Dear Unitholder,
After a very complicated year, the vaccine has been the trigger that the market needs to start evaluating companies in a more normalized way and not assuming a permanent pandemic scenario. Although we all knew vaccines would eventually arrive, the market sometimes needs to see to believe.
Since the announcement of the vaccines, the markets have reacted very positively and our funds especially well, with higher revaluations than their benchmark indices in the last quarter (Cobas Internacional +26.9%; Cobas Iberia +26.5%; Cobas Grandes CompañĂas +34.5% versus +10.8%, + 22.9% and +9.2% of their benchmark indices respectively). We still have a long way to go, but we are confident that this trend will continue, for several rea-sons:
- Value investing is once again registering a positive per-formance compared to growth investing. Perhaps the almost certain inflation scenario that is coming, with the subsequent impact on interest rates, makes it more difficult to invest in companies that sell long-term dreams versus those that offer reality.
- Our funds trade at a P/E ratio of 7-8x, well below the market's 17-20x. Despite the rise in the last quarter, we still have many companies trading at considerable discounts.
Furthermore, we all know that opportunities arise in times of crisis but knowing this is hugely different from experiencing it given the doubts and fear that comes with it. That is why Cobas would like to thank our unitholders because although we have had some outflows, these have not been significant, especially among fami-lies, where we have had net inflows. We are pleased to have unitholders who share our long-term view of inves-ting in the stock market.
For this reason, and in keeping with a commitment we made in the past, we have decided to change the structu-re of our funds management fees, rewarding those uni-tholders who have a long-term view. You can check the new structure by clicking here.
COMPANIES
Atalaya Mining (LSE:ATYM, Financial) ~9% of the Iberian Portfolio
During the fourth quarter, one of the biggest changes made to our portfolios was the significant increase in ourposition in Atalaya Mining, not only in the Iberian Portfolio, but in all portfolios. This is the first time that a company is present in all our portfolios.
Until not long ago, Atalaya Mining, which operates the ancient copper mine in Riotinto, has been a forgotten company because until 2016 it had not produced for many years, most of the shares were held by historical shareholders and its relatively small size made it an impractical investment for large funds or large mining companies. In addition, the company is listed on the London Stock Exchange but its management team and its main assets, are in Spain.
After our usual analysis, we decided to buy given its attractive multiple at normalized copper prices (PER 6x) and because of the optionality granted by its rights to the Touro mine in Galicia. Our recent incremental interest in the company is explained because in the last quarter of 2020 there were some very positive news that improves its opportunities: the announcement of a feasibility study to develop the E-LIX System that could be a booster for profits of the company.
This process uses a new technology that will allow the metals contained in the rocks to be separated more effi-ciently and avoid a smelting process. The main attraction is that E-LIX will be able to lower production costs, which will make it possible to exploit mineral resources that were previously discarded as not being profitable. The study of this novel system is expected to finish in 2021; So far it has given very good results on a laboratory scale and in the pilot plant.
Atalaya Mining will be the first company in the world to apply this technology, much more interesting than other alternative systems, both environmentally and because of its economic efficiency. It will also enjoy a five-year exclusivity period for its application throughout the Iberian Pyrite Belt, to the southwest of the peninsula, where this invention is clearly interesting.
It is a very good option, but if the process were not suc-cessful, we would be left, in any case, with some good mines at an attractive price.
Wilhelmsen
Wilhemsen (OSL:WWI, Financial) ~4% of the International Portfolio Another example of a company clearly undervalued by the market and of which we have spoken little is Wilhel-msen, a Norwegian industrial conglomerate, controlled by the Wilhelmsen family (5th generation) with businesses with leading positions in their segments. With a capitali-sation of 700mn euros and net cash, the company has bought back its own shares.
Its main assets are 38% of Wallenius (WWL), a shipping company, which transports cars and capital goods and has logistic distribution centres in the world's most important ports. Given the economic uncertainty and COVID-19, transporting cars and capital goods is at the bottom of the cycle, yet in this complicated year they have generated positive cash flow. At depressed market prices, this share is worth 360mn euros today (to put it in context at the beginning of last year before COVID-19 it was worth 25% more, during 2017-2018, a more normalised period, it was worth 65% more on average).
