ACE Fund: Manager Letter March 2015

March 31, 2015



March 31, 2015
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Aventine Canadian Equity Fund

Monthly Fund Manager Update – March 2015

Executive Summary

The ACE Fund celebrated its first anniversary at the end of March and was ranked by Morningstar as being in the top 6th percentile of all Canadian Equity Funds in the category (424) with a return of 14.3% after all fees.  The Fund was up 2.9% in March with strong performance in the Technology and Financial sectors offset by losses in Materials.  The top positive contributions came from Springleaf Holdings (LEAF-US, 3.9% weight) which was up 36% and Concordia Healthcare (CXR-T, 4.9% weight) which was up 34%.

Fund Documents

Purchase Documents

Performance Overview

Net Asset Value per Unit

AMG250 (A) AMG350 (F) AMG450 (I)
Aventine Canadian Equity Fund $113.43 $114.27 $118.00

Current Performance

1 Month 3 Months Year to Date
Aventine Canadian Equity – Class F +2.9% +7.5% +7.5%


Historical Performance

1 Year 3 Years* Inception*
Aventine Canadian Equity – Class F +14.3% n/a +14.3%
* Performance for periods >1 year are annualized.

Top Holdings

Easyhome (EH-T) 4.9%
Concordia Healthcare (CXR-T) 4.9%
Interfor (IFP-T) 4.7%
FirstService (FSV-T) 4.4%
Sandvine (SVC-T) 4.3%

Metrics of Average Company

Market Capitalization ($B) $6.4B
Expected EPS Growth 21%
Forward Price-to-Earnings 13.9x
Dividend Yield 1.1%
Return on Equity 15%

Fund Commentary

March was another very strong month for Aventine.  While most Canadian investors experienced negative performance last month, the ACE Fund bucked the trend and generated a return of +2.9% for unitholders.  These results were 4.8% better than the S&P/TSX Composite Total Return Index (“TSX”) in March and 4.3% better than the “average” Canadian Equity Fund, according to figures published by Morningstar.

March also capped off the ACE Fund’s first full year of operations and – modesty aside – the results since launch have been exceptional.  Our one-year net return to F-class investors, after all fees and expenses, is +14.3%.  This is better than double the one-year return experienced by both passive indexers (+6.9%) as well as the average active manager in Canada (also +6.9%).  As of March 31st The ACE Fund was ranked by Morningstar in the 1st percentile (top 5 funds) in the Canadian Equity category over the 1-Month, 3-Month and 6-Month periods.  For the 1-Year period since launch the ACE Fund ranked in the 6th percentile out of the 424 eligible funds in the category.  The graphic below, captured from Morningstar’s webpage, provides an impactful summary of the Fund’s results on both an absolute and relative basis through the end of March.

The Fund’s gains in March continued to be broad and catalyst-driven.  Below are select highlights from a few of the largest contributors to our outperformance last month:

  1. Springleaf Holdings (LEAF–US, +36% in March) – LEAF management delivered on our assessment that rival OneMain Financial was squarely in its acquisition cross-hairs.  When the deal was formally announced in early March, LEAF became the largest subprime lender in the US and shares roared nearly 40% higher.
  2. Concordia Healthcare (CXR-T, +34%) – Barely a year into its life as a public company CEO Mark Thompson has rapidly established CXR as an elite deal maker in the Canadian healthcare space.  The $1.2 billion acquisition of Covis Pharmaceuticals announced by CXR in March effectively doubled the size of the company and is expected to be over 50% accretive to 2015 adjusted EPS.
  3. Tricon Capital (TCN-T, +11%) – TCN delivered a huge earnings surprise with their Q4 release, posting EPS of $0.30 versus the consensus at $0.08.  On top of that, TCN also announced the accretive acquisition of a 1,400 unit portfolio of US residential real estate for $150 million, funded by cash and unused debt capacity.
  4. Enghouse Systems (ENG-T, +11%) – ENG reported strong operating results in its March quarterly earnings, announced another large acquisition in Europe ($23 million), and increased its dividend by 20%.

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:
  1. Quantitative Research
  2. Fundamental Analysis
  3. 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.


Performance Chart

Since Inception: March 31, 2014
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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. Periodic investment strategy insight 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.

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. 
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