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Sydnee Gatewood
Sydnee Gatewood
Articles (3160) 

Bestinver's 2nd-Quarter Investor Letter

Discussion of markets and holdings

Dear investor,

The first half of the year has undoubtedly been marked by the health crisis of COVID-19 and its effects on our lives, the economy and the financial markets. To this day, we are still immersed in a deep crisis on many fronts, but it is also true that the months that have passed can give us a minimal perspective to better analyze the situation from different aspects:

- Healthcare : I don't think you expect Bestinver to read this crisis in terms of health, but it is clear that it is the largest in the last 100 years, and that we should not start from the hypothesis that it has already happened.

- Social and political : In the absence of an effective vaccine against this new pathogen, the recommendations of the health authorities have led the leaders of each country to force the confinement of 4,000 million people, something unprecedented in history and that seemed unthinkable just six months ago.

- Economic : Political leaders have had to take these harsh measures knowing the impact on the economy. The harshness of the confinement has been explained in large part by the capacities of the health system, but also by the political ideals of the rulers in the different countries. The falls in Gross Domestic Product in the second quarter of the year are -34.7% in the US and -48.8% in Europe. Consider that these data are annualized quarterly, that is, the real fall is a quarter. For reference, the drop in the US in 2008 was -8% in its last quarter.

- Monetary and fiscal policy: The main Central Banks have responded to this pandemic with unprecedented increases in expansionary monetary policy. The FED has lowered rates to 0% and increased its balance from USD 4trn to USD 7trn in weeks. The ECB maintains rates at -0.50%, and has increased its asset purchase program from EUR 240bn to EUR 1.7trn. In the past, individual countries did not have the ability to print their own currency in large quantities to finance public spending without losing their credibility. It seems consensual that great powers like the US or supranational entities like the EU can do it without losing it, or at least that is how the so-called Modern Monetary Theory defends it. What does seem clear to us is that there are many more tickets (largely virtual) to pay for the same goods and services,

- Financial markets: The financial markets have gone through the different phases of the crisis (perhaps too fast): denial of the problem with hardly any falls in the markets, followed by generalized abrupt falls in all assets, and rapid price recovery. All in 3 months. This, in our opinion, is a reflection of the times we live in. The immediacy for everything, even for crises. But also the huge opposing forces of economic impact versus magnitude and speed of the reaction of central banks. It is important to note that the rebound has been produced by the latter, that is, by the action of the Central Banks, and not by a lesser impact of the pandemic, and far from it, by its end.

In the area of ​​investment, the impact of the closure of very large segments of the economy has significant and different effects where we distinguish between some (possibly) temporary shocks and others that simply accelerate trends - some positive and others negative - already initiated by the digital revolution .

- (Possibly) temporary shocks : In some segments the impact has been immediate and in others they are practically safe, although it will take a few months to impact, that is, a tsunami model that takes time from the moment the tsunami occurs until it hits the coast. For example, the impact has been instantaneous in areas related to life
urban, face-to-face leisure including travel and hotels, where the activity has simply almost completely disappeared. In these sectors, after 50 years growing at 5% per year, it is not obvious that this is a reversal of this trend but a bump in the road. There are also areas that we know well where the impact will come but has not yet arrived, such as the academic publications that Vighnesh has been covering for more than 30 years and where never, not in this period but since 1945, have they suffered a single year with negative growth. . For example, the UK Consortium (UK is 7% of the world market and they are not alone in these demands) has asked for discounts of 25%.

- Acceleration of positive trends : Trends already started, particularly in the consumer area. The digitization of business models has gone from being an extra to being a basic. Remote shopping has been the only possible way to shop for a while, which has undoubtedly helped in recent years. Digital laggards get into the habit of shopping from home. Companies that had years of advantage have increased it, those that had not done much in this regard have a huge challenge ahead. In this first group of companies that had already done their digital homework, we can highlight some such as Inditex, Next, Nike, Tencent, Delivery Hero, SFOR ... The valuation of some of these companies does not reflect these higher expected growth rates, so it takes us to revalue upwards some values ​​and invites an increase in the weight of some companies in our portfolios.

- Acceleration of negative trends : in segments of the economy that already had a headwind before the health crisis. We at Bestinver continue to try to avoid these areas. This segment is a fishing ground for inexperienced value investors, speculators, or extraordinary specialists in distressed assets. We hope that we are not one of the first two options, and perhaps occasionally the third, but only in a very specific niche, where we have extensive knowledge from the specialist who supports it.

