Bestinver's 2nd Quarter Shareholder Letter

'We are finding good investment opportunities, buying strong businesses at prices that offer great potential for growth'

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Aug 02, 2018
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Dear investor,

Thank you for your trust, reflected in your long-term vision. It is a privilege for us to work with a base of co-investors with whom we share our investment philosophy and the objective of obtaining the best long-term returns. That is our most valuable competitive advantage, given that it allows us to ensure that the resources dedicated to fundamental analysis bear fruit through the construction of robust portfolios for our investors.

Volatility, which we have considered to be a possibility for a while, arrived during the first half of 2018. And it really left its mark on the equity markets, where on 5th and 8th February, the S&P index recorded its largest daily decreases for 5 years, as well as on the fixed income markets, where a fresh political storm in Italy caused 10-year bonds to lose 10% of their value in May alone.

Without going into the technical details, it is important to note that over the last few weeks, we have seen not only volatility, but also a lack of liquidity in the market, in particular, in fixed income. And that is something worth reflecting on. It is true that nervousness is often a source of opportunity, but the lack of liquidity is a very serious issue.
We have seen how assets regarded as safe, such as the debt of one of Europe’s major powers, can lead to sharp falls in the portfolios of investors in just a few sessions. Almost in the blink of an eye. The market has shown that fixed income does not always protect investors, as many people think, and that it is no longer possible to obtain returns without risk, like it used to be.

The headlines don’t seem to be helping much either: threats of trade wars, tension in emerging markets, political uncertainty in Europe…

In the face of so many events, at BESTINVER, we remain firm in our process. We continue to dedicate all of our time to the fundamental analysis of companies, to better understanding their businesses, their strengths and their weaknesses, by studying their accounts, their results, their balance sheets and by holding hundreds of meetings and conversations each year with their directors and competitors.

We put all of our effort into completing our shopping list. If we know which businesses we want to buy and at what prices, then volatility is no longer a risk, rather, it is an opportunity to build robust portfolios for the long term. Risk is the permanent loss of capital and is not related to fluctuations in prices. We take advantage of those movements to invest in good businesses at low prices.

Taking advantage of opportunities on our shopping list

In this context, at BESTINVER, we are finding good investment opportunities, buying strong businesses at prices that offer great potential for growth. In some cases, and although it sounds paradoxical in these hectic times, we are finding companies that seem boring at first glance, but which have exciting stories behind them.

For example, do you know Wolfgang Leitner? Maybe you’ve never heard of him, after all, he’s not very popular or very eccentric. What about his father, who was a factory worker at the Industriall company Andritz when Wolfgang was young? After starting his career, Wolfgang started working at Andritz as a consultant and, gradually, he was promoted through the ranks. Ultimately, he was appointed as the CEO of the company more than 20 years ago.

Having spent more than half of his 65 years of life at Andritz, a firm in which Wolfgang now owns almost 30% of the share capital, he has managed to turn it into one of the leaders of the sector. In part, thanks to very wise purchases of other companies. The most recent of which was completed just a few weeks ago.

Andritz is an example of a company controlled by a family, where decisions are taken with a 20- or 30-year timeframe in mind. It has a net cash surplus on the balance sheet and a very strong record of appropriate capital use. We have been following the firm and analysing it for some time now. The only ‘problem’ was that it was not trading at prices that we regarded as attractive to achieve adequate returns with a high margin of safety. But that changed in June, when the share price fell to €42 and we had the opportunity to acquire a stake.

Another attractive stock that we have invested in during the second quarter is the Dutch dredging company Boskalis. Again, the company operates in a niche business, and is currently in the low point of the cycle, which makes it very appealing. The firm is well managed and has been on our shopping list for a while now, whilst we waited for the right time to invest, and an opportunity presented itself in the last few weeks.

Leading businesses…that invest to be even better in the future

At BESTINVER, we don’t focus only on companies with more traditional business models, such as the Industriall stocks described above, we also look for value where we can buy assets at prices that are well below their value.

For example, this quarter, thanks to our profound knowledge of the media sector through our analyst Vighnesh Padiachy, we took advantage of a window of opportunity that saw the stock market debut of the Chinese firm IQiyi (IQ, Financial). The so-called ‘Netflix’ of the East, which in reality is probably more a combination of Netflix and Disney, made its debut with a valuation that, according to our analysis, offered significant growth potential. And we were not alone in spotting the opportunity; the offer was enormously oversubscribed. In other words, investors requested to buy several times more shares than actually IPO-ed on the market.

The firm made its stock market debut on Holy Thursday and its first movements caused concern: the price of the shares fell rapidly from the €18 at which they had been placed to €15. But the subsequent reaction was stunning and, within a few months, the shares that we had been able to purchase had more than doubled in value with respect to their placement price. In fact, the progress has been so rapid that we have now sold all of the position, generating a very attractive return of 100% for our portfolios.

By default, we do not necessarily rule out investing in companies that are losing money. It is important to analyse the reasons in detail, understand the business well and see why the losses are happening. For example, there are some internet-based businesses for which being the market leader is the absolute key, and so they make major investments to maintain their positions. Companies such as Amazon and Netflix spring to mind.

Of course, the key is being able to distinguish the companies that ‘burn money’ for the wrong reasons from those that are building their future leadership positions. And here, again, a profound knowledge of each company, each business, each trend, is critical, which is what you have at your disposal through the investment team at BESTINVER.

European banking: an investment that has been highly profitable

Over the last quarter, we have substantially reduced our position in European banks, in what has been a profitable trade for our co-investors. Specifically, the gains have exceeded €350 million since the summer of 2016 when we started to take positions in the sector, in light of the profound mismatch in valuations that we saw at that time, greater almost than those of 2008.

In recent weeks, we have started to reduce our exposure to those entities, in light of the greater normalisation that we perceive in the market. In addition, the crisis in Italy has taken hold, which has meant demanding greater margins of safety, which has led us to reconsider our investment in stocks such as Intesa.

Very positive performance of the largest positions in the portfolio

In the Iberian portfolio, it has been a very good quarter for our main position in the portfolio, the paper manufacturer Semapa. The Portuguese company has experienced a significant increase in value, which has led it to new highs, but we still see value in the fundamentals of the company.

The paper market is currently in the low point of the cycle, capacity has decreased considerably in recent years and the company has announced price rises of between 7% and 8% in its paper division, which operates under the brand Navigator. That will have a very significant impact on the growth in profits, and so the valuation is still very attractive.

Prepared for the opportunities that will arise

At the end of the quarter, we have accumulated high levels of liquidity in the portfolio, which will allow us to take advantage of the good purchase prices that are starting to be offered by several of the companies on our shopping list. For the first

time in a long time, these opportunities are not being caused by episodes of panic or shocks in share prices, but rather as part of the dynamics of a market that is tending to normalise.
The commitment from our investors to long-term investment and BESTINVER’s own commitment to dedicate our time and effort to finding the best opportunities for investment through fundamental analysis, to adequately managing risk and to building robust portfolios, constitute the formula to follow in the search for the best possible returns.

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Beltrán de la Lastra

Presidente y Director de Inversiones

BESTINVER