  Recall that this is designed to benefit from the flight to safety capital flows (and accompanying monetary policy response) that would transpire during a significant sell off in global equity prices. We believe that the North American markets should advance further this year given the strong round of earnings out of the US and Canada, but we continue to remain cautious given the various geopolitical events that are unfolding globally and whose outcomes are almost impossible to predict.  We expect to add alpha over time through superior, fundamentals-driven security selection and prudent risk management, and remain confident that our portfolio companies have solid market positions and immediate catalysts for material growth.  At the same time we believe that we have been accumulating shares in these companies at what will become evident as materially discounted equity valuations.


Easyhome (EH) 5.0%
Firstservice (FSV) 5.0%
Open Text (OTC) 4.7%
Enghouse Systems (ESL) 4.7%
Magellan Aerospace (MAL) 4.5%
Canam Group (CAM) 4.5%


Market Capitalization ($B) $3.9
Expected EPS Growth 27%
Forward Price-to-Earnings 12.6x
Price-to-Cash Flow 9.0x
Dividend Yield 1.6%
Return on Equity 11%


While we were disappointed to post a slightly negative return in July, we recognize that the key to our investment success over time will be our ability to generate consistently positive absolute returns with low volatility.  This might sound simple, but it requires unrelenting commitment and a passion for success that drives us, your managers, to produce insightful, non-consensus research views and then hold the conviction to concentrate in only our best ideas.

If you would like to hear more about our portfolio, process and investment style we would be pleased if you would  join us for a lunch discussion in our boardroom at 2 Bloor West, Suite 3400 on September 10, 2014 at noon.  Please contact us at our personal emails or through in advance if you would like to attend this lunch.

We hope that you will continue to follow us and consider allowing us to manage some of your savings alongside our own.  


Andrew, Jim & James 

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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