Bestinver’s 2nd-Quarter Letter

Dear investor,

We come to the end of a quarter marked by the same dynamics that have been in play since the beginning of the year: an increasingly established economic recovery and a magnificent performance of the equities markets. Obviously, scratching below the surface of the stock market one can find geographies, sectors or companies that have not fared so well; however, these are exceptions to the rule. The general trend is undoubtedly markedly positive and we are at a sweet spot in the cycle. The faster vaccination rate continues to drive up economic activity. A recovery which, in Europe, will be buoyed by the fiscal stimuli set to arrive in the coming quarters. Nevertheless, monetary policies are still exceptionally expansionary, despite the clear inflationary pressures arising in the economy each day.

The central banks view these tensions as only temporary and continue to deem it appropriate to inject billions of euros into the economy every day. In the quarters ahead, we will find out if they have been clever, imprudent or merely hostages of the huge amount of debt needed to avoid zero interest rates bringing the system to a grinding halt. They certainly have a very difficult job.

One only has to examine prices (in euros) on the main stock markets around the globe to see how the combination of rising gains and extremely low interest rates are proving irresistible for most investors. Over the last three months, stocks have climbed by around 7% in Europe and the United States, with more modest upticks in the Asian indexes (China +5%, South Korea +6%), except Japan which has slumped by almost 2.5% since March. In any event, South America has witnessed the greatest differences over the quarter, with the Brazilian market posting gains of 20% while countries such as Chile and Peru have suffered falls upwards of 14%.

The commodity price rally continues unabated. As oil and oil derivatives have become 20% more expensive than three months ago and metal and agricultural raw material prices have climbed by around 10%, there is a growing number of voices warning that the increase in prices in recent quarters represents a threat to the current economic recovery.

How long are these great headwinds set to last?

We don’t know, and it actually doesn’t matter.

We don’t know because uncertainty is part and parcel of our profession. Markets throw up surprises that make them unpredictable in the near term. Our work is full of non-linear dynamics, emerging realities we did not know about or black swans that are impossible to see coming. We therefore have to be constantly improving our analytical tools and methods. How? By being aware of everything we know we don’t know (and of what we don’t know we don’t know), albeit without this stopping us from putting procedures in place that encourage reflection, debate, constructive criticism, reasoned argument and the intellectual challenge of allowing ideas and visions to vie against each another. This is only ever possible with a multidisciplinary and cross-generational investment team such as ours – undoubtedly one of Bestinver’s big assets.

And it doesn’t matter because while we invest in businesses that benefit from a better performing economy – in the same way their shares gain in value thanks to the vast pools of liquidity lubricating the markets every day – we have funds that must be capable of exploiting a not so buoyant situation. But that’s not all. A less favourable market gives rise to new investment opportunities through which we can recycle our capital, driving up returns and better balancing our portfolios in the long term.

Good businesses at decent prices

At the last Annual Investors Conference, our International Equities Director, Tomás Pintó, answered a question from a unitholder about where to find the best safe haven in view of the prevailing interest rate and inflation scenario and the storm that, in their opinion, could blow up when stimuli are withdrawn. Tomás’s reply was succinct but effective: “Good businesses at decent prices; this is always the best protection”. He was not one iota wrong.

We often mention this when discussing possible market corrections. Our larder is bulging with investment ideas: companies we know about and would like to buy. But when? When they are trading at the right price to ensure the riskbenefit ratio is acceptable.

We say the “right” price because the return we are going to obtain on our investments is determined by the intersect of two factors: the qualities of the enterprise in which we invest and the price we pay (the return we demand) to buy these attributes.

It is clear not all companies deserve the same valuation. They don’t all have the same “attributes”. Nobody demands the same returns from a highly capital-intensive business as from another that is not so. Or from a predictable and stable concern than from a more erratic business offering less visibility. The same is true for growth. A company with a wellestablished platform from which it can grow in a profitable manner does not generate the same value as another with few reinvestment opportunities. One can also not be as generous to a management team you have known for years with an impeccable service record as to another whose decisions have been more inconsistent or less successful.

The importance of the “right” valuations

Whatever the case, valuations are a very powerful tool for managing the uncertainty and risk – which are different concepts – involved in investing in a business. A margin of safety that protects one from misfortune and the errors of judgement we can (and do) all make concerning the quality, longevity or growth of a company we are planning to acquire.

