Dear Investor:
In the first quarter, the funds continued the positive performance seen in previous quarters, with the International Portfolio rising 15.5% and our Iberian Portfolio 5.3%, both outperforming their benchmarks1.
In our Q4 2021 letter we explained in detail our view on inflation (see here) and how it looked set to remain at least for some time.
Since then, inflation has continued to rise and reached levels of 7.5% in Europe at the end of March and 9.8% in Spain, its highest level since 1985. The main reason is the very large injection of money into the global economy, derived from the ultraexpansionary monetary policies of central banks and the fiscal policies of governments; then we have had accelerators, such as the rapid reopening of the post-pandemic economy, and now the invasion of Ukraine by Russia. In the short term this situation has a difficult solution, which is to take the money injected into the system out of the system. This requires a political will that does not seem very strong at the moment.
One of the conclusions already discussed in our previous letters, and we insist on this one, is to own real assets, which will reasonably maintain the purchasing power of our savings, and more specifically shares in companies that are trading at attractive prices. Moreover, historically, and as a general rule, in inflationary periods, value stocks have performed well. In this sense, it seems that after a difficult decade for value strategies, the fundamental valuation of companies based on the cash they generate is now regaining the interest it deserves as a critical element when it comes to investing.
ENERGY
In previous quarters we also shared our view on the oil and natural gas market (see here, Commentary second and third quarter 2021), where we explained the existing imbalances due to the lack of investment in the sector over the last 5 years and the natural decline of the oil fields that are already active.
Previous imbalances in the energy market have been exacerbated by the invasion of Ukraine and the related sanctions on Russia, as the latter accounts for a significant share of global oil (around 12%) and gas (around 17%) supply. As a consequence, and especially with Europe seeking to reduce its exposure to Russia, which accounts for more than 40% and 25% of its oil and gas consumption respectively, substantial additional investments in energy infrastructure will be necessary.
ENERGY TRILEMMA
In the current situation it is worth reflecting on some of
the fundamentals of the energy sector, a critical sector for economic development, and on what some call the Energy Trilemma: energy transition towards “more sustainable” sources, energy cost, and security of supply.
Today we live in a scenario where it is necessary to have energy sources that offer us a guarantee of stable supply in the face of different scenarios of diverse origin and typology (whether climatic, geopolitical, etc.). All of this in search of accessibility, abundance, reasonable cost and reduced polluting emissions. While in recent years the most important factor in investment decisions (mainly in Europe) have been the energy transition; we believe that this must now be combined with the guarantee of supply.
In this scenario some of the energy sources that a few months ago seemed according to some market narratives to be out of the equation (oil, gas, nuclear), facing immediate extinction, are regaining their importance, as necessary transitional energies, which in the current situation require more investment.
We believe that the evolution of the different energy sources within the energy matrix must be orderly, gradual, and balanced in order to resolve the current energy dilemma we face, and must incorporate the criteria of sustainability, but also those of guarantee of supply and cost.
To the extent that we exclude some energy sources, there will be fewer resources to invest in them, capital costs will tend to rise, requiring higher returns, which in turn will require higher prices for these raw materials. Therefore, we must be aware and balance and match the long-term energy transition objectives with the needs we have for security of supply and cost in the short and medium term.
EXPOSURE OF THE INTERNATIONAL PORTFOLIO TO THE ENERGY SECTOR (45% OF THE INTERNATIONAL PORTFOLIO):
For all these reasons, in recent quarters we have maintained a significant exposure of our portfolio to the energy sector, having found good companies trading at significant discounts across the value chain:
LNG infrastructures (about 13% weight at the end of March through various companies)
In addition to the already foreseen need (see 3Q21 letter) for additional regasification, liquefaction, and transport infrastructures (typically exposed to long-term fixed contracts) to obtain more gas, there is now the need for additional capacity to reduce dependence on Russian gas.
