Recently we brought to you azVALOR inaugural letter to investors using google translate to get the letter from Spanish to English. Below is the actual English translation – enjoy!


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The reason for writing a letter to our investors is to summarize our investment performance. In our ideal world, this letter would be written every five years, as this is our minimum investment horizon. However we believe that our coinvestors should have all the necessary information to assess the job we do. The purpose of this letter is not trumpet our achievements nor hide our weaknesses, but rather to give you the information we would like to receive if our roles were reversed.

As of January 25th azValor Iberia is down 9.2%YTD (IGBM-10.3%) and down 10.2% (IGBM-15.3%) since its launch on November 13th 2015. azValor International is down 10.4% YTD (MSCI-8.5%) and down 14% (MSCI-8.1%) since launch.

OUR PHILOSOPHY While azValor is a new fund, Fernando and I are not new to asset management: in 2016, we will have been in the business for 20 years. Therefore, we feel it is worth giving you some insights into the philosophy that has guided us over this time:

While we like good businesses (high ROCE) and seek brilliant and aligned management teams, our paramount aim is to buy companies that we believe are undervalued. In simple terms, we seek ‘cheap’ companies.

To buy “cheap” you often have to act in a way that appears to contradict the market or alternatively, you have to look beyond the investment horizon of the average investor.

This approach is not straightforward, and those who attempt it - in some asset management companies at least - threaten to jeopardize their careers because all too often their incentives schemes are very short term. The problem with ‘short termism’ is that it is very easy to get it wrong and difficult to get it right. Of course, those who do not attempt to beat an index but simply replicate one, are in no “danger”.

The reason why we can try to do better than index replication is because our co-investors enable us to do so as they have the patience to look longer term than the rest.

Yet despite all this advantages, we have made mistakes. In fact, approximately one in every ten investments has not performed in the way we would have expected. Some two thirds of these errors were due to a debt overload while the rest were either concentrated in the retail sector or due to disruptive technologies. ? We do not include in our list of errors, ‘errors of omission’, by which we mean not investing in something that proves (after the fact) to be a good

investment. Of course, he who doesn’t invest can’t lose, but we still feel bad about many misses best illustrated by Inditex - a great company which was on our doorstep. ? We have many more errors of this type…and there will be more.

The key therefore, is to find businesses in which we have a clear understanding of why their stock is cheap while trying to learn from past mistakes. This requires us to put all our focus on company research. It also means renouncing to have an “opinion du jour” on everything, in exchange of having the best one in a few things. This sounds boring but we believe it is far more effective.

This philosophy has served us well over the past 20 years despite:

Having lost money in 1999 when everybody was making money by investing in “dotcoms”

Having missed the real estate/banking boom in Spain between 2004 and 2008

Having seen our NAV fall by 60% between July 2007 and March 2009.

During these 3 periods a common (and legitimate) question crossed most of our investor’s minds: “are they WRONG this time?” We believe that being able to withstand these hard times is the essence of value investing.

If you watch the newly released Hollywood film “The big short”, you will begin to understand how the manager (Michael Burry) feels when markets go against him. What the film does not show so explicitly (it does in a way too) is that some investors get excited in these same “tough” market moments at the “smell” of the profit opportunity. This is also currently reflected at azValor’s offices, where many of our analysts are seen from Monday to Sunday (Thanks to all of you!) …sharks smelling blood?

IBERIAN PORTFOLIO In all, 26 companies make up our Iberian Portfolio including:

Acerinox (8.1%): One of the most efficient stainless steel producers in the world, with a strong balance sheet. 75% of nickel producers are losing money and base prices are close to minimum. We believe it is worth 70% more than what we paid for the shares.

Arcelor-Mittal (7.9%): this business is a world leader in steel which we purchased after an 87% drop in value. All Chinese producers are losing money; we believe this unsustainable situation will result in capacity closures. If they take too long, a capital increase might be necessary. Although this is not our baseline scenario, it is a risk that we are willing to take.

Gap (7.6%): Gap’s assets in Brazil have continued to positively surprise us over the last four years. However during this period the shares have dropped by 40%. We believe it is worth 60% more than its current value.

Semapa (7.4%): Semapa is the mother company of Portucel - one of the most efficient integrated paper producers in Europe. Mark-to-market of Portucel’s stake yields a 40% upside, and we believe Portucel is undervalued now.


Turning to our International portfolio we have 43 companies which we can divide into three groups:

37% of direct commodity exposure; those with indirect exposure; and those invested in good businesses which are not particularly cheap.

Antofagasta (6.5%). Purchased after a 72% fall from the peak 5 years ago. It is one of the world’s most efficient copper producers, has a strong balance sheet and is led by a family which has proven a careful capital allocator, – which is rare in this sector.

Range Resources (4.6%): Purchased after a 73% fall over the last 18 months. With a good balance sheet, it is one of the most efficient gas producers in the USA in a market where all players lose money at the operational level (AISC). Although there may be enough production for another couple of years, there is no investment incentive until at least double of today’s gas price.

ALS (4%): Purchased after a 70% fall since May 2012. It is the world leader in inspection and certification for the mining industry. With a strong balance sheet, it is an undervalued play on the depressed mining market with a much better (28%) ROCE than pure mining firms.

Rio Tinto (4%): We bought after a 60% fall since its 2011 peak. It is the world’s most efficient producer of iron ore. Discounting spot prices yields a 10% downside risk. Using our normalized ones gives us 2-3x the current price. As matters stand, 25% of world production loses money at current prices. In each of the above examples there is a lot of pessimism due to doubts about China’s future consumption. We share these doubts in some cases (steel) but we believe the analysis is far more complex and should include:

A comprehensive

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