Let’s look at a numerical example demonstrating the effect valuations have on the returns we obtain on our investments.

Imagine we can buy a somewhat unique business premises: a type of concession we are going to be allowed to operate (lease) for 10 years because after that, the building is going to be turned into a public art gallery. The peculiarities don’t end there. We know for certain that we are going to generate rental income of €30,000 and will be able to increase the rent 2% per annum in line with inflation each year.

In order to calculate the price we are prepared to pay for this business premises – the return on equity we want to obtain – we need to calculate the present value of the rental income we will earn over the next ten years. We use a simple discount to do this, i.e. a financial operation aimed at determining the current equivalent value of future cash flows. The mathematical formula we use is:

This allows us to convert all rental income to its (equivalent) value today, add it together and obtain the price we could pay for the business premises. This price would vary considerably depending on the return we want to obtain on our investment.

The results are as follows:

In the first instance, we are looking for an 18% return on our investment. In this scenario, we need to buy the premises for no more than €170,000, which would represent a P/E ratio of 5.5x (the reverse of the return or 1/18%). In the second case, if we demand 7% for this asset, we could pay €244,000 for it or a P/E ratio of 14x. Lastly, if we are only looking for a 3% return, the maximum price would be €287,000, equating to a P/E ratio of 33x.

There is not a lot more to say. The example is enough to understand the inseparable link between price and return. Anybody wanting to buy an asset performs (or should perform) this extremely simple exercise: determine the return they want to obtain and pay the right amount to achieve this. In this case, it is very easy because we know exactly how much the premises is going to generate and over what time frame, meaning there is only one unknown left to define: the return each of us deems to be “right” to acquire it.

Things aren’t so simple though in the real world and on the stock market. First, there isn’t normally a pre-defined time frame over which we will obtain cash flows (rental income in the example) as owners of a business. But that’s not all. In order to forecast these flows with a degree of confidence we need to know the multitude of factors at play that are not just confined to prices in the economy.

However, they are not that much more complicated. In essence, the exercise above is not that different to what we do for the businesses we assess. Our work involves understanding how they turn a profit, examining their corporate culture and analysing the longevity of their competitive advantages, the cyclicity of their assets, how they are financed and a long list of other features we believe are important. In short: getting to know the companies in depth.
Why? To be able to demand a return that we deem to be “right”.

It’s a good time to talk about corrections

So, at least on paper, our work isn’t as difficult as it looks. Find decent businesses, value them prudently and pay the “right” price for them. And as we said before, not all businesses deserve the same valuation. True, but it is indisputable that the less we pay for them, the greater the return we’ll obtain on our investments.

From this perspective, share price falls are not as intimidating as they first seem. They actually bring opportunities, don’t you think?

Now is a good time to talk about corrections when most of the global markets are at an all-time high. In fact, it’s not only interesting, it’s important because a plan for when these corrections occur (and they will) must be devised during a period of calm not worry. This entails being aware of the link between price and return and seeing market corrections for what they are: setbacks not a disaster – something one might believe is the case on seeing share prices plummet by 30 or 40% in a short space of time.

The goal is to follow a strategy we all understand and implement it at least twice a year: buy during the sales. It’s very strange because the stock market is one of the few places where most people prefer to buy when prices rise, not when they fall. We need to try and correct this very unusual behaviour (absurd if we think about clothing, food or any other product or service we want to buy) as we enrich our finance culture. The long-term profitability of our investments will benefit immensely if we do.

Price falls, for whatever reason – a recession, geopolitical event or monetary policy decision – are chances we as savers need to exploit as much as we can. Of course they may be intimidating but they are also far from being a real threat; in many cases they offer a magnificent opportunity to put our capital to work long term.

We’re all (a little) entrepreneurial

If the better prices (those mathematically resulting in higher returns) don’t tempt us on their own, we should put things into context. This will definitely help us dedramatise the (somewhat unsettling) climate that tends to prevail when the markets are falling. Let’s look at the figure of the entrepreneur.

It’s worth remembering we are all (somewhat of) an entrepreneur when we invest in Bestinver’s funds. Our portfolios include shares in companies such as Inditex, Roche (

XSWX:ROG, Financial), Nike (NKE, Financial), Facebook (FB, Financial), HelloFresh (XTER:HFG, Financial), Cie Automotive (XMAD:CIE, Financial), Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), Laboratorios Rovi, BMW (XTER:BMW, Financial), etc. We own a portion of their capital.

