Aventine Asset Management Inc.

Strategy Overview

The Aventine US Income Strategy is an actively managed, low volatility income portfolio with a principal focus on bonds, preferred shares and high quality dividend paying equities. It is based off of the flagship Stable Income portfolio that has been used by Canadian high net worth investors since 2008.

The primary goal of this Strategy is to provide investors with a high level of income, while also generating consistently positive investment returns overall. The Strategy seeks exposure to a variety of income sources and considers the optimal portfolio as one which balances current yield with both capital preservation and long term inflation protection.

We expect that the Strategy’s flexible approach to capital structure investment, diversified return sources, risk management capabilities and focus on value investing will result in relatively high income with relatively low volatility and lead the portfolio to achieve high risk-adjusted returns for investors.

Investment Objectives

  • Consistently positive total returns.
  • Low volatility and downside risk exposure.
  • 5% annual distribution yield.

Suitability

The Aventine  Income Strategy Fund is an ideal solution for international USD investors seeking to generate above average yield without taking a high level of equity market, interest rate, or currency risk.  The multi-strategy approach of this Strategy has consistently produced positive returns across a variety of market environments and offers forward thinking investors an excellent answer to the challenges of high valuations in blue chip dividend stocks and low yields on high quality bonds.

Investment Process

Portfolio Design

The Strategy will aim to generate a stable level of income and a consistently positive total return throughout the credit and business cycles by employing several strategies with diverse drivers of potential return. We will tactically allocate capital across four core investment strategies to obtain exposure to the most attractive opportunities available, while also giving strategic consideration to the macroeconomic environment. The four core investment strategies we pursue are outlined below.  Our assessment of investment opportunities will include both security-specific criteria such as liquidity, volatility, duration, capital structure ranking and current yield as well as issuer-specific criteria such as business model, asset valuation, management character and a variety of financial metrics to identify the issuer’s capacity to support the capital structure. We consider ourselves to be a concentrated value investor and seek to invest capital in a somewhat limited number of high conviction securities that are trading at a discount to intrinsic value.

Unlike traditional income strategies, the Strategy will have flexibility to invest in income oriented securities at any level of an issuer’s capital structure, as well as in government issued securities, government agency-backed securities and other structured securities. When assessing corporate issuers we will attempt to determine the most attractive piece or pieces of the capital structure from any of investment grade bonds, high yield bonds, convertible bonds, preferred shares or common shares. Each potential investment considered will be evaluated in the context of its ability to deliver an attractive total return within its core strategy sleeve as well as its potential impact on risk and return overall. We expect to invest a portion of capital in income producing assets, sectors or products that are often overlooked by the mainstream investment community, while also seeking to preserve capital and mitigate both downside risks and volatility risks through various portfolio controls and hedging techniques.

We expect that the Strategy’s flexible approach to capital structure investment, diversified return sources, risk management capabilities and focus on value investing will result in relatively high income with relatively low volatility and lead the portfolio to achieve high risk-adjusted  returns for investors.

Capital Allocation and Security Selection

Flexible Fixed Income Strategy
The Strategy’s flexible fixed income strategy pairs active fundamental credit investing with passive ETF allocations. Idea generation on the active side involves internal quantitative screening followed by detailed fundamental issuer research. Because the Strategy only expects to invest in a limited number of corporate bond or convertible securities its holdings will be limited to those issuers or issues that represent attractive investment value. Over time it is expected that we may own debt or convertible securities issued by various companies of which we are or have been an equity shareholder, as a lower risk way of gaining additional exposure to companies for whom our investment view is very favorable. We will not typically be an active distressed debt investor, although we may seek to participate in general situations where material credit improvements are expected to a broad sector or group of companies based on our views and analysis.

Investments in fixed income ETFs will be used to acquire and hold a base element of yield and “bond beta” as well as to express specific macro views such as the direction of interest rates, inflation or credit spreads. We may also hold ETFs based on the US Treasury market to hedge equity exposure.

Preferred Share Relative Value Strategy
The main purpose of holding preferred shares in the Strategy is to provide a source of high, tax advantaged income to investors; however several different types of preferred shares may be owned by the Strategy from time to time, each of which assists in achieving one or more additional objectives. Rate-reset and floating-rate preferred shares trade with a positive correlation to short and mid-term government bond yields, helping us to keep our sensitivity to rising short term interest rates relatively low. Perpetual preferred shares are similar to long term corporate bonds and are sensitive to changes in longer term bond yields, but may provide opportunities for yield enhancement over comparable bonds or ETFs.

Synthetic preferred shares (or split-share preferreds) exhibit very low price volatility, have almost no interest rate sensitivity and structurally incorporate a significant element of downside protection. The Strategy’s preferred share investments will be diversified across several categories. Individual securities are chosen based on the Manager’s view of their value relative to current / expected yield, with particular consideration given to volatility, liquidity, forward interest rate expectations and how other series of the same issuer may be priced.

