ACE Fund: Manager Letter May 2014

May 31, 2014



31 MAY 2014
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The ACE Fund generated solid performance in May, with F class units rising 2.2% during the month.  Gains were broad based within the portfolio, led by positions in  Industrials, Consumer Discretionary and Information Technology sectors.




ACE Fund  (Class A Master) 2.1% 3.8% 3.8%
ACE Fund  (Class F Master) 2.2% 3.9% 3.9%
TSX Total Return Index -0.2% 2.3% 2.3%


AMG 200 (Class A) $103.75
AMG 300 (Class F) $103.86
AMG 400 (Class I) $104.80


The ACE Fund had a very successful second month of operation. Due to great investor support and strong inflows at the end of April, we began the month of May with a 66% cash weighting.  We quickly set about putting this new money to work in our top investment ideas and were able to reach full investment by the end of the month.  Investors will be happy to hear that the our F class unit price increased by 2.2% after all fees during May. This represents very strong performance for a month in which the broad Canadian market actually declined 0.2%.  Since launching the Fund two months ago, we have generated a return of +3.9% net of all fees and expenses.  It should be noted that during this time period, the Fund’s average cash position has been approximately 40%.  Needless to say, we are very pleased with how the Fund is tracking out of the gate.

Some of our largest gains in the month came from Magellan Aerospace (+28%) and Easyhome (+14%).  As a developer of components to the aerospace industry, Magellan has really begun to capitalize on the acceleration in new aircraft orders over the last couple years and the results of this increased industry activity are really showing through in the company’s operating metrics and share price.  Although its forward earnings multiple has expanded from a trough of 4x in 2013 to 10x presently, Magellan still trades at a 35% discount to its aerospace peers at 16x.   Easyhome, which we highlighted in last month’s commentary and as one of our three “top picks” on BNN a couple weeks ago, continues to benefit from their strategy of shifting from a consumer leasing company to more of a financial services company.  Despite strong performance recently, we still believe that these positions remain undervalued given their future prospects.

Our month would have been even stronger if not for a few quarterly reports that missed the mark.  One of our turnaround stories, Yellow Media, declined 13% in May after releasing quarterly results that the market found disappointing.  We view the company as deeply undervalued and believe that it is undergoing transformational change that will see its declining print business replaced by new media and other digital revenues.  Already Yellow currently has over 40% of its revenues coming from its various digital business verticals.  Shareholder returns in this type of business restructuring can take time, not to mention require substantial capital investment.  On the quarterly call Yellow’s management team admitted that margin performance had been disappointing and guided to a longer time horizon for improvement in this area.   We are aware of these risks and our view remains that this is an extremely cheap business trading at deeply discounted valuation multiples – 4.8x on forward P/E basis and 2.6x on forward EV/EBITDA. Investing in turnarounds can bring some bumps, but under our current thesis we expect solid returns will come to patient investors as the business stabilizes and Yellow’s valuation discount narrows.

We have often heard the phrase “volatility brings opportunity” and our job as business analysts and company valuators is to try to figure out whether a sharp decline in a company’s share price offers us a chance to buy more of a good company at an even cheaper price, or is a signal that there has been a significant and unrecoverable deterioration in a company’s prospects and investor following. The quarterly reporting season can be a great time to take advantage of this volatility as company management communicates updates on their strategy, financials and outlook during their investor calls.  Analyzing company reports and listening carefully on management calls often provides us with the information needed to make informed decisions.  We were fortunate to welcome many new investors to the Fund in May and took advantage of this influx of new cash to increase our positions in companies that went “on sale” if shorter term investors disliked their headline quarterly numbers.  These companies have strong historical growth, a robust outlook for the remainder of 2014, and continue to trade at a discount to our expected valuation.  We believe these particular names will march higher as the quarter continues on.


FirstService Corp (FSV) 5.3%
EasyHome Ltd (EH) 5.2%
Canam Group (CAM) 5.2%
Micron Technology (MU.US) 5.1%
Newalta Corp (NAL) 5.0%
Magellan Aerospace  (MAL) 4.9%


Market Capitalization ($B) $4.0
Debt-to-Equity Ratio 74%
Forward Price-to-Earnings 11.0x
Price-to-Cash Flow 7.6x
Dividend Yield 1.4%
Return on Equity 9.8%


It has truly been an exciting few months of operations for us here at Aventine.  While we recognize that two months does not make for much of a track record in the ACE Fund (we are working on lengthening it), we believe that we have a solid foundation from which we will be investing in interesting, undervalued and non-consensus Canadian companies for many years to come.  Our goal is to continue providing investors with consistently positive absolute returns that are uncorrelated to both the broad TSX index and the typical Canadian Equity Fund.  Thanks for your support to date and we hope you continue to follow us.

Jim, James & Andrew

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.

* “YTD” and “Inception” for the purposes of performance presentation is the close of business on March 31, 2014 as this is the date the the Fund was launched.  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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