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We would like to start this quarterly letter by acknowledging that we are in an extraordinary period of financial change and extremes. What has not changed is Avenue’s strategy which we call quality investing, and we believe it is more relevant than ever. Our strategy is designed to be a universal approach to get us through both good and bad stock markets. The first principle is to identify what are the best stand-alone compounding businesses throughout the stock market. Second, we do our best to be patient and invest when these businesses are trading at a fair price.

At Avenue, we are staying calm and analytical and working hard to make sure we can stay invested while avoiding areas where profit margins might be under pressure. As the economic landscape shifts, there are many new opportunities as other investors pull back.

At Avenue we believe we have entered into a period of scarcity like we have not experienced for some time. We face scarcity of capital, energy, food and labour. While this will be a challenge for all investors, we believe there is an opportunity to invest in what we think of as resilient quality businesses that can take advantage of scarce resources while also avoiding businesses where profits may decline.

The saying, ‘stay the course’ has a long military history but it is Ronald Reagan who repurposed ‘stay the course’ as a catch phrase for resetting the economy post 1970s inflation. At Avenue, we have a strategy that incorporates bad markets as well as good and we plan to come through this current weak period stronger than when we started.

We will get through this financial market weakness remembering that the last few years have been a positive environment for investors. But right now, it seems like all prices need to find a new level. While we anticipated that 2022 would be a year of financial market headwinds, investors are faced with almost too many problems all at the same time.

“The key is not to predict the future but to prepare for it.” – Pericles, 494 to 429 BC, Athens This famous quote from Pericles was made in the context of readying the Athenian people for the unpredictability of war. During the last two months we are witnessing what seems like a throwback to a past where despots were intent on brutal conquest. This behaviour seems completely irrational within our globally integrated world of business and finance.

In our Q4 Letter, we will start by giving our view on how financial markets are interpreting the possibility that the Omicron variant will evolve to being endemic. This past year, 2021, was the second year where the virus drove central banks and governments to dramatically increase liquidity, resulting in consumer price inflation. We will discuss our view that regardless of inflation, longer term interest rates can only go up so much. The big theme for 2022 is the deceleration of liquidity as central banks tighten and governments no longer hand out cheques. Liquidity has been the main driver of the financial markets so pricing of all assets will be affected. This is why we have worked hard over the past quarter to build resiliency into Avenue’s equity portfolio.

We will start this quarter’s letter with our view on how the lingering pandemic is having a significant effect on the operations of all corporations. The economy and the stock market are changing at a fast pace, and we have seen our equity portfolio turnover increase this year. As well, we have made an incremental shift back to Canadian companies for the time being because we are finding better opportunities here. We will also discuss the bond portfolio and how we have protected it against the uptick in Consumer Price Inflation (CPI).

In this quarterly letter we would first like to discuss Avenue’s view of inflation, which has quickly become the main topic for investors. Leading from our view on inflation is our broader thinking about how nothing is normal in our current financial world. But we believe we need to get used to it; we are living in a new normal. Our conclusion continues to be that we have to stay invested, but more than ever it matters what we own and it certainly will always matter how much we pay for our investments. Lastly, we would like to give an update on the Avenue Tail Hedge portfolio now that we have been incorporating this strategy for a full year.

In this quarter’s letter we would like to discuss Avenue’s investment strategy in relationship to the current strong overall performance of the stock market. We believe a balanced portfolio of high-quality consistent businesses is more important than ever. While interest rates may rise further, proportionally most of the move has likely already happened.

If you had the good fortune last January to take a year-long sabbatical in the South Pacific, cutting yourself off from the world, you would be arriving back on an empty flight, landing into quarantine and economic lockdown. After checking in with your family and friends about their health, you might be emailing or calling Avenue to see how bad a global pandemic is for your investment returns.