WWI also has several unlisted subsidiaries, which are ignored by the market. The most significant is Wilhel-msen Maritime Service (WMS) that it fully owns, WMS is the marine products and services subsidiary (including crew management services, chemicals, consumables, logistics and safety) and generates a standardised cash flow of ~41mn euros.
In addition, WWI has 9% of Hyundai Glovis, the logistics and distribution arm of the Hyundai group. The company should benefit from the cycle's recovery (higher volumes) but is also beginning to benefit from the expected reorga-nisation of the Chung Family's structure and corporate governance. At market prices, this shareholding is worth 475mn euros today.
In short, a family-owned company, a world leader in its businesses, well managed and trading at a discount to the value of its assets.
Portfolios
At Cobas AM, we manage three portfolios: the Internatio-nal Portfolio, which invests in companies worldwide, excluding those listed in Spain and Portugal; the Iberian Portfolio, which invests in companies listed in Spain and Portugal, or that have their operational hub on the Iberian Peninsula; and, last but not least, the Large Company Por-tfolio, which invests in global companies, at least 70% of which have over 4 billion euros in stock market capitali-sation.
With these three portfolios, we built and have managed the various equity funds as of 31 December 2020. We remind you that the target value of our funds is based on internal estimates and Cobas AM does not guarantee that its calculation is correct or that they will be reached. We invest in assets that the managers deem to be undervalued. However, there is no guarantee that these assets are actually undervalued or that, even if they are, their price will move in the direction expected by the managers.
International Portfolio
Over the fourth quarter of 2020, our International Portfolio posted a positive return of +26.9% versus the +10.8% profitability posted by its benchmark index, the MSCI Europe Net Total Return index. Since the Cobas Internacional FI fund began investing in equities in mid-March 2017, it has obtained a return of -36.4%, while its bench-mark index has obtained a return of +15.5% for the same period.
During the fourth quarter we made few changes in the International Portfolio in terms of inflows and outflows. The only changes have been that FNAC Darty (XPAR:FNAC, Financial) and Spire Healthcare (LSE:SPI, Financial) have completely left our portfolio, each had a weight of under 1% in September, and Atalaya Mining has entered with a weight of around 1%; however, we did rotate the weightings of the companies in the rest of the portfolio. In addition, we have increased our exposure to Golar (GLNG, Financial) (+2.0%) and Kosmos (KOS, Financial) (+1.6%). In the case of Kosmos, the increase in the position was exclusively due to the fact the share price appreciated (+141% during the quarter). Furthermore, our exposure to CIR (MIL:CIR) and Teekay LNG (TGP) decreased by about 0.6%, in both cases because they have risen less than the rest of the portfolio.
During the fourth quarter we increased the target value of the International Portfolio by 2%, up to €163 euros/unit, compared to a rise of 26.9% in the net asset value, as a result of which the upside potential stands at 156%.
Obviously, as a result of all this potential and our confidence in the portfolio, we are invested at 97%, close to the legal maximum. Overall, the portfolio trades at an estimated 2021 P/E ratio of 7.0x, versus 17.1x for its benchmark index, and with a ROCE of 27%. If we focus on the ROCE and exclude maritime transport and commodities companies, it would be near to 38%.
Iberian Portfolio
The net asset value of our Iberian Portfolio in the fourth quarter of 2020 was +26.5%, compared with +22.9% for its benchmark index. If we extend the comparison period since we started investing in equities until the end of 2020, it has obtained a return of -20.9%, while its bench-mark index has obtained a return of +1.8% for the same period.
