Avenir Value Fund for the year ended December 31, 2016.

2016 Hedge Fund Letters

Dear Partner:

The Avenir Value Fund (the “Fund”) increased 6.4% in the December 2016 quarter and 20.4% for the full year to December 2016. By comparison, the ASX All Ordinaries increased 4.4% in the quarter and 11.6% for the full year and the MSCI World Total Return index returned 7.0% for the quarter and 8.9% for the full year. Since inception in August 2011, the Fund has returned 103% net of all fees and expenses.

Avenir Value Fund

Avenir Value Fund

2016 – Expect the Unexpected (but what else is new?)

2016 was a year of surprises with the most significant financial events being Brexit in the middle of the year and then the election of Donald Trump as the 45th President of the United States in November. Short term vicious movements in asset markets highlighted the unexpected nature of these events and there is nothing markets hate more than a surprise. In the case of the US presidential election, markets were expecting Hillary Clinton to be elected the first female president of the United States. The confusion caused by the election of Donald Trump was highlighted by futures on the S&P 500 falling 5% during the night of the election, as it became increasingly apparent Trump was going to steal a surprise victory, followed by the markets ending the next day’s trading up 1%. Since then, markets have continued to react favourably to Trump’s business-friendly agenda which calls for tax cuts, fewer regulations and a large dose of government spending leading to a powerful “Trump Rally”.

Our goal is to compound our investor’s wealth at a well above market rate while carefully managing the risks to which we are exposed. In doing this, we don’t spend a lot of time trying to predict the unpredictable because (i) it is not easy and (ii) even if you get it right, as shown above, it can be even harder to correctly determine what the impact will be on markets and when. So, we stay focused on what we believe we can do which is to search the world for quality companies that are available to us at a bargain price for reasons we understand.

We have also learnt to look lazy. That doesn’t mean that we are lazy, but if you judged our effort simply by the changes in our portfolio you might wonder whether we are putting in a full effort. In 2016, we achieved pleasing results largely by sticking with what we already owned rather than chopping and changing to appease a need for action. There will be times when we feel it worthwhile to make multiple changes to the portfolio in relatively short order, and there will be times when the most useful thing we can do is to get out of our own way and be patient.

We do not know exactly what Brexit or a Trump administration mean longer term but they are likely to lead to bouts of volatility which will be good for us. We ended 2016 with cash equal to 20% of net assets and will be quick to act when we find worthwhile opportunities.

Avenir Value Fund – New Partnership

Before discussing some specific developments within the portfolio, I wanted to update you on an exciting new development at Avenir Capital. You may have noted in the press recently the announcement that Avenir Capital has entered into a partnership with Fidante Partners (Fidante). Fidante is a boutique asset management platform wholly owned by Challenger Limited (ASX:CGF). This is a very exciting development for us and you, our investors, and I want to take this opportunity to give you some background to this new partnership.

While we had good investment returns of 26% (gross) in 2016 and have returned 19% per annum since our inception over 5 and a half years ago, I have also had a growing realisation that operating as a small fund manager was getting increasingly difficult in today’s world. The regulatory demands on all funds, irrespective of size, grow continually and become increasingly time consuming and financially burdensome. Ultimately, this can only detract from the time we are able to devote to clear-headed thinking on investment decisions. This is, of course, what we prefer to be doing with our time and, even more importantly, what we implicitly promise to our investors that we will be doing.

So, during 2016, I become more open to exploring different paths to ensure that we were going to be able to build Avenir to last and to deliver ongoing superior returns to our investors. One of these paths led to Fidante Partners which is a multi-boutique platform that forms long-term partnerships with fund managers to support and grow asset management businesses.

While we were flattered that an incredibly high quality and successful organisation wanted to learn more about what we did, we were also very cautious as we have thus far resisted the overtures of a range of hedge fund seeding and incubation groups. Fidante’s sterling reputation preceded them, however, and so we approached our early conversations with an open, if somewhat reserved, mind. We also recognised that a meeting with Fidante has a very low probability of success. Fidante receives calls continually from fund managers seeking to partner with them, and they are extremely disciplined in their selection of firms with whom they partner.

Despite the above, over almost 8 months of discussions, it became clear that there was something exciting to be done here. As it became increasingly clear that we might be given the opportunity to partner with Fidante, it became more real that we were going to have to actually make a decision as to whether we wanted to or not.

Why Fidante Partners?

So, what was important to me in considering whether to form a long-term partnership with Fidante? Several things, the first of which was, are they the type of people that I wanted to forge a long-term partnership with? People who would be pleasant to work with and who were professional, diligent, hard-working and operated with the utmost integrity? As I met more and more of the team at Fidante, I was highly impressed by what I saw and increasingly confident and excited by the thought of working alongside them. While individually they are very impressive, what struck me most is the culture that appears to run through the organisation which is both hard working and enthusiastic about what they do, but also very collaborative and supportive.

Also important, was their ability to deliver on their promise of providing a world class operational, governance, risk management and compliance environment, thereby freeing us to devote the bulk of our time to investing which is how it should be. What Fidante can deliver on this front is without peer and is something that we could not hope to achieve in our current form. Fidante is a wholly owned subsidiary of Challenger Limited, an ASX 200 publicly listed company, which also owns Challenger Life which is Australia’s leading provider of annuities and retirement solutions. Challenger Life is ‘A’ rated by S&P and operates in a highly regulated field and is regulated by

1, 23  - View Full Page