ACE Fund: November 2016 Manager Letter

November 30, 2016



30 November 2016

Aventine Canadian Equity Fund

Monthly Fund Manager Update – November 2016

Executive Summary


The Aventine Canadian Equity Fund (“ACE Fund”) finished the month of November up 2.7% and has gained 4.2% year to date.  

OPEC’s deal to cut crude oil fuelled the Fund’s energy sector companies, accounting for approximately 1/3 of the gain during November. The portfolio’s positions in industrials, our largest sector weight, also contributed positively to performance.

Fund Information

Purchase Documents

Performance Overview

Current Performance

1 Month 6 Months Year to Date
Aventine Canadian Equity – Class F +2.7% +1.8% +4.2%


Historical Performance

1 Year 3 Years* Inception*
Aventine Canadian Equity – Class F +5.1% n/a +8.7%
* Performance for periods >1 year are annualized.

Metrics of Average Company

Market Capitalization ($B) $2.1B
Expected EPS Growth 28%
Forward Price-to-Earnings 14.1x
Dividend Yield 2.1%
Return on Equity 13.1%

Performance Statistics

Annualized Standard Deviation 11.8%
Annualized Alpha vs TSX Composite 5.5%
Beta vs TSX Composite 0.7
Correlation vs TSX Composite 0.5
Sharpe Ratio

Fund Commentary

The ACE Fund finished November up 2.7% and has gained 4.2% year to date in 2016. Gains in the portfolio were led by the energy sector, as the 3 companies that make up the Fund’s energy “book” accounted for about one-third of the Fund’s gain during the month.  Also helping performance were the Fund’s positions in industrials, our largest sector weight.

Powering the energy sector was OPEC’s November 29th announcement of a deal to curb the group’s crude oil production by roughly 1.2 million barrels.  While this news didn’t officially come until the end of the month the market had been marching energy names higher for several weeks as a negotiated supply cut had become the most probable outcome.  Notably, this was the first coordinated OPEC production cut since the depths of the 2008-09 crisis and with widespread participation (11 of the 13 member states) we believe that this heralds a significant shift for oil markets.  It’s an important psychological milestone that likely represents the cartel’s “Whatever It Takes” moment, referencing European Central Bank President Mario Draghi’s famous speech in defense of the Euro currency in 2012.

While there are many elements of the deal which come under fire from skeptics – production cuts are from record levels, expectations for quota cheating, fuzzy time-frame for implementation, etc. – an organized move towards price stability is something that the market should view positively overall. OPEC should realize by now that technological advancement will continue to drive the global marginal cost of production lower, weakening its degree of influence over pricing in future years.  OPEC is making hay while the sun shines and so are we, with roughly 15% of the Fund invested in assets that benefit from rising oil prices (at the time of writing).

There was something else in November that may have caught your attention – the US Presidential election.  While the entire election cycle was a media spectacle of ridiculous proportions, it is tough to say that it hasn’t changed the nature of American politics in a major and perhaps lasting way.  Moreover, the impossibility of its aftermath is even more mystifying: Donald Trump, whose election was universally viewed as a would-be catastrophe for stocks back in October, has sent markets leaping to all-time highs with his pro-business, anti-regulation cabinet appointments, commitment to significant tax reform and fiscal stimulus proposals.  With a great American “reflation” apparently underway, expectations for both growth and inflation in 2017-18 are being raised by economists and strategists everywhere.

As an asset class, equities are generally benefiting from the economic upgrade, although new highs at the index level are masking major sector rotations taking place underneath.   While we wrote about the potential impact of Trump’s likely policies in our commentary last month, the improvements haven’t been limited to just the U.S.  Global economic data has jumped across the entire developed world, giving this market the legs to continue moving higher.  The charts below highlight a few things we are watching in this regard.  First is Citigroup’s G-10 Economic Surprise Index, which illustrates the degree to which economic performance in the developed world is coming in better or worse than expectations.  The second chart shows the relationship between an improving Global PMI Composite (a key leading indicator) and positive revisions to earnings per share, both of which bode well for the ACE Fund’s current positioning.

Considering that most of the world runs on some combination of recent memory and current experience, we generally pen our letters based on insights and expectations relating to a 30-day window that occurs on either side of today.  With such a massive emphasis placed on “the now”, the value of having a deeper historical context can often be overlooked, despite how grounding and informative it is to step back and view the world through a wider lens.  Occasionally we’ll review a series of very long term investment-related charts for perspective and the chart below stood out to us at a recent “2017 Outlook” presentation we attended.  Images like this help to remind us that markets are simultaneously moving within multiple cycles of different duration.  Positioning within the seasonal (multi-month) and economic (multi-year) cycles will always be important considerations for day-to-day portfolio management, but over long periods of time tremendous gains come from owning great companies during secular periods of structural innovation and growth in technology, healthcare, finance and industry, as illustrated here.

A Reflection on 2016 and a Peek Into 2017

With only a few weeks left in the year we can easily say that 2016 has left its mark on us.  From the Chinese Yuan devaluation in January to “BRexit” in June, the intense lead up to the US election, and a binary OPEC decision to close the year.  This has been a year for the record books and at this point we are looking forward to 2017 and the better opportunities it hopefully provides for us.  For those readers that have followed our strategy since we started managing money, you will know that a year like 2016 – where market leadership is dominated by resources and banks – is not the ideal environment for our approach.  But notwithstanding difficult market conditions for active managers everywhere and some missteps in a couple company-specific situations, we have mostly been in the right place at the right time. So while some of the bigger opportunities this year were outside our wheelhouse (eg. gold miners, energy exploration, junk bonds), we have still been involved in several of the higher quality performers in the Canadian equity market.

Our positioning since the summer has been undervalued cyclicals – such as industrials, energy and discretionary stocks and while they had been weak throughout the fall they are now starting to break out again which we expect will continue to buoy the ACE Fund into 2017.  From a Risk Model perspective, we continue to see nothing but green lights as credit conditions, volatility and overall trends are moving in the right direction.  As a result we are close to fully invested and as much concentrated in our best ideas as we have been all year.

Thank you for your interest in the ACE Fund, we appreciate your continued support and look forward to working with you in 2017.

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 in various jurisdictions across Canada, please contact Aventine Management Group Inc to discuss if you may be eligible to invest.  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 the ACE Fund is the performance of the target series of F Class units. 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 © 2016 AVENTINE MANAGEMENT GROUP INC., All rights reserved.

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