A look back at the past 12 months
In our September 2014 Commentary we wrote that “our sole aim as managers of the ACE Fund is provide investors with long term results that are superior to a passive investment approach by delivering both higher returns and lower volatility, period.” Using this statement as an objective benchmark, we can evaluate our performance over the past year from a number of perspectives:
• The Quality of Our Returns
An essential tool in evaluating a manager is assessing the “quality” of their return stream. Is performance broad based and the result of a repeatable process, or is it the result of a few large and lucky bets? At the time of writing, 9 of the ACE Fund’s 18 current core positions have each contributed greater than 1% to the Fund’s overall return. We have owned nearly all of these 9 positions since the Fund’s launch last year and we have consciously added to them as the Fund has grown. Additionally, our positioning during much of the year was quite conservative and we were able to generate significant investment returns despite holding approximately 20% of the Fund’s assets in cash and short positions, on average.
• High Sharpe Ratio (Fund Return – Risk Free Rate) / Fund Volatility
One of the more common metrics that we use to measure our risk-adjusted returns is called the Sharpe Ratio which takes your return over the risk free rate and divides it by your realized volatility. Viewed another way, the Sharpe Ratio is the Fund’s excess return per unit of risk taken. The higher the Sharpe Ratio the more effective the manager is at translating risk into returns. While we only have 12 months of data, it is worth noting that we have more than doubled the TSX on this front:
ACE: 1.92
TSX: 0.78
• High Active Share and Low Correlation
As active managers we are wholly focused on adding value over a passive indexing or ETF-based strategy. While value can be added in several ways, when considering portfolio construction and management, our objective is to provide investors with a portfolio that is materially different from the market index. We do this because we believe that the best way to provide consistently better than average performance is to be consistently different from the average portfolio (i.e. the market). Investors pay us active management fees to find exceptional investment opportunities in undervalued and underfollowed companies, not to shadow a market index and earn them returns that are substantively similar to what they can get from an ETF product. We measure how different our portfolio is from an index using a metric called Active Share which calculates, in percentage terms, how different a portfolio is from a reference index. Since launch the ACE Fund’s Active Share has been consistently above 90% and as of March 31 stood at 94%. Additionally our realized Correlation and Beta to the TSX over this period are 0.60 and 0.47 respectively (vs. targets of 0.75). This has been a key factor in our outperformance during the Fund’s first year and leads to one final point:
• The Strength of Our Process
We have written extensively about our Active Value investment approach over the past year and at this milestone it makes sense to again highlight our three pillar process as a driver of high quality returns for our investors:
- Quantitative Research
- Fundamental Analysis
- Risk Management
While each pillar is individually important, what makes our results repeatable is the integration of each element into an authentic process of portfolio optimization. We do not apologize for the fact that our investment process is much more active (125% turnover) than a traditional “buy and hold” approach to value investing. On the contrary, our process forces us to continually validate our investment theses and valuation targets. We have aggressive expectations of management teams, expect them to deliver results on time and target, and are not interested in owning underperforming assets whose value propositions may take years to materialize. We have been very pleased with the many opportunities that we have uncovered for the Fund’s investors over the last 12 months (on both the buy and sell side) and unquestionably attribute these to our process.
In Closing
It is often a useful exercise to review the activities and results of your competitors in order to better gauge the effectiveness of your own strategy. We note that several Canadian managers we consider peers are doing victory laps to celebrate gains generated from big bets in “one time” trades such as shorting Energy late last year. While we commend the call, we do not consider these strategies to be repeatable and therefore believe investors should be cautious when approaching these strategies (and whose managers are willing to make big bets on future commodity prices). We have also noticed that a number of our peers with purely quantitative investment strategies have generated exceptionally poor performance over the past 12 months, returning less than 1% on average. We believe that their underperformance is the result of lacking two key elements of our investment process – Fundamental Analysis and Risk Management.
Thanks again for reading along with us as we close out the ACE Fund’s first year. We look forward to continuing to grow our track record and build wealth for our existing investors. We also invite those readers seeking a consistent performer with a proven, repeatable process and the ability to deliver through the many market cycles here in Canada to invest some of your own savings alongside our own.
Sincerely,
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