The Euro periphery has had an incredible 2014 so far, leading developed market stocks with some countries getting double-digit returns in the first quarter as investors position themselves for what they expect to be the beginning of a major rebound. But Madrid-based Bestinver Asset Management, a widely respected fund that leans toward value strategies, is reducing its exposure to those economies in favor of cash.

Bestinver moves toward cash, large caps

“We have moderately reduced the exposure to Spain and Portugal,” writes Bestinver chief marketing officer Beltran Parages in a recent letter to investors. “This is a very low risk which is also reflected in very stable assets, such as foods, electricity, telecommunications, etc., that manage to adapt to difficult environments without major problems”, according to a recent letter to investors reviewed by ValueWalk.

The Bestinver Iberian fund reduced its exposure to Spain from 22.4% in March 2013 to 16.1% this month, and reduced exposure to Portugal from 16.9% to 15.8% over the same period. International exposure also declined from 55.2% to 49.8%, while cash more than tripled, rising from 5.5% last year to 17.2%.

The Iberian fund, which has $200 million AUM and focuses on Spanish and Portuguese equities (exposure is measured using sales figures), is invested in45 companies, with a heavy tilt toward exporters and large caps. Its five largest positions are Portugal Telecom, SGPS (ADR) (NYSE:PT) (ELI:PTC) (8.21%), Semapa – Sociedade Invest Gestao SGPS SA (ELI:SEM) (7.79%), Sonae SGPS SA (ELI:SON) (OTCMKTS:SOSSF) (7.03%), Acerinox SA (BME:ACX) (OTCMKTS:ANIOY) (5.47%), and CORP. FIN. ALBA INH. EO 1 (FRA:CSV) (4.55%).

Bestinver

The Bestinver International fund made a similar move, reducing exposure to Italy from 8.8% in March 2013 to 8.4% now, and total exposure to Spain, Greece, Portugal, and Ireland fell from 3.4% to 2.8% as overall EU exposure fell from 38.3% last year to 35.5% this month. US exposure stayed constant and EM exposure went from 20.9% this time last year to 22% now, but the big winner was again cash, which grew from 5% of the portfolio in March 2013 to 7.2% now.

The Bestinver International fund is the opposite of the Iberian fund, investing only in equities outside of Spain and Portugal (again, Bestinver prefers to measure regional exposure by sales), with $447 million AUM over 55 positions and a similar preference for large caps. Its top five positions are in Bayerische Motoren Werke AG (ETR:BMW) (FRA:BMW) (8.57%), EXOR SpA (BIT:EXO) (OTCMKTS:EXORF) (7.58%), Wolters Kluwer (AMS:WKL) (OTCMKTS:WTKWY) (7.5%), Thales (6.58%), and Wm. Morrison Supermarkets plc (LON:MRW) (OTCMKTS:MRWSY) (3.93%).

bestinver intl portfolio 0414

Increase in cash could be a troubling sign

“Fundamentally, the managers apply the philosophy postulated by Warren Buffett and Benjamin Graham,” writes Morningstar analyst Javier Sáenz de Cenzano, who gives Bestinver a Gold rating and has clear respect for fund manager Francisco Parames’s ability to find great investments, but the changing weights have him concerned.

Cenzano explains that the Bestinver Iberian fund has historically had higher exposure to small and mid-caps, and that it only recently started making significant investment in the financial sector, but portfolio weights are based on the fund managers’ conviction, not in reference to an outside index. The increase in cash holdings has Cenzano concerned that the Iberian fund, which is still accepting new subscriptions, is in danger of outgrowing its ability to generate alpha, which could also explain why the fund is now tilted toward large caps.

“One problem we see in the process is the high asset volume. The managers are not able to invest in smaller-cap companies that used to be in their investible universe, nor increase their exposure to those in which they already have a significant stake,” writes Cenzano.

While the Bestinver letter acknowledges the shift to more cash and defensive stocks, it doesn’t explain the rationale behind the change. Francisco Garcia Parames has a strong track record, so the decision to keep his powder dry may be a strategic decision, but with other funds increasing their exposure to southern Europe it’s hard not to wonder if Cenzano is right to be worried that the glut of cash means that Bestinver’s success is interfering with its ability to generate alpha.