The ACE Fund has been ranked in the top 1% (second highest return) of all Canadian Equity Funds in the category over this two year period with a return of +8.5% compared to the S&P/TSX Composite return -0.1%. 
 

The biggest contributions in March came from New Flyer (NFI-T, +29%) and ZCL Composites (ZCL-T, +20%).  New Flyer reported an excellent quarter and earnings came in above the highest estimate on the street.  Management comments focused on their strong margin performance and they noted accelerating growth in Motor Coach Industries, acquired last year.  Markets cheered ZCL’s decision to return some capital to shareholders as management of this steady business announced a 66% dividend increase and a $0.50 per share special dividend (representing 7% of the stock price). 

Our biggest disappointment in March was Concordia Healthcare (CXR-T) whose 16% decline during the month cost the Fund over 100 bps (i.e. 1.0%) of performance.  We were happy with Concordia’s Q4 earnings and cash flow performance, which was ahead of what most analysts were expecting, but apparently the results were not good enough to spark buying interest in the stock.  As we all know, the negative press around Valeant, particularly with respect to drug pricing and their delayed annual report, has hurt the entire specialty pharmaceutical industry. The result is that Concordia is trading today at a valuation multiple of less than 4x our expected 2016 earnings.  We strongly believe the balance sheet concerns are overblown and that Concordia currently represents one of the top investment opportunities in Canada.

ACE is more to us than just an investment fund within a growing wealth management organization.  It is about expanding our knowledge, working with amazing mentors and daring to be excellent over a long period of time.  We believe that we have the opportunity to build something truly exceptional with our team here, focusing on finding value investments which will reward our investors and ourselves. 

Our investment process has benefited from the input of these new influences, and we have incorporated several subtle refinements over the two years to further strengthen our ability to generate superior risk-adjusted returns.  While we are proud of our results to date, we don’t sit around patting ourselves on the back – we are always looking ahead, searching for our next great investment.  But on this 2nd anniversary we feel it’s appropriate to take a moment and thank our investors, partners and mentors for their continued support, encouragement and guidance.

Performance Since Inception
 

Since launching the ACE Fund we have provided an annualized return of +8.5%, net of all fees and expenses, soundly outperforming the TSX Composite annualized performance of -0.5% on a total return basis.  Perhaps most impressive is that we accomplished this feat during a period in which the average stock (and average investor) in Canada has experienced bear market-like conditions.   Regular readers will recall that ACE was the #1 performing Canadian Equity fund in calendar 2015, but Morningstar also recently ranked us as the second best performing Canadian Equity fund – with the seventh best Sharpe Ratio (risk-adjusted return) – over the trailing 2 years as at March 31^st, 2016.  The chart below shows 131 major funds from the Morningstar Canadian Equity category plotted in terms of risk and reward.  While our standard deviation is higher than many of our peers (+9% months like November 2015 will skew this measure), we have taken risk well and more than compensated our investors for the higher volatility. The following sections highlight 4 factors that we attribute a lot of our early success to.

This philosophy of investing in strength so long as a quantum of value is present has led us to be shareholders in some tremendous Canadian companies over the past two years.  We took meaningful positions in several of these names long before they were on the radar of the investing public or financial journalists.  Being early can come with some special risks, such as illiquidity or volatility, but these are more than offset by the margin of safety that comes from being able to acquire shares at cycle-low valuation multiples.  The best part is that when we get it right, those risks diminish as the companies grow into industry leaders and begin to develop widespread appeal.  The following three charts show examples of companies that represented “cheapness in the right hands” when we acquired them and that have since comprised a significant portion of the gains that we have all shared in as unitholders of the ACE Fund:
 

To illustrate, since launching ACE we have held seven stocks in which have netted the Fund gains in excess of $400k each, while holding only two stocks which have cost us that same amount.  Looking back at our trading ledger over the past two years, it’s clear that the most significant impact our sell discipline has had on the portfolio was getting us out of the Energy sector early. While we never held anything near a TSX-like weight in this sector, avoiding 50% further downside on the companies we did own in late 2014 saved us perhaps 5% at the Fund level.  The below graph shows how shares of Newalta, an oilfield service company, have fallen over 85% since we exited the position at a 30% loss back in December of 2014. Selling Right in 2014 kept our losses reasonable, and Active Value kept us from trying to call a bottom in the commodity sector throughout 2015. 

On this final point above, we believe that dimensional risk management – bottom-up, top-down, and cross-asset – is important because most risk is managed through the rear view mirror by investors trying to avoid the last crisis.  

One way to measure this is through a figure know as downside capture ratio which is the percentage of the downside your fund has captured.  For example, if the TSX is down 10% and your fund is down 5%, your downside capture is 50%.  The ACE Fund has a ratio of only 15% (as a point of reference, 85% is considered a strong  ratio), so over the last two years we have only captured 15% of the markets downside.  Our partners have added an incredible amount of strength to our process in this regard and we consider it to be one of our best assets as we navigate these increasingly challenging markets. 

Notwithstanding that valuation concerns exist at the market level, trends across most asset classes have turned positive on the exceptionally strong rebound in prices since mid February.  Indeed, nearly every major category we track across equities, credit, FX and commodities, has showed an incredible level of resilience.  Flow of funds data also suggests long positioning remains light and that the recent rally was missed by the majority of investors which is often a precursor for the continuation of a trend.

In both Canada and the US, our risk models turned positive in early March, recovering the sharp deterioration that began in early January. As a result, our confidence in the sustainability of the recent market surge off the lows has risen.  Accordingly our investment exposure has risen as well, and much of our dry powder has now been back to work.

We deeply appreciate all of our friends, family and investor support over the past two years and hope that you will continue to enjoy many more years as satisfied investors in the ACE Fund alongside us.