ACE Fund: Manager Letter October 2014

October 31, 2014



31 OCTOBER 2014
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The ACE Fund returned -0.9%  in October with strong gains in Technology, Staples and Discretionary. These gains were offset by losses in Energy and Materials. The largest individual positive contributions came from Clearwater Seafood (CLR-T, 4.5% weight) which was up 7% and Enghouse  Systems (ESL-T, 5% weight) which was up 5%.  



MONTH SINCE 3/31/14*
ACE Fund  (Class F) -0.9% 2.1%


AMG300 (Class F) $102.14



  • October was a roller coaster of a month for equity investors, one that saw both the sharpest correction and the strongest rally in over 3 years.
  • We entered the month conservatively positioned and as a result were able to avoid much of the market’s losses.
  • Third quarter earnings for our portfolio companies have generally exceeded expectations, but a key earnings miss late in the month cost us 80 basis points and the opportunity to post a positive return in October.
  • Overall, in what was a very challenging environment for active managers, the ACE Fund was down 0.9%.  Since inception we have made 2.1% after all fees for unit holders.

When we launched the ACE Fund earlier this year we were excited to incorporate some of the risk management strategies executed by our partner, Andrew Shortreid, in other areas of the firm.  Andrew’s research primarily focuses on protecting capital and managing volatility during times of market stress through the use of options and other hedging techniques.  For those of you who have not yet met Andrew, the October 3rd BNN appearance below is a great introduction to his views.


The past 2 months have served as a significant stress test for the Fund’s investment approach and we are happy to report that we have been able to outperform 70% of Canadian Equity managers and 85% of Small/Mid Cap Canadian Equity managers over the past 2 months, according to Morningstar.  The foundation of this result is a process that delivers strong security selection,  but we have also added value through active risk management and tactical trading.

The linkage between economic growth, commodity prices and the stock market (particularly in Canada) cannot be understated and recent weakness in the commodities complex seems to be pricing in slower growth ahead.  The prime example is WTI Oil which has now fallen 28% since its recent peak in June.   Headlines attribute much of this move to a supply glut, but weakening demand and a stronger US dollar are equally large factors.  According to recent company reports this has not yet curtailed activity in the Canadian oil patch, but a new market equilibrium below $80 would have a very real impact on the Canadian economy.   Stock markets are a discounting mechanism and the below chart illustrates how the potential drag from weak resource demand is being priced into both the Canadian stock market and the loonie.  In the Fund we have only a very small allocation to resources and hold a 10% weight to US companies.  In addition, many of our other Canadian companies generate a material proportion of their revenues in US dollars.  Going forward this should continue to buffer us from some of the headwinds facing the Canadian market.

The Fund saw solid outperformance in October from two companies we have highlighted in the last few months.  Clearwater Seafood (CLR-T,, +7.5% in October) has benefitted from lower fuel costs, a weaker Canadian dollar and an upswing in market interest as investors have rotated towards Consumer Staples companies.  Sandvine (SVC-T,, +1.1%) has recently perked up on the announcement of several new contract wins.  Investors had overreacted to lighter than expected revenues last quarter and with the recent positive news flow, sentiment now appears to have turned strongly for the better.

We got additional colour on Sandvine earlier this week when we met with management, and we came away believing that the company has a very bright future.  We particularly liked CEO David Caputo’s description of how sponsored usage by major corporations is opening up entirely new avenues for growth.  Companies already know when we access their web content from our mobile devices and have web pages designed specifically for tablets and smart phones, however these pages are generally stripped down versions designed to be light on mobile data usage.  As mobile spending becomes an increasingly large share of total consumption, corporations targeting a larger wallet share of mobile are looking to enrich the customer experience.  This means pushing out video and other high data usage formats to mobile devices.  Historically this would have been a cost to the customer but now savvy companies are actually paying for the bandwidth consumed by mobile customers surfing their web content.  Sandvine is a market leader in the technology that enables wireless carriers and companies to seamlessly manage this “sponsored” type of web activity.

Our experience with Canam Group (CAM.TO) this month is a different type of story that resulted in a costly lesson.   We had previously written that we like Canam for its attractive valuation, ability to win new business and a record backlog, but noted that their internal operating performance in the early part of the year was sub-par.  When we spoke with management about a month ago, our read through was to expect sequential improvement in the second half of the year, however Canam reported disappointing earnings at the end of October which sent the company’s share price sharply lower.  The poor results were mostly driven by weaker margins as the company’s recent contract wins had come at the expense of profitability.   With actual performance weakening instead of strengthening, Canam’s leadership has now failed to manage market expectations effectively for several consecutive quarters and their credibility is shot.  We no longer believe in management’s ability to deliver on the backlog profitably and as a result we are not interested in being shareholders of this company.


Enghouse Systems (ESL-T) 5.0%
Firstservice Corp (FSV-T) 5.0%
Magellan Aerospace (MAL-T) 4.9%
Sandvine (SVC-T) 4.7%
Linamar (LNR-T) 4.6%
Easyhome (EH-T) 4.6%


Market Capitalization ($B) $999M
Expected EPS Growth 24%
Forward Price-to-Earnings 11.8x
Dividend Yield 1.6%
Return on Equity 12%


The fund today holds a diversified portfolio consisting of 20 core long positons, 5 short positions and several index put options.  We also hold a cash reserve of 15%, which provides us with a bit of a volatility buffer and serves as dry powder to add exposure in core names when they go on sale.

Our view globally is that economic data on balance is either soft or softening, but we do see bright spots in the US and recognize that there is good seasonality this time of year.  Also, markets have tended to perform very well after the midterm elections historically.   In Canada we expect that two of the major drivers of the economy, energy and metals, will continue to struggle.  As previously mentioned, our current portfolio is very much tilted towards US revenue drivers (see below for sector weights) with several holdings domiciled there and many of Canadian companies generating a majority of their revenue from US customers.  As such, we believe we are well insulated from the potential headwinds facing Canada.

While we often write about ways we reduce volatility and protect downside, such as hedges and liquidity buffers, we in no way mistake this for our first job, which is to make money being long the stocks of great companies.  Finding undervalued, catalyst-rich companies experiencing positive fundamental change is our passion and the reason we come to work every day.  At the same time, the broader team at Aventine is able to add value to our process with overlay strategies that use only a small part of the Fund’s capital but make a big difference when markets fall into crisis.   The combination of these two approaches in the fund helps us to be less correlated with the overall market and generate returns while keeping portfolio beta low (currently 0.45).

We are off to an excellent start in November and have already seen a number of catalysts shine through.  Holdings such as Linamar, Newalta and CCL Industries have reported strong results and seen their shares react very favourably.  During tough times like the middle of October, being an equity investor can require patience and fortitude.  We expect there to be bouts of volatility from time to time, and inevitably, another bear market one day.   As an investor, you should be able to trust that when the seas get rough you are partnered with a deep team of professionals, intensely focused on growing and protecting your capital, because their own savings is invested right next to yours.

We do hope that you will continue to follow us and consider allowing us to manage some of your own savings alongside our own.  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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