Francisco Garcàa Paramés (Trades, Portfolio), the well-known Spanish value investor, is having a rough year in terms of the performance of his flagship fund, Cobas Selección. The fund registered a negative return of -9.4% until the end of the third quarter of 2018, proving that value investors are indeed facing difficult times to produce consistent returns above their comparable benchmarks.
Aryzta
In his third-quarter letter, the fund manager blamed the performance of one specific investment for the results they are having: Aryzta AG (XSWX:ARYN, Financial), a Swiss producer and distributor of bakery products.
In his letter, Paramés wrote, "Since the beginning of the year the negative impact of Aryzta has been 10%. The performance of the remainder of the International Portfolio has been reasonable and has even surpassed its benchmark index."
With a strong position in the company since the beginning of the fund in 2016, Cobas faced profit warnings, write-downs, management changes and, ultimately, an $800 million capital increase that brought the stock from the mid-30s to 1.40 Swiss francs ($1.39).
Activism
Optimistic about the future of the business, Paramés tried to block the capital increase:
"It is for this reason that we took an activist stance at the company’s General Meeting of the 1st of November last, proposing a more limited capital increase and the sale of other assets to strengthen the company’s balance sheet. Unfortunately, we were only supported by 47% of the shareholders, which meant that the proposal of the Board was approved."
The capital increase
With the operation occurring right now, choices are limited:
"We will now subscribe the new shares corresponding to us and will decide on the weighting the investment will have on our international portfolio, based on the investment alternatives we have, which are numerous. The truth is that, with the capital increase approved, the upside potential is limited but, at the same time, the risk is drastically reduced."
Lessons
In tought times, the best of the best take their experiences and try to learn from them. Paramés does just that, highlighting what he thinks went wrong with the investment:
"To trust a management team with little share participation in the company..."
"The level of debt was not originally a problem, but a series of adverse circumstances (increased costs, a delay in selling assets, and a new management team) meant that this debt could become problematical at a delicate moment."
What now?
Could Aryzta still be a credible investment opportunity? For Cobas, the investment "still has potential to recover a high portion of losses assuming very limited risks.”
Investing for the long term
Don’t miss out on Paramés recently published book, "Investing for the Long Term." It’s a very well-structured book with new concepts and ideas that should surprise value investors, like the importance of the Austrian School of Economics in understanding markets or the different sources of investment opportunities.
Read more here:
- Cobas Management: Fear, a Value Investor's Worst Travelling Companion
- Francisco Garcia Parames Will Speak at 2019 GuruFocus Value Conference
- Cobas Asset Management Comments on Aryzta
Cobas Management: Fear, a Value Investor's Worst Travelling Companion