Oil and gas producers (13%)
Mostly exposed to raw material prices in the market. Higher commodity prices and cost reductions in recent years mean that these companies are generating more cash than ever, which combined with a more balanced capital allocation policy compared to previous cycles (debt reduction, dividend payments and share buybacks) allows for a quick and direct return to shareholders.
Service providers: oil, gas, new sustainable technologies (11%)
Typically exposed to third party contracts based on the investment cycles of the energy sector, where an increase in investment seems inexorable to correct the imbalances discussed above.
Oil and gas transport infrastructure (8%)
Includes gas pipelines (with long-term fixed contracts) and crude oil transport with oil tankers, exposed to the price of daily freight rates, which vary according to the demand/supply of ships, and respond to the evolution of crude oil demand. These companies should benefit from higher freight rates as demand continues to grow, coupled with an ageing fleet that will tend to be recycled and a reduced supply of new ships in the coming years.
Finally, what is most interesting about our exposure to the energy sector is that most of it (28% of the international portfolio) is not dependent on the price of oil, gas, or derivatives, but on the imperative need to invest to ensure future security of supply.
FOCUSED ON WHERE WE ADD MOST VALUE
In the face of a complex geopolitical environment and a very uncertain economic situation, Cobas Asset Management investment team remains focused on where we can add the most value, which is in the search for highly undervalued companies with strong balance sheets that are prepared to withstand different scenarios.
At Cobas AM we manage three portfolios: the International 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 have their core operations in the Iberian territory; and finally, the Large Cap. Portfolio, which invests in companies globally and in which at least 70% are companies with a market capitalisation of more than 4 billion euros.
With these three portfolios we constructed the various equity funds we manage as of 31 March 2022. Please note that the target value of our funds is based on internal estimates and Cobas AM does not guarantee that these estimates are correct or will be achieved. Investments are made in securities that the managers believe to be undervalued. However, there is no guarantee that these securities are undervalued or, if so, that their prices will perform as the managers expect.
International Portfolio
During the first quarter of 2022 our International Portfolio returned1 +15.5% versus a return of -5.5% for its benchmark, the MSCI Europe Total Return Net. Since the Cobas International FI fund began investing in equities in mid-March 2017, it has returned -1.1%, while its benchmark returned 36.5% over the same period.
During the first quarter we made few changes to the International Portfolio in terms of purchases and sales. We only exited Inpex and Dassault Aviation entirely, due to their good performance. On 31 December these companies had a combined weighting of just under 2%. On the entry side, we bought:
- Fresenius (FMS, Financial): a leading healthcare company that mainly operates hospitals and dialysis centers among other businesses.
- Organon (OGN, Financial): pharmaceutical company formed from the spin-off of Merck & Co a year ago, focused on women’s healthcare, and with a presence in biosimilars and other well-established pharmaceuticals.
These companies trade at 6-7x normalised cash flow and at the end of March had a combined weight of close to 2%. In the rest of the portfolio on the sell side, the most important movements have been in Golar LNG and Kosmos Energy, but thanks to their revaluations of around 100% in the quarter, the weight of these companies at the end of March remained more or less the same as in December. On the buy side, we have increased our exposure to Curry’s (ex-Dixons) and BW Offshore.
During the first quarter, thanks to market volatility and our rotation, the target value of the International Portfolio in-creased by 9% to €216/share, the highest since our inception, implying a potential upside of 119%.
As a result of this potential and confidence in the portfolio, we are invested at around 98%, close to the legal maximum allowed. The portfolio trades at an estimated 2022 P/E of 6.3x versus 13.7x its benchmark and has a ROCE of 29%, but if we look at the ROCE excluding shipping and commodity companies, we are close to 40%, which shows the quality of the portfolio. In short, it is a portfolio of very good businesses trading at very low multiples.
Iberian Portfolio
The Iberian Portfolio’s net asset value performance during the first quarter of 2022 was +5.3%, compared to +0.2% for its benchmark. If we extend the comparison period from when we started investing in equities to the end of March 2022, it returned1 +0.7%, while its benchmark returned +14.2% for the same period.
