Volume 12 Number 1
First off, I want to take this opportunity to thank all the front-line workers who dedicate themselves, day after day, night after night, to caring for the most vulnerable in our society. I would also like to send a message of support to all those who have seen their dreams, passions and life plans demolished as a result of this unprecedented crisis. Entrepreneurs are the pillars of our communities and the current situation is simply unsustainable for many of them. I tip my hat to all who are showing extraordinary resilience.
It was important for me to start the letter this way because we at Rivemont were among the privileged, the most fortunate, in 2020. Indeed, against all expectations, stock markets ignored the pandemic and gave us perfectly respectable returns. If someone had told me early last year that North American markets would wind up in positive territory despite this nightmarish pandemic with its confinements and many restrictions, I would never have believed it.
However, and this is the real beauty of stock markets, it is very difficult to predict what direction they will take in the short to medium term. But it is still possible to react to them and position one’s portfolio to take advantage of arising opportunities. That is what we did in 2020.
Those of you who follow our activities closely know that we had an exceptional year in terms of performance. Here is an overview:
“Equity” strategy, gross return: 21%
Rivemont Alpha Fund, net return: 36%
Rivemont MicroCap Fund, net return: 52%
Rivemont Crypto Fund, net return: 187%
This financial letter will therefore focus primarily on a review of our investment decisions and our forecasts for 2021. Then, as usual, we will present our market outlook and our largest positions.
Our year was divided into three distinct periods: the crisis and the steep decline at the beginning of the year; the rebound led by industries helped by the lockdown and the fight against COVID-19, and the euphoria that began at the end of last year, caused by the massive injection of liquidity by central banks.
As is our nature, and because we favour active management, we reacted quickly in the first quarter to protect the portfolios by liquidating several risky positions. This proved very positive for the portfolios during the period.
Our one mistake was to sell certain bonds whose value was falling abnormally, as shown in the chart below.
In fact, there was an extremely strong rebound after the U.S. Federal Reserve announced it would purchase corporate bonds directly on the market. We reinstated our positions at that point, but the damage was done.
After selling our stocks, we were slow returning to a fully invested portfolio in order to avoid another bear market. Protecting our investors’ capital is always our chief concern.
We then invested the available capital in two industries directly related to the pandemic: online sales and biotechnology. Amazon and the iShares Trust Nasdaq Biotechnology ETF, which includes companies that develop vaccines, were added to our portfolios. Here are this fund’s top holdings, their market capitalization and their weighting in the index.
|GILD||GILEAD SCIENCES INC||$673,842,436.80||6.19|
|VRTX||VERTEX PHARMACEUTICALS INC||$506,538,421.72||4.66|
|REGN||REGENERON PHARMACEUTICALS INC||$467,829,656.73||4.3|
|ALXN||ALEXION PHARMACEUTICALS INC||$295,827,102.35||2.72|
However, 2020 would not have been as profitable without the contributions of two companies in particular: Docusign and Lightspeed. The first, the industry leader in electronic signatures, whose stock we purchased in 2019, was naturally helped by the imposition of lockdowns. The result was an investment that grew almost fourfold. The second is a Montreal company that offers e-commerce platforms, a Shopify 2.0, in other words. Let’s wish it the same success as the original.
As I said earlier, we have the impression that stock markets are in a period of euphoria. A correction is entirely possible and even desirable. It would be yet again an opportunity to profit from the usual rotation of industries to position our portfolios for the next cycle. The wheel never stops turning…
Rivemont Crypto Fund
This is our most volatile and risky strategy, but it possibly holds the greatest potential. We don’t systematically include the Rivemont Crypto Fund in our private wealth portfolios because of the unusual characteristics of this asset class. Please feel free to contact us if you would like to learn more about this strategy or dip your toes into it.
If you have not already done so, I invite you to read the article on cryptocurrencies that I wrote for Le Droit Affaires in order to demystify this new area of global finance.
