The ACE Fund returned -1.0% in June. Since inception, the Fund has outperformed the S&P/TSX Composite Index including dividends (“TSX”) by 8% on an annualized basis, returning 12.1% compared to 4.1% for the TSX. Annualized volatility of 7.1% compares favourably to the TSX at 8.4%. For the month of June, our largest positive contributions came from Airboss (BOS-T, 5.1% weight) which was up 27% and Concordia Healthcare (CXR-T 4.4% weight) which was up 9%.

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The Aventine Canadian Equity Fund (“ACE Fund”) returned -1.0% in June after all fees and expenses. This represents strong outperformance versus both the S&P/TSX Composite Index (“TSX”) and our Morningstar Canadian Equity peer group, which returned -2.8% and -2.3% respectively.  Investors in the ACE Fund will be pleased to learn that we continue to rank in either the top 1% or top 2% of our peer universe over every significant measurement period since our launch.   To highlight, in the trailing twelve months to June 30th, the ACE Fund has returned +9.6% versus the TSX at -1.2% and our peer group average at -0.7%.  Over this period the ACE Fund is the third best performing Canadian Equity fund, out of 430 Canadian Equity funds tracked by Morningstar.  Since inception on March 31, 2014 the Fund’s net performance to F Class investors after all fees is 12.1% annualized, roughly triple the TSX Index total return of 4.1%.  For a more complete summary of the Fund’s performance since inception see the table at the end of this letter or download the June factsheet.

June was a tumultuous month for global capital markets as the unfolding drama in Europe and China impacted everything from currencies to commodities, stock markets and bond yields, and created an environment of rising uncertainty.  At the same, the market was also trying to quantify the influence of ongoing political affairs, such as the Iran nuclear negotiations, and determine if the Federal Reserve would begin raising interest rates this year or continue to defer action in the name of “financial stability”.  Certainly these are complex and dynamic events, and the aggregate uncertainty manifested in June through surging volatility and the marked paring of risk taking activity.  Canadian equities were not immune to these forces, however as we mentioned last month the ACE Fund employs a variety of hedging techniques that serve to cushion its capital base from this volatility.

Throughout the relative excitement in global markets, valuations across our portfolio of undervalued and catalyst-rich businesses held firm.  News flow was light when compared with recent months, but we did have a couple portfolio companies hit the wire with material announcements.  On the positive side, shares of Airboss of America (BOS-T), a rubber compounding company, soared after announcing a small acquisition within its defense group division.  Similar to Magellan Aerospace (MAL-T) – which we wrote about in last month’s commentary – the broad market seems to have recently “discovered” Airboss, pushing up the multiple at which the company’s earnings are valued.  Operationally, the company has been performing very well and this has been the centerpiece of an investor relations campaign undertaken recently by the new CEO, Lisa Swartzman.  This outreach, coupled with a favorable profile in Report on Business magazine and the initiation of new research coverage by some prominent analysts has been driving interest in the Airboss story.  Including a 27% gain in June, Airboss shares have now climbed 115% since December.  While this strong performance has certainly been to our benefit, at current levels we no longer see the incredible value that attracted us to the company in the first place, over a year ago.  Accordingly, we have been sellers of Airboss in early July.

On the negative side of the ledger, our largest decline in June was the technology company Sandvine (SVC-T).  Shares were 16% lower in the month as the company reduced its Q2 earnings guidance, claiming delays in the sales cycle.  Our conviction in Sandvine remains high, and we view it as a very solid Canadian company with global leadership in their niche segment of the technology sector.  We understand the inherent lumpiness in Sandvine’s revenue cycle and accept it as one of the challenges of selling to global telecom and network companies.  Last September we noted a similar occurrence as a short-term headwind in the Globe and Mail, and the shares are up close to 50% since then.   We also note that despite pulling back in June, Sandvine shares are still up 10% year to date.

These are challenging times for investors, fraught with risk, but not without opportunity.   After a period of relative market stability, current events serve to remind us just how interconnected the global financial system is and how fast risk is transmitted across oceans.  While we are hopeful that  coordinated stability across economies and asset classes can be found by policy makers and market participants, we must acknowledge that an increasing number of scenarios result in deeply negative outcomes.  As such, our thoughts immediately turn to capital protection, and over the past few weeks we have been reducing long exposure.

At the time of writing the Fund’s long exposure, net of cash and short positions is 74%. Taking into account our options positions (all of which are either “in the money” or within a couple percent of being so), our net exposure falls to 55%.  While it certainly wouldn’t be enjoyable, the current portfolio of longs and hedges is well positioned to successfully weather a period of extended volatility if need be.

Given the Fund’s low net exposure and high cash balance we are building a shopping list with the intent of seizing any opportunity to add to core positions, or build new ones in undiscovered or under-appreciated Canadian companies, should they go “on sale”. As noted above, there are many such scenarios that, through chaos, lead to opportunity and our research in this regard is incessant.

Thanks as always for these few minutes of your undivided attention.  We appreciate your time and support and hope that you will continue to follow our progress.  Should you consider joining us as investors in Aventine Canadian Equity Fund, your capital will receive great care and attention, as it is right next to our own.