During the first quarter we made some changes in terms of portfolio entries and exits. We have completely exited Metrovacesa, Ence, Sonae and Prisa, which at the end of December had a combined weight of slightly more than 7%, and we have entered Iberpapel, Applus, Acerinox, Gestamp and CIE. All of them are “old acquaintances” of Cobas and at the end of March had a combined weight of slightly more than 5%. In the rest of the portfolio the most important movements were on the buy side CAF and Mediaset España, while on the sell side Galp EnergĂa and Repsol.
It should also be noted that during the quarter we received two takeover bids for portfolio companies:
- Mediaset España (XMAD:TL5, Financial): On 15 March Media for Europe (MFE, formerly Mediaset N.V.) launched a takeover bid for the 44.3% it does not own of TL5, offering as consideration €1.86/share in cash plus 4.5 MFE ordinary A shares. We consider that this offer does not adequately value TL5’s assets.
- Metrovacesa (XMAD:MVC, Financial): On 23 March FCC launched a partial takeover bid for 24% of MVC’s shares at a price of €7.8/share in cash. While it is true that we believe that this price does not reflect the value of MVC’s assets, we have decided to liquidate our position as the potential for revaluation is now lower and there are more interesting investment alternatives.
During the quarter, thanks to the rotation, we increased the target value of the Iberian Portfolio by nearly 6% to €230/share, a record high, bringing the potential revaluation to 129%.
We are nearly 99% invested in the Iberian Portfolio, and the portfolio trades at an estimated 2022 P/E of 6.8x versus 13.4x its benchmark and has a ROCE of 29%.
Large Cap Portfolio
During the first quarter of 2022 our Large Cap Portfolio returned +12.9% versus -3.0% for the benchmark MSCI World Net. Since the Cobas Grandes CompañĂas FI began investing in equities in early April 2017, it has returned1 -6.9%. In that period the benchmark index appreciated by 71.4%.
During the first quarter we made very few changes in terms of portfolio entries and exits. We exited Atalaya Mining (LSE:ATYM, Financial), which at the end of December had a weighting of close to 1%, and entered Elecnor (XMAD:ENO, Financial) and TĂ©cnicas Reunidas (XMAD:TRE, Financial), which at the end of March had a combined weighting of close to 3%. In the rest of the portfolio the most important movements have been on the buy side Affiliated Managers Group (AMG, Financial) and Fresenius; on the sell side Golar LNG (GLNG, Financial) and Dassault Aviation (XPAR:AM, Financial) due to their performance.
During the quarter, the target value of the Large Company Portfolio increased by 15% to €216/share, also an all-time high, representing a potential upside of 132%.
We are almost 97% invested in the Large Cap. Portfolio. Overall, the portfolio trades at an estimated 2022 P/E of 7.4x versus 17.7x its benchmark and has a ROCE of 32%.
Past performance does not guarantee future performance.
This document is of a commercial nature and is provided for informational purposes only, and can in no way be considered as a contractual element, a recommendation, personalized advice or an offer.
Nor can it be considered as a replacement for key investor information documents (KIIDs) or any other mandatory legal information which must be consulted before any investment decision is made.
In the case of any discrepancy, legal information prevails. All this legal information will be made available to you at the manager’s headquarters and via the following website: www.cobasam.com. References to Cobas Asset Management, S.G.I.I.C., S.A. cannot be understood as generating any type of legal obligation for said entity.
This document includes or may contain estimates or forecasts concerning the development of the company in the future and financial results, which come from the expectations of Cobas Asset Management, S.G.I.I.C., S.A. and are exposed to factors, risks and circumstances that could affect the financial results implying a difference with the estimates and projections.
Cobas Asset Management, S.G.I.I.C., S.A. has no obligation to publicly update or communicate the update of the content of this document if the facts are not exactly as they are collected here or if there are changes in the information it contains.
We also remind you that past performance does not guarantee future performance.
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