ACE Fund: Manager Letter November 2014

November 30, 2014



30 NOVEMBER 2014
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The ACE Fund returned 2.2%  in November with strong gains in Technology, Discretionary and Health Care. These gains were partially offset by losses in Energy. The largest individual positive contributions came from Linamar (LNR-T, 4.6% weight) which was up 17% while Micron Technologies (MU-US, 3.4% weight) was up 11%.  



MONTH SINCE 3/31/14*
ACE Fund  (Class F) 2.2% 4.4%


AMG300 (Class F) $104.41


Highlights of our November letter:

  • The selling in commodities continues
  • The importance of being different
  • An update on ACE Fund core holdings CCL Industries and Linamar
  • A new position in Concordia Healthcare
  • Market outlook


The selling in commodities continues

Against a backdrop of weaker than expected global growth, many industrial commodity prices continued to slide in November.  WTI Oil fell 18% during the month (after a 12% fall in October) and the losses in energy-related assets actually accelerated into month end after OPEC officials decided against officially supporting crude prices through coordinated production cuts.  Market participants who bet that this outcome was “priced in” were swiftly treated to a new 5-year low as the benchmark price experienced one of its largest single day declines on record.    While there has been much discussion in the media surrounding motivations, alignments and pain thresholds of major players in the oil market, no single factor can be pointed to as a definitive explanation of the recent price action.  Of particular interest are the below charts, highlighting the impact that (1) resurgent US production growth is having on OPEC / Saudi Arabia, (2) current market prices are inflicting on Russia, and (3) the decline in value of Canadian energy prices since mid-summer (click the images for larger charts).


Falling oil prices may be making loud headlines, but energy is far from the only sector in the commodity complex that has been hurting Canadian portfolios.  Industrial base metals such as copper and iron ore have also sold off sharply and many companies in the S&P/TSX Materials sector are either at or below their trough prices of the great recession.   Readers will recall from prior letters that our investment approach favors companies and industries with positive price trends, attractive valuations and earnings catalysts, the lack of which across most of the resource sector this year has kept our interest focused on other sectors.  At the end of November our exposure to the energy and materials sectors was roughly 9% on a combined basis.  We were also well positioned with a healthy cash reserve of 6%, which has provided us with the flexibility to add to positions in Technology and Industrials at bargain prices in early December.

The importance of being different

It is a frequently overlooked fact in the investment industry that the best way for active managers like ourselves to generate consistently positive returns over time is to own a portfolio that is significantly different from the broad market.   This characteristic is specifically beneficial when investing in an equity market like Canada, which is heavily concentrated in financial and resource sectors.  For instance, the ability to materially differentiate our portfolio from the S&P/TSX Index has been very helpful over the past few months in our efforts to preserve capital and lower volatility.

Portfolio differentiation is such an important attribute to long term returns that professional consultants have actually created a statistic to measure exactly how different any particular fund is versus its benchmark, called “active share”.  The simple definition of active share is the percentage of your portfolio that is different from the benchmark.  This statistic provides an excellent and simple scorecard which ensures that we adhere to our investment principles – concentrated, active, sector agnostic.  We believe that too many Canadian equity funds are essentially indistinguishable from the broad Canadian market, and would like to highlight that the ACE Fund has an extremely high active share at 92%.

Company updates

We had a significant number of our companies report in the month of November and we were quite pleased with the results.  The most encouraging updates came from Linamar and CCL Industries.

Linamar (LNR-T, +17% in November) has now beaten earnings expectations seven quarters in a row by an average of 20%, with the most recent positive surprise coming in at 30% above the mean earnings estimate.   Linamar is benefiting greatly from their Skyjack business, which sells equipment like scissor lifts and telescopic booms, as well as from their expanding scope in auto parts.  Linamar boasts an industry leading return on equity at over 22% and management has been guiding earnings higher for next year based on strengthening margins.

CCL Industries (CCLb-T, +6% in November) continues to impress us with their industry leading position in the label making market as well as extremely low earnings and cash flow volatility.  In November, they reported a 3% earnings beat on improved margins and outperformance by their Avery division.  CCL is an impressive free cash flow generator which will benefit strongly from a lower Canadian Dollar.   CCL’s balance sheet continues to strengthen and our expectation is to see management pursue further consolidation in the label industry, solidifying their position as a leading firm within this sector.

New position: Concordia Healthcare

One of the more interesting areas on our radar, and an area in which we have been successful investors over the past few years, is the Healthcare sector.  Healthcare comprises only 3.5% of the Canadian market and any headlines on the sector are typically dominated by Valeant Pharmaceuticals.  This area has recently created outsized returns for Canadian investors due to many mergers, acquisitions and initial public offerings over the past couple of years (Paladin Labs, Patheon and Atrium Innovations, to name a few).  We are excited to announce that we have built a position in Concordia Healthcare (CXR-T, +14%), an exciting company that is presently going through a major transformation.  Concordia acquires, licenses and develops legacy and orphan drugs, mostly in the US.  Since Concordia was listed on the TSX in December 2013 management has pursued a growth-by-acquisition strategy, and created tremendous gains for shareholders in the process.  While early investors in Concordia have done very well to date, we believe that significant opportunities exist for the management team to continue adding value as global pharmaceutical companies seek to sell legacy drugs and re-focus energy on research and development.


Linamar (LNR-T) 5.2%
Easyhome (EH-T) 5.1%
Enghouse Systems (ESL-T) 5.1%
Firstservice (FSV-T) 4.9%
Open Text (OTC-T) 4.7%
Sandvine (SVC-T) 4.6%


Market Capitalization ($B) $8.4B
Expected EPS Growth 18%
Forward Price-to-Earnings 13x
Dividend Yield 1.6%
Return on Equity 10%


The positive momentum we have seen from the portfolio in November continued into early December.  Although the past few days have been challenging for all Canadian equity investors, we remain optimistic about the prospects of our portfolio and North American equity markets over the next 6-12 months.  Supporting this view are the following:

  • Many companies we own will benefit from lower energy prices in the form of cheaper input costs, a lower Canadian dollar or both.
  • We believe companies in the Consumer Discretionary sector will benefit from increased consumer spending as a result of lower gas and heating prices.
  • We expect additional stimulus from central bankers in China, Japan and the Eurozone as these regions struggle with subpar growth and  lack of any meaningful inflation.
  • On an aggregate basis, the portfolio of companies we own in the Fund have strong returns on equity (13%), superior EPS growth (18% expected next year), and can be purchased at a lower average valuation than the broad market (12.9x versus 14.2x for the TSX).In addition, every company we own has tangible catalysts on the horizon. We believe that we are well positioned for future investment gains.

We hope you will continue to follow us and would be very pleased to be trusted to manage an allocation of your investment savings alongside our own capital.  If you have any questions or comments, please feel free to contact us at our personal emails or through



*The  Fund’s “Peer Index “ is the Scotiabank Canadian Equity Hedge Index (Equally Weighted).  Most recent monthly performance of this index is not always available at the time of publishing.

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.

* Inception of the Aventine Canadian Equity Fund is March 31, 2014

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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