Interview: The True Value of Research
True Value Investment Fund has applied diverse investment strategies in focused market segments to produce an outstanding track record
Alejandro Estebaranz is an industrial engineer, the founder of Spanish value investing website Arte de Invertir and the co-manager of True Value investment fund. The fund has about 140 million euros in assets under management and obtained a 4-star ranking from Morningstar in 2018. It has produced an annualized return since its foundation in 2014 of 9.24%, beating 85% of funds of its category, according to Expansion Ranking.
Estebaranz was very kind to share some details of its investment strategy, profound research and ideas!
Roque: True Value has been a true outperformer since its inception. What would you highlight as the most important factors for your success?
Estebaranz: We have always been very nimble. Since the beginning, we knew we could only outperform in small caps and that the U.S. was a hard place to outperform, so we looked for ideas in better investment environments like France and Canada. We like those two countries to invest because they are business friendly and have many quality small caps at the right price.
Roque: Since the 2008 financial crisis, the value strategy has significantly underperformed. Why do you think that has happened in this business cycle?
Estebaranz: Value stocks became very expensive in 2007, so there should be a natural rotation. The severe downfall in global markets during the great financial crisis made market participants afraid of taking risks in subsequent years. They tend to buy bonds, but when yields collapsed almost to zero, they moved into the safest places of the equities arena (defensive and quality growth stocks), making these very expensive.
Roque: Do you think we will revert to the mean? Or is the definition of value (low price-earnings and price-book ratios) just outdated?
Estebaranz: I think it will revert in the next business cycle. The expensive stocks of today were actually cheap during the great financial crisis, and that’s why they devalued less than value stocks then. Now it's happening just the opposite. It's just human nature.
Roque: True Value's investments are very diverse. You have positions in large and solid companies, like Google (GOOG, Financial) or Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), but also small and somewhat illiquid capitalizations, like Groupe Open. You have cyclical investment, like IPCO, and high-growth businesses like Constellation Software. Do you think the ability to select investments from different value buckets is essential for your fund's long-term strategy? Why?
Estebaranz: We admire Peter Lynch. He usually invested in six different themes (slow growers, stalwarts, fast growers, cyclicals, turnarounds and asset plays). However, if you look at our portfolio you will find that every investment has common characteristics: good defensive businesses, with high insider ownership and low price. We feel very comfortable with our actual portfolio, because we know each company very well.
Roque: Can you describe what a perfect investment would look like for you? Can you give an example of a current investment that most approximates to the ideal criteria?
Roque: You have big positions in air leasing companies, namely Aercap and Air Lease. How do you defend your investment thesis considering the high risks that these companies face, like the residual risk?
Estebaranz: We have done a lot of work around these companies. It may sound strong, but we have not found other investors who know more than us in this sector. It is very important in this industry to have the correct portfolio of airplanes, low leverage and scale. If you have modern, high-demand airplanes and you are not forced to sell at the worst time, you will do fine. That is why we only like Aercap and Air Lease here. They can grow earnings per share 15% or more per year, they will do well in crisis (check out Aercap's performance in 2008) and they are trading at 7x earnings per share!!! They also have an investment-grade balance sheet.
Roque: You have recently sold your position in Fiat and don't hold any positions in the car manufacturing sector, which is one of the lowest price-earnings ratio industry segments right now. Do you think the sector is waiting to be disrupted?
Estebaranz: We concluded that the investments for the electric vehicle will be substantial. We think the sector is cheap, but we didn’t like the new management at Fiat. It is very important for us to have the right people in charge of our companies. It is very hard to predict the auto sector, but we prefer to focus in some auto parts that will do fine in every environment.
Roque: Can you share some of the mistakes that you have made over your investment career and what you have learned from them?
Estebaranz: We have made mistakes and have learned a lot. The first one is investing in companies with bad managers. For example, we invested in Extendicare, which was a special situation, where the company was selling a large part of its business, and the sum of the parts indicated a 100% upside. Nevertheless, management didn’t get full price for those assets! We didn’t lose too much, because it was cheap, but the cost of opportunity was high.
We also made the mistake of investing in fast-changing industries like ad tech or entertainment. The companies within these sectors can go from earning a lot money to almost nothing, very fast. Now, we try to avoid those kind of sectors.
Roque: Can you give a book or article reference that most value investors don't mention but that you find particularly enlightening?
Estebaranz: Value investors don’t talk too much about George Soros (Trades, Portfolio), but his book "Alchemy of Finance" is very good, and has lots of lessons to teach. Value investors sometimes fall in love with their ideas, even when they aren’t working, and one of the greatest skills of George Soros (Trades, Portfolio) is that he can change his mind very fast and admit a mistake.
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