Rivemont MicroCap Fund
I would first like to welcome Mathieu Martin and Philippe Lapointe, who are joining Rivemont to manage the Rivemont MicroCap Fund. The team is growing and becoming stronger.
2020 proved to be an extraordinary year for the microcap sector in Canada. While large cap companies were hitting peaks and their valuations were high by historical standards, there were still many bargains among microcap companies at midyear. We saw a significant influx of institutional capital into this sector in the second half of the year, which drove many of our stocks up. This phenomenon was reflected in the fund’s annual performance.
Here are a few figures for the fund as at December 31, 2020:
- $12.3 million in net assets under management
- 95% invested and 5% in cash
- 32 positions in the portfolio, the largest representing 13.5% of assets.
- the top five positions accounted for 37% of the portfolio.
- unit value of $9.51*, for a return of +25.4%** for the quarter
- +52.7%** return for 2020
* Series B units (MAJ724)
** Return net of all fees
The table below presents the total return (including dividends) of the major North American indices for 2020:
2020 was absolutely outstanding for the Rivemont MicroCap Fund, which outperformed all the main indices. Moreover, the fund navigated its second period of high volatility (the first occurring in December 2018) and once again demonstrated its resilience and ability to bounce back.
Of course, we should not expect to see such returns every year. However, we believe that, with our rigorous and proven investment process, we can continue to do well against the benchmarks through good times and bad (yes, there will be bad times one of these days, unfortunately).
Let me conclude this letter by noting an important highlight for the fund this year. In 2020, it obtained its first “10-bagger,” meaning a security whose initial value has grown by ten times or more. The stock in question was Xebec Adsorption (TSX: XBC), a Quebec company that we first bought in 2018 at 70 cents a share. In 2020, the stock closed at $9 a share, which is equivalent to a return of 1,186% on the initial shares purchased. Xebec is a global provider of gas generation, purification and filtration solutions for the industrial, energy and renewable energy sectors. The company is well established in the energy transition field through patented technologies that transform biogas into clean renewable energy sources. It has more than 1,500 customers, including small businesses, multinationals, municipalities and government agencies seeking to reduce their carbon footprint. Headquartered in Montreal, Quebec, Xebec has several sales and support offices in North America and Europe, as well as two manufacturing plants; one in Montreal and one in Shanghai.
You will find below a list of the individual securities with the largest weight in our “growth” portfolio. These stocks were selected based on their respective potential to outperform the stock market. You will find a short description of their activities, the annual dividend, if any, and the total return since their first inclusion in our portfolio.
Despite the pandemic, 2020 was a very special year for us since all our strategies beat their benchmarks, often by a significant margin. Our assets under management grew by about 50% to exceed $75 million. I want to take this opportunity to again thank all our clients for the confidence they show in us. Without you, we couldn’t be where we are, and we are fully aware of that.
Martin Lalonde, MBA, CFA
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Volume 12 Number 3
Time flies. The pandemic began more than 18 months ago and so much has changed. It’s hard for us to believe that the stock market is now hitting new highs week after week. In fact, central bank intervention has been such that all assets are now in a bull market. Lumber, canola oil, used cars, maritime transport, food: all are strongly on the rise. However, if we dig deeper, particularly in the stock market, we see that everything is not so rosy. We’ll discuss the result of this review in the first part of this financial letter.Read more >
Volume 12 Number 2
Portfolio management consists of three distinct activities: making investment decisions, ensuring compliance and governance, and building relationships with clients, not necessarily in that order. As you know, we’ve implemented an array of new technologies to support these activities and maintain the connection between the firm and its clients. However, after nearly 12 years, our investors have also become our friends, people we talk to about our children’s graduation, our business achievements, or simply about the weather. And I can assure you that we look forward to seeing you again in the flesh and shaking your hand after this horrible pandemic. I can’t count the number of times I’ve heard this in a conversation: “Let’s go for a beer or coffee when this is over.” We’re definitely ready to greatly increase our intake of caffeine (or other liquid, where appropriate) to make up for lost time.Read more >
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