ACE Fund: Manager Letter November 2015

November 30, 2015



30 November 2015
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Aventine Canadian Equity Fund

Monthly Fund Manager Update – November 2015

Executive Summary


The Aventine Canadian Equity Fund returned +9.2% in November – our strongest month since inception.

Morningstar ranks us in the top 1% of all Canadian equity funds (out of 904) over the 1, 3, 6 and 12 month time periods.  

The Fund has generated double digit positive returns year to date (+11.7%), while both the S&P/TSX Composite Total Return Index (-5.4%) and the average Canadian Equity fund (-3.1%) are negative.

Fund Documents

Purchase Documents


Media Appearances

Performance Overview

Current Year Performance

1 Month 6 Months Year to Date
Aventine Canadian Equity – Class F +9.2% +1.9% +11.7%


Historical Performance

1 Year 3 Years* Inception*
Aventine Canadian Equity – Class F +13.8% n/a +10.9%
* Performance for periods >1 year are annualized.

Top Holdings

Concordia Healthcare (CXR-T) 8.1%
Goeasy (GSY-T) 7.5%
Clearwater Seafood (CLR-T) 6.4%
Aercap Holdings (AER-US) 4.9%
Winpak (WPK-T) 4.8%

Metrics of Average Company

Market Capitalization ($B) $5.5B
Expected EPS Growth 41%
Forward Price-to-Earnings 12.9x
Dividend Yield 1.5%
Return on Equity 12%

Fund Commentary

November was an exceptional month for the Aventine Canadian Equity Fund (“ACE Fund”) as our investment theses on several of the portfolio’s highest conviction holdings were validated and we benefitted from the realization of a key valuation catalyst in a core position.   November saw the Fund rise by 9.2%, bringing our 2015 return to 11.7%.  We are the best performing fund in Morningstar’s Canadian Equity category this year – by several percentage points.  For context, we note that the S&P/TSX Composite’s Total Return, which measures the broad Canadian market, has a year-to-date return of -5.4%.  We’d also like to highlight that the Fund has fully recovered from its August-September drawdown and note that the Fund hit a new all-time high on November 30th.  This latter point carries a special significance with us because it means that every single investor in the Fund has a positive return.

Valuation Catalysts

We began acquiring shares of New Flyer Industries (NFI.TO), a transit bus manufacturer, last fall and as the share price has risen from $13 to $27 New Flyer has grown into one of the Fund’s largest holdings. The “valuation catalyst” behind its recent price surge was the acquisition of Motor Coach Industries (“MCI”) in early November for $455 million.  In addition to being highly accretive to earnings and free cash flow,  the combination of the leading North American manufacturers in the bus and motor coach industries makes great business sense and the market responded very favorably.   NFI announced the deal one day following a great earnings report and in combination, these two events provided a 38% boost to NFI’s share price in the month.  We believe this is a truly transformational acquisition for New Flyer, and there are several items in particular which support this view:

  • As the equity market cap of a combined NFI-MCI approaches $2 billion, it gets on the radar of many larger investment funds and analysts who cannot buy or cover smaller companies. Achieving this level of maturity acts as a substantial tailwind for companies which are able transition from “risky to own” to “risky to not own”.
  • The opportunities for cost savings and other operating efficiencies between the two companies are excellent.  New Flyer has proven that they are very adept at driving a tight manufacturing cost structure and given that the companies are practically neighbours in Winnipeg, we expect NFI’s same rigor and results to be realized in the MCI vertical.
  • NFI’s growing scale and demonstrated operational stability has enabled them to activate their balance sheet and fund an accretive acquisition of significant size using debt as opposed to equity.  This is a big developmental milestone, as well as very attractive for shareholders.

High Conviction

While our strategy of buying undervalued, catalyst-rich companies with strong operating momentum has generated great returns for our investors, there are always going to be some positions inside the portfolio where the stock price moves contrary to our thesis.   A company’s stock price can fall for either market related reasons or company specific reasons and we earn our keep by being able to identify the difference.  Given how closely we follow our positions, we are generally able to correlate a declining stock price to notable factors such as negative earnings surprise, poor industry trends, management issues or macroeconomic factors.  Occasionally however a stock we own will fall for a reason we can’t easily identify, or decline far beyond what we believe is warranted given publicly available information.  As active value investors this is our “fat pitch” – an optimal risk-reward scenario.  Provided that we intimately know the company, management and industry, we will approach these scenarios with our highest conviction and seek to capture an outsized return as the price distortion corrects.

Our high conviction in Goeasy (GSY.TO) and Concordia Healthcare (CXR.TO) has been on display for several months and we have commented on these two companies extensively in the past, both in print as well as on BNN.  The chart below uses our trading activity in Concordia to illustrates this conviction in real-time.  As the market turned on CXR we were aggressive buyers, ultimately increasing our shareholdings by over 3x as the loathing peaked.  These decisions paid off handsomely for our unit holders as the shares increased 29% in November and almost 100% off the lows.  To recap our theses on CXR and GSY:

  • Concordia Healthcare: Shares of Concordia Healthcare unjustly suffered from “guilt by proximity” as its larger peer Valeant Pharmaceuticals was eviscerated by short sellers, politicians and the court of public opinion in September.  We strongly believed that Concordia’s AMco acquisition was a game changer for the company and continue to expect that it will generate tremendous cash flow for shareholders.

  • Goeasy: For much of 2015, a significant short seller weighed on the share price, preventing the market from recognizing Goeasy’s very impressive loan book growth and operating improvements.  Each time Goeasy shares appeared poised to advance on fundamentals they were met with significant selling by market participants who – we believed – misunderstood the earnings power and underlying loan exposure of the business.  After a very strong earnings release in November the company revalued 30% higher in very short order.  Although the company’s current valuation multiple has expanded, we still believe the business is worth significantly more than the current share price.

The decisions made earlier this year, first to maintain a sizeable weight in these names and then add aggressively when sentiment was at its worst,  were the reasons for the outperformance in November.  We were able to get a grasp on the fundamentals and valuations of these businesses and take action while our peers were focused on news headlines and their emotions.


While November was a great month for the ACE Fund, we realize that this experience was apart from the broader Canadian equity market, which remains challenged.  Economic gravity is inescapable and we see little opportunity for Canadian growth to accelerate as long as low resource prices and weak domestic service activity persist.  But the economy is not the equity market and – at the risk of sounding overconfident – we believe we are well positioned for continued outperformance through this type of environment.  We hold 20% cash at the time of writing and our market hedges have been both active and profitable this quarter.  Our exposure to resource sectors and banks is negligible.  A substantial number of our positions generate the majority of their revenues outside Canada, many others see a direct benefit from lower energy prices, and several benefit from both these advantages.  In summary, we are not the typical Canadian equity fund, which is why our results have not been typical.

We hope our readers and investors all have a joyous Holiday season. Best wishes from the team here at Aventine and please give us a call if you have any comments or questions.

Performance Presentation

Fund Inception: 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. 
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