Valentum Asset Management is a Spanish independent management firm with 144 million euros ($160.7 million) under management. The Valentum FI Fund is managed by Luis de Blas and Jesús Domànguez, who apply the value investing philosophy with a focus on identifying credible catalysts. Since inception in March 2014, the total return for investors has been 77.7%, or 11.97% per year. The fund's benchmark, the MSCI Europe, has returned 33.0%, or 5.77% per year, over the same period.
Blas was very kind to share some wisdom, experience and investment ideas with me.
Roque: According to Morningstar, the number of active mutual fund managers that have outperformed passive peers in Europe over the last 10 years is less than 25%. Valentum has produced, since its foundation, a significant outperformance to the MSCI Europe Index. Why do you think that has happened? What conditions do you have in place to sustain this outperformance in the future?
Luis de Blas:Â It is based on three pillars: the first one is that size matters, trying to outperform the market with a lot of assets under management is difficult, so we are taking advantage of our size. The second reason is that we invest a lot in small caps, where there is less information and we can find very well priced jewels and growth is easier to achieve (although the FANGs are the exception for us). Lastly, we are a concentrated fund, which is the only way to generate (or to lose) alpha. As you can imagine, we will close the fund when we reach certain levels; we want to maintain our flexibility and our concentration.
Roque: Why are FANGs an exception for you?
Blas: Well, they have been able to grow at an incredible pace despite being already huge. It has to do with scale as a competitive advantage."
Roque: We are also seeing a significant increase in assets that are managed passively, with the rise of exchange-traded funds. Why do you think this has happened? Do you think it will mean revert?
Blas: The rise of ETFs should be faced has something normal. ETFs are fantastic tools for get exposure to the market at a very low cost. They will take a good portion of the pie of the market because of that. There were funds in the market that were charging 2% fees for something very similar to ETFs! Those should disappear (in Spain there are still some examples). Nevertheless, there will always be funds looking to generate alpha and trying to justify higher commissions.
Roque: Your investment philosophy is based on two pillars: value and momentum. Why isn't value enough?
Blas: An attractive valuation is a necessary condition for our investment. Upon that, we try to reduce the time in which price and valuation should converge. To be much clearer, for us momentum is a way to say catalysts. Those catalysts could be strategic presentations, changes in management, spinoffs … But of course, not all our investments have the catalyst side.
Roque: Can you give an example of a current investment you have with a normal catalyst that you look for?
Blas: One is The Gym Group (LSE:GYM, Financial) in the U.K. The market thinks there is a lot of competition and pricing pressure, but you can easily check pricing every month by checking the Gym Group website. We are just waiting for results where the market can see pricing pressure is not an issue right now. Another one could be Rovi (XMAD:ROVI, Financial), a Spanish pharma company. The market is not giving any value to one product that has already passed phase 3 and that we think could double valuation. We expect that with the final approval, the company will publish total addressable market and details about possible peak sales that could be a catalyst.
Roque: What specific value strategies do you follow?
Blas: We are focused on free cash flow generation. We make a lot of adjustments because we want to know how much FCF a business can generate. For example, if it is a growing business, we adjust working capital and growth capex. Also, we want companies with a very strong balance sheet, which is a way for us to try to avoid bankruptcies, reduce beta and be more accurate in our valuations.
Roque: Can you give an example of a company that currently complies with your ideal criteria?
Blas: We have a small cap called TCM (OCSE:TCM, Financial), which makes kitchen products and has a very strong position in Denmark. It is trying to expand into Norway and Sweden. It is trading at 11% free cash flow yield with no debt and growing at double-digit rates, gaining market share in Denmark and with the optionality of having the same success in other countries. Fantastic working capital administration, nice free cash flow conversion, very well managed. It is cyclical, but the valuation is a joke.
Roque: The small- and mid-cap universe is very much cursed with illiquidity. Can you explain why that is and how do you balance the risk of that exposure?
Blas: We try to balance that risk with a higher-than-average cash position in our portfolio (83% of exposure since inception).
Roque: What have you learned from your investment errors?
Blas: Most of our mistakes have to do with management, so now we take much more care with things like incentives or skin in the game. When we started the fund, we looked to free cash flow generation and a strong balance sheet. Now we have also added good management as a crucial investment pillar.
Roque: Can you give a book or article reference that has helped frame your investment thinking?
Blas: We love "Fooling All the People Most of the Time" byÂ David Einhorn (Trades, Portfolio)) and "You Can Be a Stock Market Genius" byÂ Joel Greenblatt (Trades, Portfolio), but those are well known. Everything is already invented in this business; we have a very simple method and probably the most difficult thing is to stick to that method in all the market conditions. Consistency is crucial.
Roque: You are part of a very strong value investing community in Spain. Why do you think Graham, Buffett and Munger's ideas got such a strong foothold in Spain?
Blas: It probably has to do with Bestinver, which was the first independent fund. They have been very successful following that path.
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