Dear Investor,
Bestinfond (Trades, Portfolio) ended the quarter with a return of +1.1%, bringing its cumulative annual return to 18.0%.
With the arrival of autumn, a reasonably quiet summer period has come to an end. There have been no major shocks on the macroeconomic front: the companies' results have continued their upward trend and the fund's net asset value, after a very positive first half of the year, has consolidated those gains. However, this relative calm, which came to be a little unsettling during the first part of the summer, overshadows a reality which is much more nuanced that it appears at first glance.
Dispersion means opportunity
In the field of statistics, there is a term that perfectly describes the groundswell we see in the markets today: dispersion. This concept refers to how a set of values is statistically distributed, reflecting their variability or their distance from the mean value. What does this mean? It means, for example, that in a survey to find out how many German cars are owned by ten families living in a building, it is interesting to know the mean (in this case, one per floor). But if we want to draw relevant conclusions from the sample, it is even more interesting to know that one of these families has three BMWs for everyday use and seven Porsches in the garage because, in addition to being millionaires, they are also collectors of vintage cars.
This example is an exaggeration, but understanding the concept of dispersion is very useful in explaining how we have managed the fund in recent months. As mentioned above, although profitability is positive and on the surface it looks as if not much has happened, the reality is that many of our shares have bounced back sharply while others have fallen considerably. To give a foretaste of what we have done in this respect, although you will already have guessed it, we have reduced our investment in the former and increased it in the latter.
Being able to buy (or sell) companies whose prices diverge from the fundamental valuation of their businesses is exactly what we do. That is why we believe that today's market dynamics are excellent news for Bestinfond (Trades, Portfolio)'s unitholders. Why do we say this? Because in our line of work, dispersion means opportunity.
A (still) decoupled world offering good investment opportunities
There are many factors that can explain the differences between the price and value of the companies we analyse or hold in our portfolio at a given time. In recent times there has been one recurring theme: the obsession of a large part of the market with the economic situation and its impact on companies' short-term results.
This should come as no surprise. We are emerging from a period in which macroeconomics and geopolitics have dictated much of equity performance. These factors do not change overnight, particularly when the process of reconstructing the imbalances that have plagued us since the pandemic is not happening as fast as we would all like.
It is understandable, therefore, that the stock market performance of many companies is still influenced by the statements of some central bank or the latest economic data. Beyond the headlines, we believe that there are certain dynamics in the current economic cycle that have a deeper impact. One of the most striking is the evident global disconnection between the manufacturing sector cycle and the services sector cycle: the former is in obvious contraction and the latter in persistent (and surprising) expansion. We find this decoupling interesting, not only because it explains the differentials in economic growth in many countries but also because it is behind the stock market losses of some companies which, with sufficient care and patience, may become good long-term investments for our unitholders.
The cycle of interest rate hikes is coming to an end
As mentioned above, the impact of this divergence on countries' economies is significant. Thus, while the United States —an economy in which the services sector represents 70% of GDP— continues to surprise with its dynamism (despite the brush with a new financial crisis last spring), Europe is hardly growing at all and China is showing a weakness that nobody expected at the beginning of the year. The case of Europe is paradigmatic, as it clearly reveals the contrasts referred to above. While countries such as Spain, with an economy closely linked to tourism and services, recorded reasonably good levels of business activity, Germany, with greater dependence on the industrial sector and a high level of exports to China, is in recession.
This gap between the manufacturing and services sectors and its possible short and medium-term consequences were discussed in our last quarterly newsletter. The good news is that to date, the slowdown in the former sector has not had a major impact on employment. The less good news is that its recovery, expected in the coming quarters, is starting to be reflected in oil prices and hence in forecasts of further rate rises that will be needed to control inflation. In this respect, the market is discounting further tightening by the Fed while the possibility that rates have peaked in Europe is becoming increasingly widely accepted in the consensus among analysts.