During the fourth quarter seven companies completely left our portfolio, which had a weighting close to 7% at the end of September, as they performed well during the quarter. Their share price increased by 50% on average and the outflow was also because of the takeover bid we received on Sonae Capital (XLIS:SONC). In terms of purchasing, only FCC (XMAD:FCC) has entered our portfolio (0.6%). In addition, we have significantly increased our exposure to Atalaya Mining (+4.2%) to 8.7%, due to our comments above. As this posi-tion exceeds 5% and by regulation all the positions exceeding 5% cannot add up to more than 40% of the fund, we have had to lose weight in Elecnor (XMAD:ENO) to 4.6%, which has enormous potential, but much less than Atalaya Mining.
During the quarter we significantly increased (+9.6%) the target value of the Iberian Portfolio, up to €177/unit, as a result of which the upside potential has risen to 124%.
In the Iberian Portfolio, we have invested 97% and, as a whole, the portfolio trades with an estimated 2021 P/E ratio of 7.4x, compared to the 17.9x of its benchmark index, and with a ROCE of 27%.
Large Company Portfolio
During the fourth quarter of 2020, our Large Cap Portfolio had a return of +34.5% versus +9.2% in the benchmark index, MSCI World Net. Since the Cobas Grandes CompañĂas FI fund began investing in equities in early April 2017, the return has been -33.2%. In that period, the benchmark index rose by 34.8%.
Samsung (XKRX:005930) and Cogna Educaçao (BSP:COGN3) left the Large Cap Portfolio, which had a weight of 3.3% and 0.9% respectively at the end of September. With these sales, we have financed the purchase of British American Tobacco (LSE:BATS), TEVA (TEVA), Atalaya Mining, Maire Tecnimont (MIL:MT) and Gilead (GILD), which have a combined weight of approximately 6%. We also increased our position in Golar (+2.9%) and LG Electronic (XKRX:066575) (+0.8%). In the case of LG Electronics, this is because the share price appreciated (+88% during the quarter). In addition, we lowered our position in OCI (MEX:OCI) (-1.3%) and Arcelor Mittal (XAMS:MT) (-1.9%) as it performed well during the quarter.
During the quarter we have increased the target value of the Large Cap Portfolio by almost 8%, up to €148/unit, as the net asset value has been revalued by 34.5%, the upside potential stands at 121%.
In the Large Cap Portfolio, we are 97% invested. Overall, the portfolio trades at an estimated 2021 P/E ratio of 8.4x, versus 21x for its benchmark index, and with a ROCE of 28%.
News
In our Cobas AM news section, the objective is to give a preview of the projects and initiatives of the company, as well as the most important milestones that occurred in the last quarter.
Contact with our unitholders
Despite the anomalous situation caused by the COVID-19 pandemic, the Investor Relations team has continued its work on a regular basis, maintaining our availability and closeness in contact with our unitholders, through telephone meetings, video calls and webinars.
It should be noted that we have had more than 51,000 contacts with our co-investors throughout 2020.
New fee structure
On December 18, the new fee structure for Cobas AM was published.
From January 1, 2021, they will be based on fund classes and will be lowered based on the customer's seniority. That age will be determined by the time elapsed since the first contribution to the funds, and will remain intact as long as it maintains a position in the funds subject to this improvement in commissions.
You can consult the statement issued by the manager through the following link.
Participation in radio show "Tiempo de InversiĂłn"
Manuel Tortajada interviewed Juan Huerta de Soto, Cobas AM analyst, on October 5 on Radio IntereconomĂa. A program that offers financial, tax, employment and legal information.
You can access the audio of said intervention, through the following link.
Participation in Value School Winter Summit 2020 Carmen Perez, an analyst at Cobas AM, discussed the effects of the pandemic in the distribution sector, what to expect in the future and why invest in the sector. You can access the full video of the presentation, through the following link.
Participation in the podcast "Tu Dinero Nunca Duerme" During this quarter, Carlos González, Head of Investor Relations for Individuals, has participated in the radio program Tu Dinero Nunca Duerme, the first financial culture program of the Spanish generalist radio esRadio in collaboration with Value School. Carlos González spoke about all the keys to saving for retirement, in the edition of the program that took place on December 13.
The podcast audio is available at the following link.
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