azValor a Spanish value fund “which broke off of” Bestinver has just released its first letter. The letter is in Spanish but a reader was kind enough to translate the highlights (in decent English) and was kind enough to send a copy of the letter for which we used Google translate to present below!
Unfortunately, this is in Spanish may be you can get the letter in English. I just thought that may be you were interested in their first letter after they left bestinver. Released today.And just to be accurate current member of azValor ( Mr. Guzman and Mr. Bernard) are both investment managers in bestinver except Mr. Parames who has still ( i think) one year of non competition so he is not officially in azValor although it is presumed that he will join them after it expires.
Main positions (sorry for translation errors).
azValor Iberian portfolio
Acerinox (8.1%): One of the world most efficient producer of stainless steel. 75% of nickel producers are losing money and base prices are near minimum levels. We think it has 70% upside.
Arcelor-Mittal (7.9%): Worldwide leader in Steel, bought after an 87% decline. All chinese producers are losing money and we think this unsustainable will result in capacity closures. If it takes to much time, may be they will need a capital increase, we will take the risk.
Galp (7.6%): Brazil assets have positively surprise in the last 4 years, during this period the stock has decline 40%. We think it has 60% upside.
Semapa (7.4%): Portucel´s holding company, one of the european vertically integrated most eficient producer. 40% upside using Portucel current market value, that we think is undervalued.
azValor – International portfolio:
37% direct exposure to commodities:
Antofagasta(6.5%): Bought after 72% decline from highs from 5 years. One of the most efficient producer of copper, with solid balance sheet, and a family that has prudently allocated capital, “rara avis” in this sector.
Range resources (4.6%): Bought after 73% decline in the last 18 months. Good balance sheet, one of US the most efficient producer of natural gas, where all producers lose money at operating level (AISC). Although there could be production for a couple of years, there is no incentive to invest until price double from current levels.
ALS (4%): Bought after 70% decline since May 2012. Worldwide leader in inspection and certification for the mining industry. With 28% ROCE and solid balance sheet, we think is undervalued and with better ROCE to play the depressed mining market.
Rio Tinto (4%) Bought after 60% decline from beginning of 2011. It is the most efficient iron producer. With commodity current levels with think it could fall 10% and with normalised price the stock could triple rather than double. 25% of world production lose money at current price.
7% indirect exposure to commodities through business with infinite ROCE/net cash, afected indirectly by sentiment in commodities.
45% in better business although not as cheap:
BMW (4.6%): We still think is best managed company in the sector. Through the preferred share, we pay x4 2015 earnings. If earnings fall 30% multiple just increase at x6, because of accumulated liquidity. We value at 90% more.
Dassault Aviation(4,4%): At our average price we pay PER x5 for a business with 80% ROCE that we now well since 13 years ago, and whose management we admire. 50% upside.
Danieli (3%): After 52% decline in 24 months, the price at which we invested valued at 0 this worldwide leader company in steel plant engineering that has generated an average of €150m/year since 2005. We value the company at an 80% than what we paid.
The last reason for writing a letter to our investors is to illustrate the results obtained. In our ideal world, this letter would be five years, for that is the minimum horizon to which we invest. We understand however our co-investors must have the necessary information to judge our work. In this letter our successes or not ensalzaremos We hide our weaknesses; We try simply to give them the
information we would like if our roles were reversed.
At the end of the 25th, azValor Iberia lost 9.2% in 2016 (IGBM -10.3%) and 10.2% from the beginning November 13, 2015 (IGBM -15.3%). In azValor International lose 10.4% in 2016 (MSCI -8.5%), and 14% from the launch (MSCI -8.1%).
azValor just born but Fernando and age 20 and investors in 2016. We recall the main points of our philosophy throughout these years:
- Although we like especially good business (high ROCE) and preferred teams, the most important thing for bright and aligned managers us is to buy low.
- In general, cheap to buy must be contrary to the market something, or look at a higher average looking term investors.
- In general, the above is not comfortable, and those who attempt it, put in career-threatening, because in this sector the incentives are very short term and short-term get wrong (or difficult to hit). Who replies indexes do not run this risk.
- If we can try is because our co-investors we allow your patience to look at longer-term average.
- However, we have made mistakes in the past, approximately one in ten investments. The majority (2/3) of the errors were due to excessive debt. The rest is concentrated in the retail sector or It is because disruptive technologies.
- are not included in the above errors of omission (not to invest in something Okay). Although who does not invest in something you can not lose (even to rise), we still hurts not having invested in Inditex, holding it at home”. There are many more such errors, and will remain …
- The key then is to find businesses in which we assume the reasons by listed cheap, trying to learn from mistakes last. This requires putting 100% focus (our time) analysis companies. It also requires renouncing to have an opinion of everything it is fashionable at the time, in exchange for trying to have the more solid opinion on a few things. This sounds boring but we believe it is more effective.
With this philosophy we have achieved very satisfactory returns over 20 years. These returns were despite what:
- To have lost money in 1999, when all earned investing in “Dotcoms”.
- Glad we missed the boom of real estate / banking in Spain between 2004 and 2008.
- To have fallen by 60% between July 2007 and March 2009.
In all these periods, the common (legitimate!) Question among many investors was: “Can be mistaken this time”? We believe that endure these hard times is the essence of value investing.
See the newly released “The Big Short” (“The big bet”) film, and you will understand how it feels to manager (Michael Burry in the film) in those moments. What comes out less in the film (also comes in other characters) is that the losses tend to be moments of planting future benefits, and it also creates some excitement in the managers. In now fall in azValor no activity in the office Monday Sunday and every one analyst makes a special effort (thanks to all!), some of them being very excited at the potential buying opportunities. Let them.
azValor – Our portfolio
26 Iberian companies in the portfolio. These are the main ones:
Acerinox (8.1%): One of the producers of stainless steel most efficient world, with a strong balance sheet. 75% of