2021 Q2 Manager Letter

June 30, 2021

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Quarterly Manager Letter
Current News and Updates

Q2 2021

QUARTER IN REVIEW
Q2 YTD
Aventine Balanced Composite:  +3.6% +12.2%
Aventine Canadian Equity Fund:  +4.7% +21.2%
Aventine Dividend Fund (USD):  +6.5% +11.7%

June 30, 2021 – Q2 Commentary

It was a strong Q2 for the Aventine strategies as equity markets continued to benefit from both accelerating growth and inflation as we marked the anniversary of the economic low point of the pandemic.  The Aventine Canadian Equity Fund (“ACE Fund”) closed the second quarter up 4.7%, and 21.2% year-to-date.  The main drivers in the quarter were our positions in Photon Control Inc (PHO-TO, Market Cap $378.3M, +42%) and ATS Automation (ATA-TO, Market Cap $3.34Bn, +34%), as we realized several significant catalysts.  The Aventine Dividend Fund finished the second quarter up 6.5%, and 11.7% year-to-date in USD. The biggest performance drivers were S&P Global (SPGI-US, Market Cap $100.6Bn, +17%) and Roper Technologies (ROP-US, Market Cap $51.5Bn, +17%) as high-quality “compounders” benefitted from a rotation out of cyclical names such as Caterpillar (CAT-US, Market Cap $114.0Bn, -6%).

Aventine clients also benefited from their position in our high-quality core equity strategy, where utilities and dividend-paying stocks continued to look very attractive relative to low interest rates and potentially peak economic growth.  We believe this strategy is poised to realize some significant catalysts as companies execute on M&A opportunities that have been put on the backburner for the past 12 months.

Overall, our equity strategies performed very well considering the primary driver of market returns in Q2, and year-to-date, has been commodities – an area where we have no exposure.  For reference, Oil was up 24%, and the CRB Index of a basket of commodities was up 15%, in the quarter.

Alternatives continue to be a big driver of solid risk-adjusted returns, especially relative to traditional fixed income and cash.  Fixed income benchmarks rallied towards the end of June, however, they still posted a negative 2% return in the 1H of 2021.  We continue to find very attractive and complementary opportunities within structured notes, alternative credit, and traditional private equity.

Client portfolios, represented by our Balanced Composite, were up 3.6% in the second quarter and 12.2% so far in 2021.  This compares very favourably to traditional balanced benchmarks such as the Tactical Balanced category tracked by Morningstar, which is up 4.6% YTD. 

Core Equities

Our Core Equity strategy had a strong Q2, with the average position up 7.4%.  High-quality stocks led the way as investors looked for more sustainable growth after the significant pandemic-led bounce back lost steam.  Our two real estate investment trusts (“REITs”), Summit Industrial (SMU-un.TO, Market Cap $3.17Bn) and InterRent (IIP-un.TO, Market Cap $2.52Bn) performed well, up 26% and 15%, respectively, in the quarter.  We believe the trends in industrial, and apartment real estate are very strong and remain steadfast long-term investors in both sectors, particularly with their exposure to growing cities in Ontario. 

We also saw big gains in Facebook, up 18%, as investors celebrated an incredibly strong quarter.  They posted an impressive 40% earnings beat with revenue coming in 10% above market expectations.  We continue to believe the stock is mispriced given the secular growth in their platform and their various other initiatives such as virtual reality.  With their 50% EBITDA margins and very reasonable valuation (12x EBITDA), we believe the stock will continue to move higher, especially if they continue to report 20% y/y revenue growth, as is expected.

Aventine Canadian Equity (“ACE”) Fund

The ACE Fund finished the quarter +4.7% and is currently +21.2% year-to-date.  The performance was driven by several stock-specific catalysts, the most significant of which being the acquisition of Photon Control Inc by MKS Instruments.  The stock was up 42% in the quarter, which was bitter-sweet as we were optimistic about the prospects of the business and saw more long-term value. During the quarter, we also began to build a position in specialty insurer Trisura Group (TSU-TO, Market Cap $1.8Bn) which was well timed with the stock up 39% in Q2.  Analysts have struggled to keep up with their growth, and as a result, they have handily beaten estimates while demonstrating their operational strength.  We believe this is an exciting growth company, building new relationships across the world of reinsurance that we look forward to following over the next few years

Lastly, ATS Automation continued to impress in the quarter as they announced a $120mm order for their life sciences division, the higher margin part of their business.  The stock finished the quarter up 34% and remains one of our top 3 positions by weight. 

Aventine Dividend Fund 

One of our favourite criteria when selecting stocks for inclusion in the Dividend Fund is exposure to long-term structural themes we believe are accelerating. One of these themes is cyber security.

