Dear fellow investor,
Our quarterly commentaries are usually written by the entire management team, but this time around I have decided to pen a more personal letter in which I would like to convey my thoughts and convictions at this time. It is a testing time for some of us, as our global funds have now been reporting losses for seventeen straight months, which is approaching the longest period of sustained losses I have ever had, and by that I mean the 20 months running from July 2007 through to March 2009. Over that period, we sustained heavier losses, at 60%, although the market suffered equally.
The current situation, however, rather reminds me of the 1998-2000 period, when there was a huge discrepancy between some really overvalued securities (largely rela-ted to telecoms, tech and media) and the rest of the market, and especially “traditional” securities. As we can see from the chart prepared by Morgan Stanley, today we find ourselves in a situation that is similar, or possibly even worse, than the one we witnessed during that period: the shares of “value” companies have never been so undervalued when compared with “growth” compa-nies as they are now. In fact, the situation now is even more pronounced than in 2000. As you all know, we invest in “value” shares.
These situations are common in the markets, and that’s good for us, I’d say, because they allow us to buy extraor-dinary assets at bargain prices. This would never occur in the private market. Let’s face it: nobody would sell us their company for the prices we are buying at across the different markets. Yet to reap the rewards, we must be patient.
For many people, being patient is far from easy, and the question on everyone’s lips is when will that value feed through to the share price. In other words, when will the funds start to rise? I don’t have an answer, as we are talking about probabilities. Just as our Spanish fund rose by 40% in a market that fell by 40% over the 2000-2002 period, and just as our global fund gained 33% during the 2000-2003 period while the global index shed 42% (in both cases an 80% relative difference), we might reaso-nably expect our funds to start rising before too long. Let’s not forget that market aberrations are relatively short-lived: while the market can be irrational in the short run, it is generally efficient in the long term.
We already explained what happened in other periods at our Annual Conference. Experience has shown us that the harder and longer the fall, the stronger the recovery.
This bears repeating: companies generate profits over time, and if this does not feed through to the share price, then the company accumulates a sort of hidden value that pushes up its upside potential with each day that passes. When prices eventually rise, they will climb higher as all that stored value is released.
This situation is plain to see at Cobas in the summer of 2019. We have a truly extraordinary portfolio, showing considerably more quality than we had in 2000 or for that matter in 2009:
- Companies boasting highly competitive positions and with heavy entry barriers in place (average ROCE of 25%).
- Most of them reporting growth (not value traps that fail to grow).
- With minimal financial risk (net cash or little in the way of debt), even for those that should have high debt (such as LNG transportation) thanks to the quality of their assets. Incidentally, the shipping sector has seen cutbacks or even closures of several analysis depart-ments (Morgan Stanley, UBS, JP Morgan, among others) due to the tremendously bearish market we have been witnessing over the last five years. A good signal.
- With little exposure to the economic cycle: at around 25% (and focused on automotive and crude transport companies).
70% of our companies have a family as their main sha-reholder, with a long-term view.
With logical reasons to the lack of interest from other investors in the short term: falling share prices for many years (shipping sector), temporary problems (Dixons), complex corporate structures, making them difficult to analyse (Teekay LNG, Golar), Brexit (Babcock, Dixons), Italy (CIR, OVS), non regard to their cash positions (Danie-li, Asian companies), or of hidden assets (International Seaways, Porsche, Renault), cyclical companies, and so on. Temporary situations that hide the true value and will pass with time and offer us an extraordinary opportunity.
- And remarkably priced (PER of 6/7x versus a market priced at 15x). I can honestly say that I do not know of any fund that invests in developed countries and boasts such attractive multiples.
In a nutshell, we have a collection of wonderful businesses for the price of companies that are going nowhere.
Meanwhile, many of their owners or managers are, like us, immensely frustrated with the baffling prices of their assets and are taking measures to address the situation. They are buying back shares, and even weighing up drastic measures such as changing the corporate struc-ture or doing whatever is needed for the market to recog-nise the value of their assets. These measures, and the fact that their assets are clearly undervalued, will see to it that the market appreciates that value sooner rather than later, regardless of market performance, as we all saw from 2000 onward.
We have sustained a negative performance in recent months, since we have a rather concentrated portfolio (Teekay group, Babcock, Dixons, Golar, CIR, Porsche and Renault and Aryzta account for 45% of the total portfolio). We believe this poor performance is now behind us, as we are now more confident than ever with our valua-tions. Following our Aryzta valuation downgrade last year, we have not had to make any further significant downgrade.
We therefore maintain a revaluation target of over 100% for most names, and we are now even more confident than we were when we began to invest in 2017, thanks to the hard work of the management team. In short, we now have a portfolio invested at multiples of 6/7x, rather than 8/9x as was previously the case. There is no logical reason for this decline, which is down to temporary situations affecting most of the securities, as discussed above.
I sincerely believe that we have a unique portfolio, that must be given time to mature. But words alone are not enough: actions speak louder than words. Due to the contract I signed with my former company, I was unable to invest all my assets and those of my wife in Cobas. But, in September, I’ll finally be able to do so and I certain-ly aim to significantly increase my investment in the funds. Needless to say, I’m in no doubt and it seems to me like a very opportune moment to do so.
I know increasing positions at these times is not an easy decision, but good results come from hard decisions.
In any case, I am grateful to each and every one of our nearly 30,000 participants for their ongoing trust, patien-ce and presence of mind during these testing times. As an objective indication of just how much our fellow retail investors trust in our funds, we have received net inflows in excess of 10 million euros year to date. In total, Cobas AM has seen a very small volume of net redemp-tions in the year at around 7million euros. This is extre-mely telling when we compare this with total cash out-flows from equity funds marketed and sold in Spain, which in the year to date have climbed past 3 billion euros according to Inverco figures. Despite the past 17 months, we have new clients who place their trust in us each and every day and that gets me even more excited about creating further value for our funds, which sooner or later will feed through to their net asset values. All things said, we are back to the year 2000, but now with a better portfolio than we had 20 years ago. A port- folio that should show a stellar performance over the coming years.
Francisco GarcĂ Âa ParamĂ©s
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