Clearly, you as unitholders and us as the mangers of your funds are not au fait with the day-to-day of all these companies, although we do shape their destiny just as their founders or majority shareholders do. We are owners of these companies and therefore, entrepreneurs. A little “lazy” of course but entrepreneurs at the end of the day.

In fact, it’s vital we remember that shares in a company represent a portion of the value of their business. In other words, they confer the right to share the earnings they will generate over their lifetime. This value won’t be particularly affected by an economic downturn or any type of setback. This is a crucial point when investing on the stock market.

As we have said, we just need to put ourselves in the shoes of an entrepreneur (of the “non-lazy” kind”) faced by a challenge. Let’s consider one of the hardest: a recession, for example. Imagine we’re the owners of any type of business: a haberdashery, pharmacy, law firm or even Inditex. Nobody likes to go through a few hard years in their business (not even Amancio Ortega) but its value is not structurally affected by this, right?

We all know haberdasheries, pharmacies, law firms and, of course, listed companies that continued to operate after the recession in the early ’70s and again after the one in 1992-1993. They also survived the tremendous difficulties that arose at the start of the last decade and lasted for several years. And they will continue to turn a profit and generate value for their owners after they overcome the impact of Covid-19.

Now consider when would have been the best time to buy these businesses. During the good or bad times? If we consider it in this way, the answer is obvious. We mustn’t overlook this when things aren’t going so well in the markets.

If the example of entrepreneurs isn’t enough, let’s find inspiration in the property market. Spaniards understand this concept very well when they relate it to their favourite asset. Think about the value of a decent apartment, in a sunny street in a wealthy neighbourhood of a great city and whether this falls significantly because it is covered in scaffolding for 18 months. It doesn’t, does it?

The same is true for listed companies. These are corrections: the scaffolding on shares.

One of Bestinver’s unquestionable strengths

It’s important we always have these concepts in mind and seize the day as best we can when it arrives.

This is an environment that will always favour investments in a specific geography, sector or security as not all assets correct to the same extent. Nor does this happen at the same time. This is where value can be found in the various funds we manage on your behalf. A raft of investment possibilities and one of Bestinver’s unquestionable strengths.

Funds built with the same philosophy – fundamental analysis, appropriate risk management and a long-term view – but all with their own attributes. These qualities will better suit the individual circumstances of each unitholder and/or the market context in which we find ourselves. Portfolios that perfectly complement each other and have the same goal: to furnish you with different tools to build up your capital long term.

For instance, an investor wanting to take a stake in international enterprises that grow faster than the global growth rate and are exceptionally well managed have a fund such as Bestinver Grandes Compañías at their disposal. This fund invests in extraordinary businesses and with a long term view. Eminently profitable companies that the fund’s managers, Carlos Arenillas and Tomás Pintó, buy when the price of their shares is reasonable, offering multiples that at first glance might appear high but are diluted over time and do not compromise the fund’s long-term profitability. We shouldn’t forget that the longer the investment horizon the more the returns we obtain as shareholders converge with the returns of the underlying business in which we have invested. If you want to find out more about this somewhat not fully understood fact, check out this speech by

Charlie Munger (Trades, Portfolio) (Warren Buffet’s partner) called the “Art of Stock Picking”.

The same is true with Bestinver Latin America. Few Spanish fund managers have a product that repeatedly places in the top three global funds in its category as has the fund managed by Ignacio Arnau supported by Pablo Ortea in recent years. A formidable duo who know the region like the back of their hand and are capable of identifying the best investment opportunities in Latin America. A fund that invests in companies which benefit from the growth in the middle classes in the region and has been a pioneer in applying ESG criteria in its management approach.

And what do you think about investing in the megatrends of the future? Bestinver offers you a SRI (socially responsible investment) fund that will benefit from the tailwinds driving three trends we believe have a long way to go: decarbonisation of the economy, digitalisation and improving quality of life through consumption habits. A fund managed by Álvaro Llanza with the help of Raquel Martínez that focuses on investing in sustainable businesses that will achieve constant and growing demand for their products and services in the decades ahead.

