ACE Fund: Manager Letter May 2015

May 31, 2015



May 31, 2015
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Aventine Canadian Equity Fund

Monthly Fund Manager Update – May 2015

Executive Summary


The ACE Fund closed up +2.8% in May as our non-resource positions produced solid gains. Since inception, the Fund has outperformed the S&P/TSX Composite Index including dividends (“TSX”) by 7% on an annualized basis, returning 14.0% compared to 7.0% for the TSX. Annualized volatility of 7.2% compares favourably to the TSX at 8.2%. For May, our top positive contributions came from Magellan Aerospace (MAL-T, 3.5% weight) which was up 24% and Linamar (LNR-T 4.0% weight) which was up 18%.

Fund Documents

Purchase Documents

Performance Overview

Net Asset Value per Unit

AMG250 (A) AMG350 (F) AMG450 (I)
Aventine Canadian Equity Fund $115.53 116.55 120.84

Current Year Performance

1 Month 6 Months Year to Date
Aventine Canadian Equity – Class F +2.8% +11.6% +9.6%


Historical Performance

1 Year 3 Years* Inception*
Aventine Canadian Equity – Class F +12.2% n/a +14.0%
* Performance for periods >1 year are annualized.

Top Holdings

Easyhome (EH-T) 6.5%
Interfor (IFP-T) 4.9%
Mitel Networks (MNW-T) 4.7%
Airboss of America (BOS-T) 4.6%
Linamar (LNR-T) 4.4%

Metrics of Average Company

Market Capitalization ($B) $5.6B
Expected EPS Growth 24%
Forward Price-to-Earnings 14.5x
Dividend Yield 1.0%
Return on Equity 12%

Fund Commentary

The ACE Fund finished the month of May up 2.8% after all fees and expenses which compared to the S&P/TSX Composite Index return including dividends (“TSX”) of -1.2%. Year-to-date in 2015 the Fund has gained 9.6% and is ranked as one of the top 5 funds in the Canadian Equity category tracked by Morningstar.  Since the Fund was launched on March 31, 2014 the net performance after all fees is 14.0% annualized, double the TSX of 7.0%.


Non-Resources Sectors Drove Performance in May

Last month we cautioned investors that April’s resource sector rally, in our opinion, was unsustainable in the short term.  Our view was that the rebound in commodity prices, particularly energy, had occurred too quickly and was absent of meaningful adjustments to the supply-demand imbalances that had pushed resource prices to the Q1 lows.   In the short term we have been correct in this assessment as the TSX Energy Index declined 7.2% in May.  With the summer driving season having now arrived in the U.S. we should see demand for petroleum increase and provide some support to energy prices, however as we look past seasonal factors into the second half of the year we remain bearish.

Commodity prices clearly have an outsized impact on the Canadian economy and resource sector volatility provides easy fodder for fund managers like us to comment on.  But as most of our investors fully understand, the focus of our investment approach is on identifying businesses with strong cash flows driven by superior products, superior assets and astute management – not on short term profit potential linked to volatile commodity prices.  When we do choose to own companies in resource extraction (and related industries), we invest using the same criteria as for industrial, financial, or consumer enterprises, seeking undervalued assets with positive long term dynamics for end-market prices.

We Continue to See Catalysts Realized

While our inherent resource sector underweight was helpful in May, we also realized large gains for investors in key parts of our portfolio as investment catalysts continued to play out.   Linamar (LNR-T) and Magellan (MAL-T) posted very positive first quarter earnings which resulted in the Bay Street analyst community revising their profit forecasts and price targets dramatically higher.  These two positions provided the largest contributions to the Fund’s performance in May, rising 18% and 24% respectively. A few days after its earnings release, Magellan announced that it was spending $56MM in capital to acquire a UK engineering firm.  While this a positive development, we can’t help but notice that Magellan’s valuation has expanded by 51% over the past twelve months, mostly through multiple expansion.  Magellan has been a core holding of the Fund since April 2014 and is a great example of what happens when we own a company that the broad market subsequently “discovers.”  Magellan’s share price has doubled since our initial purchase price last year and with the company now approaching our valuation target, our expectation for continued gains going forward has been tempered somewhat.

Another notable catalyst event for the Fund in May was the acquisition of Ann Taylor (ANN-US), a US based retailer of women’s fashions.  They were acquired by Ascena Retail (ASNA-US), a competitor.  Despite Canadian equities being our core focus we had long been intrigued by the take-out potential for Ann Taylor based on the pressure a number of activist private equity shareholders were applying to the company’s board.  Our fundamental view on the company was positive as well: an undervalued business with free cash flow yield of nearly 7%, but we thought the stock lacked a valuation catalyst.  Once the company began a competitive auction process our catalyst was in place and having determined there was a high probability of the company being acquired at a large premium, we began accumulating a position.   In mid-May, less than a month after our initial purchase, ANN announced the friendly acquisition by Ascena for $47 a share (a 23% premium).


The current market temperature remains in the “goldilocks” zone, with weak growth and inflation figures likely to discourage any near term changes to interest rate policy on either side of the border.  Broad market valuations are high on a historical basis, but not out of hand, and most developed equity markets are in bullish trends.  The TSX has traded sideways for a few months now, but this is mostly due to the poor year-to-date performance of banks and energy companies.  Outside of these areas we are seeing many companies get a boost to revenue and earnings from the weak Canadian dollar.  On balance, this is a big positive for the Fund and is being reflected in the earnings and share price performance of many of our core positions.

The global liquidity spigot remains wide open, with most of the world in easing mode, and this will continue to both support asset prices and suppress volatility.   The most important source of uncertainly for global investors surrounds the Fed’s timing on the first rate hike.  While many headlines are suggesting a September liftoff, we note that market expectations implied by Fed Funds Futures remain farther out the calendar (Q1 2016).  Given the Fed’s ongoing concern with market stability we do not expect them to launch the tightening cycle until the market is fully prepared for it, which places us in the “lower for longer” camp.

Based on our research we don’t see a significant market correction around the corner, but we are generally prudent in managing our overall exposure to the market and as such continue to employ downside protections as we have done since our inception. As of early June we are carrying 86% net long exposure with downside option coverage on an additional 20% of the Fund’s capital (we hold hedges on TSX, S&P 500 and Emerging Markets ETFs).  Again, while we view market risks to be relatively balanced, the catalysts for a significant market move (to either direction!) can materialize very quickly.  It is the “unknown unknowns” of risk management that concern us most, so we own downside insurance and will continue to roll this protection as it expires.  On the other side of the ledger, we continue to identify and conduct research on attractive portfolio candidates and keeping an ample cash reserve allows us to capitalize when the best of these opportunities emerge.
2015 thus far has been an extremely rewarding environment for our style of investing and we are confident that, with our current portfolio and expected catalysts, we believe the back half of the year could be just as exciting.

Welcoming New Additions

We wanted to share one final bit of news with investors before signing off.  The month of May saw the team at Aventine grow by two great individuals as Matthew Lai joined the firm in a permanent role as an Operations Associate and Nicholas Hart reprised his role from last year as our Summer Investment Analyst.  Please join us in welcoming them to the firm.

Until next month,

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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