Francisco Garcia Parames is one of Spain’s – and arguably one of the world’s – best investors.
Several years ago he retired from his position as fund manager at Bestinver where he ran the company’s flagship fund for 25 years. Over this period, he achieved an average annual return of 16% for investors for a total return of 1,688.62%.
To achieve this return Parames used a value approach, buying companies at a deep discount to market value and then riding their return to health. In most years this strategy helped him achieve a return of 20% or more. During his 2½ decades at the head of the fund there were only two years in which he reported negative returns –Â 1999 and 2008.
Parames was blocked from starting another fund by his previous employer for two years when he left in 2014. However, some of his former analysts left to set up their own venture azValor in mid-2015 and believed he would join them when allowed. Parames had no intention of joining his former analysts and instead set up a new fund management office called Cobas Asset Management.
Drawn back into the fold, azValor’s staffers have come back to join their former leader.
At the beginning of 2016 I was able to speak with former Bestinver Asset Management executives Alvaro Guzmán de Lázaro, Fernando Bernard and Beltran Parages on who set up azValor and the strategy as well as temperament required to achieve returns of 17% per annum as Parames did.
Below I’ve picked out the highlights of the interview. The full interview can be found here.
How to make 17% per annum
What do you think is the primary trait that helps azValor stand out from its peers?
What has worked in the last 15 years will likely work in the next 25. It is a mix of various things: a very long-term focus, thanks to a deeply loyal investor base that has shown no panic at past bottoms; a preference for good businesses over mediocre ones; no attempts on our side to try to “force” our circle of competence into places/sectors where we cannot bring much (software, biotech, foreign real estate, foreign insurance, foreign banks); a good understanding of economics rooted in the Austrian School of Mises, Hayek, Rothbard, etc., while at the same time avoiding macro predictions, which we believe are a form of excess luggage. Maybe some of the former are pretty common among value investors with maybe the exception of the latter. And above all, and this is easier said than done, a deep focus on a cheap price.
How do you go about looking for ideas? What’s your investment process?
We avoid the typical screening/filtering. Instead, we have a mental database of companies we’ve deeply looked at in the last 20 years. Then ideas come naturally through many ways: profit warnings in places we know or a competitor’s praise of a business model, for example, or just chatting with like-minded value investors.
In your first letter to investors, you highlight the fact that you’re looking for "cheap companies." How does the fund define cheap in this case, and how do you go about calculating your estimate of intrinsic value?
We first try to answer an apparently simple question: Will the business be around in 10 years? Then we try to answer a little harder one: Will it make more money than today and why? If the answer is yes in both cases, we then look at the FCF yield to the firm. We are not comfortable with anything below 8% to 9%. Sometimes we’ve made exceptions if the ROCE is really good and the barrier to entry very solid, in which cases we can settle at 7% to 7.5%. Below that we do not dare to venture.
You also mention that you’re on the lookout for companies with "brilliant and aligned management teams." What qualities are you looking for in a brilliant management team?
An eye for efficiency (the key in all businesses in which barriers to entry are not high) and another one for capital allocation. We normally find both in family owned companies, as owner-operator structures better align the incentives of the managers. The ideal manager is one who increases market share without damaging margins, avoids empire-building acquisitions and prevents the share count from going up for the right reasons.
Start a free seven-day trial of Premium Membership to GuruFocus.