Bestinver clients can also invest in the hedge fund, Bestinver Hedge Value, that acquires positions in companies in the global consumption value chain. A category that has infinite connections and provides incredible opportunities for one of the most talented teams in Spain – a team comprising Jaime Vázquez and Miguel Dolz capable of identifying winning business models. Companies that will unquestionably dominate the world in the 21st century and we can invest in during the initial phases of their life cycle. A global fund to build up capital over many years and benefit from the digital revolution in which we are immersed.

And, not forgetting the firm’s flagship funds: Bestinfund and Bestinver International. The largest funds with the longest track record and with a hallmark that is more value based. These funds are jointly managed by Tomás Pintó and Jorge Fuentes who believe the concepts of growth and value aren’t opposing but are, in fact, totally complementary. Funds investing in traditional sectors that are no doubt currently out of fashion but offer unarguable value, but also in less mature businesses that have a fabulous opportunity to generate long-term value that is not currently priced in.

A philosophy shared by Bestinver Iberian, another of the firm’s major funds. A product holding positions in the best companies in Spain and Portugal. Businesses identified by Ricardo Seixas and his team, professionals with much experience in the Iberian market and a long track record of generating truly impressive returns. A profitability that will undoubtedly be boosted when the discount at which Iberian companies are currently trading compared to their European counterparts decreases. We’re talking about companies that are absolutely competitive on the global stage, fantastically well managed and with price multiples shaped by the major stigma suffered by these businesses since the eurozone crisis almost 10 years ago. An opportunity this fund’s unitholders will benefit from when the international community realises that the Covid-19 crisis has served to cement (possibly even more so) the euro’s irrevocable nature.

An opportunity that Bestinver Tordesillas FIL will also exploit. This fund also invests in Spanish and Portuguese businesses and aims to protect and grow its unitholders’ capital. A goal that it achieves using alternative management techniques aimed at mitigating the fund’s volatility, reducing its correlation with the Iberian indexes and obtaining gains in any market context.

And what about the fixed income funds? Bestinver Corto Plazo, Bestinver Renta and Bestinver Deuda Corporativa. Funds with different time horizons and risk profiles that work closely with their sister equity funds and are magnificently managed by one of the most renowned teams in Spain. A team led by Eduardo Roque who share the firm’s value-based investment philosophy and contribute their knowledge to the fundamental analysis of the equities team. The team also draw on this analysis and, combining it with specific work on this type of asset, use it to find the best opportunities on the bond markets.

And if all these options aren’t enough, Bestinver recently established an alternative fund area. Bestinver Infra is this division’s first fund and the firm’s first venture capital fund. A vehicle managed by Francisco del Pozo and his team, which provides direct access to stakes in high-quality global infrastructures. An asset whose performance is unaffected by the economic cycle and obtains stable and predictable returns shielded from inflation. This is clearly attractive to anyone looking to diversify their investments beyond the markets of listed shares and bonds.

As you can see, a plethora of opportunities in which to invest. High quality, very profitable funds that benefit from the incredible talent of the professionals making up Bestinver’s investment team. A multi-disciplinary, crossgenerational team whose mission is to find attractive enterprises that can be included in our portfolios. Your portfolios.

Find them, value them and pay the “right” price for them.

Corporate information

I know we have just mentioned it but we wanted to announce that Raquel Martinez will now support Álvaro Llanza managing the Bestinver Megatendencias fund. Raquel has been with the firm for four years and during that time has analysed companies in the TMT sector alongside Vighnesh Padiachy (Padi to us) and Miguel Dolz and carried out specific work in other sectors, always showing excellent attention to detail. Congratulations Raquel and best of luck in your new post.

We would also like to remind you that you can check out the investment team’s blog articles we regularly publish if you are interested in finding out more about our investment philosophy, the valuation methods we use for your portfolios or any of the investment cases for the positions held.

We have also released our “Valor con B” podcast to the same end. This is a space you can listen to on all the main streaming platforms to discover a bit more about our managers, their professional track records and the funds they manage as well as specific investment cases, discussions about current market affairs and the best approach to longterm saving. A space for learning and finding out everything we believe you might find of interest.

Lastly, we would like to invite you to read the managers’ updates on each of our funds. These round-ups summarise the managers’ vision, the main movements in each fund’s portfolio this quarter and the investment theses for some of the companies in which the funds have invested.

Best regards,

The investment team

BESTINVER