Rapidly rising e-commerce activity is just one of the key drivers for the global cyber security market. E-commerce giants such as Amazon are rapidly diversifying their businesses, and the ecosystem of connected devices is getting wider and bigger. Furthermore, governments and corporations are finally starting to take notice of the tremendous risks associated with cyber threats. The Biden administration has made stopping these extremely disruptive attacks a national-security priority, but we believe the worst may be ahead of us. It is believed that there were some 65,000 successful cyber breaches in 2020, and Homeland Security estimated that $350 million in ransom payments were handed out to groups engaging in ransomware schemes last year. The global cyber security market is expected to reach USD 366 billion in 2028 from USD 153 billion in 2020, exhibiting an impressive CAGR of 12%. In the Aventine Dividend Fund, we hold Palo Alto Networks (PANW-US, Market Cap $38.9Bn).

PANW is well positioned to capitalize on the expanding and evolving digital security market. The Company has been active in M&A recently and now possesses a leading security suite that compliments its legacy firewall business. With this, we believe that the market is both (1) underestimating PANW’s ability to grow its NextGen Cloud offerings and (2) underestimating the resiliency of its firewall appliance sales. PANW demonstrated this in its most recent Q3, where firewall product sales grew 3% y/y, and NextGen ARR increased 71%, well above the street. We believe PANW will continue to see dramatic growth as they can offer new products to an extremely large existing customer base.

Outlook

While we witnessed several volatility spikes in Q2, markets were relatively calm compared to Q1.  Outside of the usual sector rotation and stock-specific volatility, the economic momentum and inflation we have been highlighting for the last number of quarters continued to provide a positive backdrop for equities.  While growth is expected to remain strong for the next few quarters with real GDP growth estimates of 6.5%, we also believe that we could see equity headwinds should we fall short of these elevated expectations.  The economic surprise index has normalized after several quarters of positive surprises, which could be a good leading indicator.

As always, we remain focused on individual companies and their fundamental performance. Based on our analysis, we believe our portfolio companies have a lot more gas in the tank.  We continue to find great underfollowed opportunities, and it appears as if we are getting “another kick at the can” from stocks that will disproportionately benefit from the economy opening up, which continue to suffer post a weak Q2.

Thank you for your continued trust in Aventine to manage your savings.  Please do not hesitate to reach out to learn more about our strategies or to set up a time to discuss your account.

Best wishes as always,

James, Jim, David, Shannon and Nicho 

Contact Information
Email Phone
James Telfser   jt@aventine.ca 416-847-1767 x501
Jim Pottow   jp@aventine.ca 416-847-1767 x502
David Pepall   dp@aventine.ca 416-847-1767 x511
Shannon Vadovic   sv@aventine.ca 416-847-1767 x510
Nicho Hart   nh@aventine.ca 416-847-1767 x514

Aventine Performance Update
June 30, 2021
—–
Aventine’s Partners and their families are among the largest investors across each of our strategies. 

Aventine Balanced Composite
Inception: June 1, 2009

Aventine Balanced is our core portfolio for separately managed accounts following a “balanced” mandate. It is an actively managed, endowment-style portfolio that offers investors diversified exposure to a broad variety of markets and asset classes. This diverse portfolio produces below average volatility and high income generation as we include asset classes such as private debt, mortgages, traditional and non-traditional fixed income, all-cap equities, alternatives and portfolio protection through prudent risk management strategies.  

CURRENT PERFORMANCE SUMMARY
Q2 YTD 2021
Aventine Balanced Composite  3.6% 12.2%
Annualized 3 Year 5 Year Inception
8.1% 8.5% 8.2%
The Inception Date of this Strategy is June 1, 2009.
Additional performance information and disclosures on composite construction is available upon request.

We encourage new clients to join Aventine by investing in our customized portfolio solutions which are tailored to your specific goals.

To learn more about how our independent approach to managing wealth differs from traditional models please feel free to contact us anytime. 

WEB: AVENTINE.CA     |     EMAIL: INFO@AVENTINE.CA     |     PHONE: 416.847.1767

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This email communication is intended to provide you with information about the Aventine Total Wealth Strategy (the “Strategy”), the Aventine Canadian Equity Fund and the Aventine Dividend Fund (the “Funds”) managed by Aventine Management Group Inc. The Strategy and the Funds are 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 each Fund and Strategy is contained in its Offering Memorandum which should be read carefully before investing and may be obtained from Aventine Management Group Inc. upon request. The Offering Memorandum 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 the Strategy and the Funds 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 Funds is the performance of the target series of F Class units. The value of the Strategy and the Funds 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 © 2021 AVENTINE MANAGEMENT GROUP INC., All rights reserved.
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