In short, we find opportunities in (possibly) temporary shocks where there are capital-hungry areas (for example AMS) and valuations protect us from temporary risk; in areas of acceleration of positive trends where they have anticipated the growth of the next two or three years, the challenge here being to avoid excessively high valuations. And with very few exceptions, we are not interested in accelerating negative trends because of the very real risk of permanent capital losses.

Our wallets

What at first seemed to us an impact on supply (through the interruption of supply chains) has become a first-order demand crisis, only comparable to those produced in war episodes of global significance. I mention this because being our job to prepare (not to predict) and with the benefit of looking at the past bull, possibly we had the opportunity to have reduced the new risk that appeared at a very affordable cost, favoring even more than what we do structurally the quality over price.

Crises in financial markets are undoubtedly good opportunities for those of us who do active management. In our different strategies we have taken the opportunity, to prudently, make some changes in the portfolios:

- International Portfolio : The arrival of Tomas Pintó as head of international equities and fund manager in particular, together with market events, has led us to have a little more turnover this quarter, incorporating ten companies to our portfolio.

- Large Companies : We take advantage of the turmoil to invest in high-quality companies that do not usually offer these buying opportunities such as NIKE (NYSE:NKE), LVMH (XPAR:MC) and Stryker (NYSE:SYK).

- Bestinver Hedge Value Fund : We took advantage of the volatility of the month of March to sell companies that had performed well and buy companies with good balance sheets in businesses that have suffered temporarily from COVID-19 but whose business models are not affected in the middle and long term, for example, the "off-price" or outlets sector in the USA.

- Bestinver Bolsa : The movements are a continuation of the previous quarter with the increase in NOS (XLIS:NOS)and the incorporation of Inditex and Arcelor (XAMS:MT). This quarter we have incorporated another company where the market underestimates its resistance to the changes that are coming, such as Logista (XMAD:LOG) and Catalana Occidente (XMAD:GCO).

- Bestinver Latam : We take advantage of the high levels of volatility in the region to continue increasing the quality and potential of the long-term portfolio by investing in companies such as Arco (ARCO), Totvs (BSP:TOTS3) or CBD and divesting from others such as BTG Pactual (BSP:BPAC3) or Globant (GLOB).

- In Fixed Income , it has been a quarter of strong recovery in the price of bonds after the debacle of the first quarter of the year. Eduardo Roque and his team have continued to build portfolio, - reducing liquidity, short-term bonds and covered bonds, thus increasing the duration of credit. Purchases were mainly directed at corporate bonds and financial debt from banks and insurance companies.

- Bestinver Tordesillas : Throughout the quarter, the fund has managed to recover a good part of what was lost in the last part of the first quarter. Initially taking advantage of the generalized falls to reinforce in companies with high visibility (defensive characteristics such as electricity companies) and then more towards the end of the quarter with positions in companies that are a little more cyclical and somewhat lagging, such as telecommunications.

- Bestinver Megatrends : Since the beginning of the year, the fund was positioned relatively defensively. In this quarter, the two most relevant actions have been, on the one hand, to fully divest in the sectors that are being highly affected by the pandemic and, on the other, to reposition ourselves in sectors that we think will be relatively favored by this situation for at least the next two years.


During this last quarter at Bestinver we have made some modifications. First of all, for our fixed income funds, we have incorporated a system to defend our participants against delicate market situations in which significant inflows or outflows may occur. This system, known in English as "swing pricing" allows high transactions to be executed at the current market price, thus not impacting the rest of the fund's participants.

In our hedge fund, Bestinver Hedge Value Fund, we have modified the success fee to make it more attractive for the participant, in addition to including taking short positions to increase the ability to generate long-term profitability. And finally, we have just launched a new fixed income fund called Bestinver Corporate Debt.

Regarding the investment team, Tomás Pintó has incorporated Jorge Fuentes Lowy to the International Equities team. And we have formalized the position of Miguel Dolz and Carlos Arenillas as managers of the Bestinver Hedge Value Fund (helping Jaime Vázquez) and Bestinver Grandes Compañías (helping me) respectively.

Finally, my transition period reaches its final phase, and this will be my last quarterly letter as a Bestinver employee, the next one I will read as a participant. To say goodbye, I want to thank the Acciona Group for the resources that I have had to bring the project to fruition, to all the employees who work to make Bestinver possible and above all, to each and every one of you as participants for having trusted in our work. I leave with the tranquility of having fulfilled my commitment when I came to put the interests of the participant before any other from the first day to the last, and convinced of leaving a more robust Bestinver and ready to face a new stage.

Thankful and wishing you the best of success,

Beltran de la Lastra

Director of Investments


About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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