In our view, it is becoming increasingly clear that inflation is on the right track and the interest rate hike cycle is coming to an end. A less dynamic services sector, a scenario that may become more visible in the coming quarters, should dispel the doubts that still persist in part of the market as to how restrictive monetary policy should be in this economic cycle.
Beyond short-term speculation, however, it is necessary to put things into perspective. A reasonable return to normality is not to expect a return to zero rates, just as it was not the case last year to assume that double-digit inflation figures were sustainable in the long run. We do not believe that an additional 25 or 50 basis points of monetary “tightening” is really relevant to drastically divert the course of an economy in the medium term. Nor are they likely to alter the positive returns we expect from the portfolio in the coming years.
Our scenario has not varied and our plan remains unchanged
Our baseline scenario remains the same as the one described to you in recent times. It envisages a reasonable return to normality in the developed economies, at different paces and on a non-linear basis, which would be explained by the complete normalisation of production chains and, above all, by the inevitable impact that the monetary policies implemented by central banks in the last year and a half will have (and are having) on consumption and investment. This tightening, in our view, does not mean that we are heading for a deep recession. Why do we say this? For many reasons, but the main one continues to be the solvency built up over the last decade by households and businesses, without forgetting how well capitalised the financial sector is.
And just as our perspective on the economy has not changed, neither has the way we manage our portfolio. We are still interested in buying good companies, run by people we admire and, above all, at good prices. This plan requires an intensive analysis process to help us determine how much we want to pay for them, so that we can build a safety margin into our valuation in case something does not go as expected.
Fortunately, we have a top-class group of professionals that enables us to gain an in-depth knowledge of the business models we are analysing (their competitive position, the profitability and growth they can enjoy in the long term, etc.) and thus estimate how much a company is essentially worth. When things got difficult last year, this approach gave us the confidence we needed not to sell fabulous companies at historically low valuations.
However, this process is only the first part of the plan. In order to achieve the objective we are pursuing through this strategy, which is to obtain good long-term returns on our savings, there is one additional ingredient that is absolutely necessary: patience.
Warren Buffett (Trades, Portfolio) said that the stock market is a device that transfers money from the pockets of the impatient to the pockets of the patient. The validity of the quote by the great American investor is confirmed by the performance of our fund over the last twelve months. A result that would have been impossible without the experience of investors who, fortunately, have already seen a few stock market cycles in Bestinver's 35-year history.
This document has been drawn up by Bestinver Gestión, S.A. SGIIC for informative purposes only and may not be considered under any circumstances as an offer to invest in its investment funds. The information has been compiled by Bestinver Gestión, S.A. SGIIC from sources deemed to be reliable. However, although reasonable care has been taken to ensure that the information is correct, Bestinver Gestión, S.A. SGIIC does not warrant that it is accurate, complete or up to date. All opinions and estimates included in this document constitute the judgement of Bestinver Gestión, S.A. SGIIC at the date to which they refer and are subject to change without notice. All the opinions contained herein have been expressed on a general basis, without regard to specific investment objectives, the financial situation or individual needs. In no event shall Bestinver Gestión, S.A. SGIIC, its directors, employees and authorised personnel be liable for any type of damage that might arise, directly or indirectly, from the use of the information contained in this document. Under no circumstances is the announcement of past returns a promise or guarantee of future returns. All Bestinver returns are expressed in euro, net of fees and expenses. Potential: The fund's revaluation potential at a given time in the opinion of Bestinver's managers, calculated as the difference between the current and target PER. It is not the gain that the fund will achieve in a given period because, even if the fund achieves a specific performance, the managers' objective is to increase or at least maintain that potential. PER: Free cash-flow price at which the fund is listed, based on the PER estimated by Bestinver's managers for each company (including adjustments such as: debt, time of cycle, share price, foreign currencies, etc.). Target Price: Net Asset Value that could be reached by the fund's units based on the intrinsic value of all the securities making up the portfolio estimated by Bestinver's managers.
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