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.