ACE Fund: Manager Letter September 2014

September 30, 2014



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The ACE Fund returned -3.2%  in Sept. with losses concentrated in Energy and Materials.  We had positive contributions from both Consumer Staples and Industrials.  The largest positive individual contributions came from Clearwater Seafood (CLR-T, 4% weight) which was up 25% and Micron Technologies (MU-US, 3% weight) rising 7%.



MONTH SINCE 3/31/14*
ACE Fund  (Class F) -3.2% 3.1%


AMG300 (Class F) $103.06


The past six weeks have been challenging for Canadian investors in general, but a good stress test for our strategy and management philosophy.  September brought a big uptick in volatility and in this environment the ACE Fund delivered reasonable performance, falling 3.2%.  Increased hedges, shorts and cash positioning have been very helpful in offsetting the market’s recent decline and we have taken steps that significantly dampen the fund’s downside exposure near current levels.  Should we see equity markets continue to fall in October, investors in the ACE Fund will be well insulated when compared to our peers.

With market leadership narrowing and momentum slowing, we increased our exposure to the Consumer Staples sector.   One of these holdings, Clearwater Seafood (TSX:CLR, was the fund’s top performer in September, rising 25%.  Clearwater is a global harvester, processor and distributor of premium shellfish which has seen investor sentiment shift higher thanks to recent marketing by the CEO, as well as the general rotation into less volatile areas of the market.  Clearwater is an underfollowed name in Canada and our investment thesis is built on its enviable position in a stable industry with high barriers to entry.  We remain very bullish on this particular holding.   We also added Empire Company (TSX:EMP, to the portfolio mid-month and believe that it is well positioned to benefit from continued sector rotation as Canadian investors preference for all-weather stocks remains high.

Our exposure to commodities, which saw dramatic declines in September, remains low.  A good capture of how poorly the resource sector has been performing lately is illustrated by the Thomson Reuters CRB Index.  This index, which represents a basket of 19 different industrial and agricultural commodities was down 7.4% in September alone.   The team here has been talking a lot about how sharp the commodity pullback has been, particularly in the energy sector, and its impact on the broader Canadian equity markets.  Our expectation is that WTI oil likely bottoms in the low $80 range and in that area we may start to look for value in what has been a heavily sold energy sector.

At present we have 9% in US dollar cash and stock positions, which benefited from currency gains during the month as the greenback rallied 3% against the loonie.  Both US companies we own are in the technology sectors and one in particular, Micron Technology (NDQ:MU,, also rose 6.5% after reporting much stronger earnings and guidance on the back of tight supply in the memory chip market.

Staying with the technology sector, we wanted to highlight a company that we have been doing some deep research on lately.  Sandvine Inc. (TSX:SVC, provides telecommunication and cable businesses the software and hardware to be able to analyze how their customers are consuming data  and is also a company we have previously gone on record with as one of our top picks.  The company’s share price has traded lower of late (-16% in September) based on softer than expected revenue guidance.  Management projections for the upcoming quarter were characterized as “lumpy” with higher complexity contracts “taking longer than anticipated to realize”.  We have always acknowledged that there is a high degree of timing variability in the Sandvine’s revenues and see the current decline as excessive punishment for a company with 78% gross margins and nearly 40% of its market cap in cash.  Last week Sandvine announced two large new customer wins, with one of these representing a competitive displacement – something we consider to be a very positive sign for their product offering.  Recent research affirms our view that 15% per year revenue growth for the sector over the next five years is attainable and shares at the current price represent a significant discount to intrinsic value.  We were buyers of Sandvine in September and we are still buyers at the current price.  This company has great prospects in a highly profitable niche segment of the broadband communications business so look for us to be writing an update on this particular position in the coming months.


Canam Group (CAM-T)) 5.5%
Magellan Aerospace (MAL-T) 4.6%
Clearwater Seafood (CLR-T) 4.5%
Firstservice Corp (FSV-T) 4.4%
Enghouse Systems (ESL-T) 4.3%
Sandvine (SVC-T) 4.2%


Market Capitalization ($B) $893M
Expected EPS Growth 23%
Forward Price-to-Earnings 10.5x
Dividend Yield 1.8%
Return on Equity 11%


Our sole aim as managers of the ACE Fund is to provide investors with long term results that are superior to a passive investment approach by delivering both higher returns and lower volatility, period.  As a predominantly “long” oriented fund we are generally exposed to quick reversals in the broader market but we will always respond to increasing volatility and downside risks with a strong defensive counter.  We are willing to accept some volatility at turning points because our goal is to protect the fund from large declines in value, not call a market top.

We’ve responded to the recent market weakness in 4 ways.  First, we have raised our cash position to a significant level, presently 17%, as the list of stocks that meet our strict buy list criteria has shrunk.  Second, we have been active on the short side of the market, taken positions against 3 companies that we believe are materially overvalued, and are currently reviewing several more candidates.  Third, our sector positioning has become more defensive, as alluded to earlier, with our most recent purchases taking place in industries that tend to outperform in falling markets.  Fourth, we have added some portfolio insurance through the options market which will act as a buffer should equity prices continue to decline broadly.  Similar to the deductible on an insurance policy there is not much of a payout from the fourth strategy when a loss is “smaller” in nature (say like a 4% decline), but will tend to reward us at an accelerating pace to “dampen the downside” should market losses intensify.

To summarize the fund’s current positioning, please see the breakdown below:

Despite the use of these varied downside protection tools to reflect our more conservative view of the market’s near term prospects, we claim no special ability to accurately forecast the future.  Our efforts in this regard are purely in service to Warren Buffett’s famous “Rule Number 1” (do not lose money).  We also try to take into consideration Warren Buffett’s famous “Rule Number 2” (do not forget Rule Number 1).

However, so far we have been correct in our assessment and with the Canadian market having fallen an additional 3.5% in October at the time of writing, our portfolio protection strategy and defensive positioning is holding up very well.  The nature of our portfolio insurance is that as the market’s fall becomes more extreme, our protection rises in value as an accelerating rate.  While we are enjoying some coverage in the short term, by no means are we rooting for a new bear market.  On the contrary, we hold a generally optimistic worldview and much prefer share prices when they are rising, particularly when we own the shares going up!

As we have written in the past, the per-share price of a company tells you, in real-time, what someone is willing to pay for a minority stake in a business.  Our process, and why we have been successful over time, hinges on identifying companies that show a significant disconnect between the price we pay and the value we get.  A large part of that comes from investing with company management teams that have demonstrated an ability to develop or acquire businesses in a way that materially grows its value to us, the shareholders.   When we look at our portfolio of holdings, we are very excited about what the future has in store for them and considering we are paying less than 11 times next year’s earnings at the portfolio level, we believe there is plenty of room for upside as these companies continue to grow.

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


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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