Enhanced Dividend Equity Strategy
The Strategy’s equity investment portfolio will comprise between 30 and 40 securities and be managed with a bias towards value and quality style factors. The Strategy utilizes a quantitative screening process combined with detailed fundamental research to identify undervalued companies with low earnings variability, solid balance sheet, a track record of delivering attractive total returns to shareholders and the capacity to continue growing shareholder distributions. It is expected that from a market capitalization perspective the Strategy’s average equity holding will be considered large cap and possess a dividend yield of between 1% and 4%, with a central tendency towards 3%. The Strategy will invest primarily in US listed equities and is also expected to invest a portion of its capital in mid cap companies.

The Strategy expects to be an active writer of short term call options against its long equity portfolio in an effort to generate additional yield and provide downside protection. Traditionally covered call overwriting strategies provide strong risk adjusted returns and are an effective way to monetize the excess optimism that tends to form around stocks in the later stages of the market cycle. The Strategy may also write cash covered puts on individual equity securities as a way to generate yield while waiting to gain entry to a position at a share price below the current market. In general the Strategy’s income-oriented option writing activities will be short term in nature, 90 days or less. The maturities and strike prices will be chosen based on factors such as the volatility, momentum and earnings calendar of the underlying stock and the delta of the options contract. Options writing is expected to enhance the dividend equity strategy by between 6% and 12% on an annual basis.

Structured Securities Strategy
Structured securities such as equity-linked notes allow the Strategy to effectively transform a position in an equity index such as the S&P 500 into an exposure that very strongly resembles a high yield bond. In many cases historically, structured notes have allowed investors to outperform bonds with lower volatility. Low bond yields and high equities valuations make certain aspects of the structured notes market an attractive income opportunity today. The Strategy will utilize several types of equity linked notes, such as “coupon notes” or “auto-callable notes” purchased on the primary or secondary markets from major banks. The objective of these securities is to enhance portfolio income as annual yields for different issues may range from 6% to 9% or higher, while providing a very low probability of permanent capital loss. We have significant experience investing in structured notes and have strong insight into the pricing and behaviour of these securities.  Additionally, where opportunities arise to profitably do so, we expect to engage in closed end Strategy arbitrage related to the annual redemption provisions provided by these issues or in situations where the Manager identifies particularly deep discounts to NAV.

Risk Management

Risk management and control is a prominent consideration for the Strategy. We actively seek to manage volatility, promote stability and minimize the risk of large portfolio losses. The Strategy benefits from active risk control in three separate ways – portfolio controls, investment processes and organizational policy. Additionally, we have implemented a comprehensive set of operational and compliance safeguards to mitigate investor exposure to potential operational or compliance risks.

Portfolio Controls
At the portfolio level the Strategy utilizes several controls to reduce risk. First and foremost, portfolio construction and management in the Fund is undertaken with a conservative bias. Position sizing decisions on both a relative and absolute basis are made with consideration given to a security’s average liquidity, and minimum requirements for both liquidity and market capitalization represent a hard threshold for all investments. We use tools to measure portfolio factor exposures, volatility and value-at-risk trends and uses this analysis to rebalance exposures as required. Additional risk controls include the prohibition of investment in private placements and other unlisted or non-marketable assets.

Investment Processes
The Strategy utilizes several models in its investment process which assist in determining what strategy allocation, sector allocation and cash or leverage positioning is appropriate for the prevailing market environment, and in identifying what valuation targets or loss limits should be implemented for individual securities. The core risk model is a proprietary financial conditions index which considers credit spreads, volatility, stock price and foreign exchange inputs to establish the degree to which the Strategy should be positioned more defensively or more aggressively in general. Aventine is a trend-oriented investor, seeks to invest in securities with strong relative strength and tends to utilize a break in the positive price trend of a security as an exit point, all else equal.  All holdings are continually monitored and we will typically liquidate a holding under one of three scenarios – a break down in trend, a material negative revision to the initial investment thesis, or the discovery of a better risk-reward opportunity.

Strategy Performance

The Aventine Income Strategy has been run on a discretionary, managed account basis for Canadian investors since December 2008.  Andrew Shortreid has been the lead portfolio manager of the strategy since June 1, 2009 and continues to lead the Strategy’s investment activities.  Jim Pottow, James Telfser and Krikor Shahinian provide additional support and research for the portfolio.  Since inception, the multi-strategy income approach has consistently generated strong, low volatility absolute returns while providing investors with an attractive, tax efficient income stream.

The below information, for the Aventine US Income Strategy, is current as of October 31, 2017.
The performance presented has been generated in non-USD local currency terms and is calculated net of fees and expenses but gross of an investor’s individual hedging costs back to a USD (or any other) reference currency, which we estimate to be 0.5% per annum.

Growth of $1,000,000

Graph showing monetary figures

Performance Highlights

  • Annualized ROI of 8.7% Since Inception
  • Annualized Alpha of 4.5% vs. Benchmark
  • No Negative Calendar Years Since Inception
  • Annualized Volatility: 5.1%
  • Sharpe Ratio: 1.63
  • Best 12-Month Return: +19.9%
  • Worst 12-Month Return: -4.8%