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azValor takes value opportunity from Catalan crisis


Veteran value investors Alvaro Guzman (pictured) and Fernando Bernad launched their firm azValor in November 2015, having spent the previous 13 years working together at another firm, building a value portfolio from EUR200 million to EUR10 billion.

azValor has EUR1.7 billion under management for some 16,000 retail, high net worth and institutional investors who are as committed to the pair’s quest for value returns as they are.
Guzman says: “How we interact with clients is what makes this company different.”

The firm is a classic value investing firm, buying things that are cheap in the expectation that they will go up once specific problems have been resolved.

“As a result of our interactions and historic returns we have a patient client base,” Guzman says. “They know what we do and that bad times are a harbinger of better times ahead – we are really very fortunate to have this client base.”

Guzman refers to the firm’s investors as partners. “Our clients are our partners; the companies in which we invest also perceive us as partners, not activists, they receive us with joy and open arms and the third leg is our employees who are also partners, who educate partner clients to invest in partner companies.”

The pair look for value opportunities globally but are aware of their base in Spain and have historically had the bulk of the portfolio within a two-hour flight. Some 20 per cent is a focus on the 130 Iberian stocks in Portugal and Spain in which azValor has had a great deal of experience, and enjoyed the past few years of good performance.

The firm has five principles as value investors: they invest in stocks because they have been the best performing asset class over the last two hundred years.They believe that stocks offer fractional ownerships of businesses. “If they prosper, we will prosper,” Guzman says. Market fluctuations should not be a guide but a servant. Guzman says: “Market fluctuations are in a way serving us – these businesses are trading every day and people get nervous, greedy and fearful and that works for us.”

The third principle is that the future is uncertain and so they have to buy with a margin of safety, buying cheaply. Fourth principle Guzman says is: “If you want to buy a business for the long term, you have to know what you are talking about or the market will knock you down, you have to build a circle of competence.”

The final principle is, he says, to focus on your mistakes and learn something each time you make a mistake to keep modest and humble. “After 20 years with the same partner we remember and do not repeat the same mistakes again,” he says.
The current Catalan crisis in Spain saw azValor cashed up and ready to invest. “We had a lot of cash, around 22 per cent in the Spanish fund which we don’t like. It’s uncomfortable but not as uncomfortable as doing something stupid,” Guzman says.

“At the outset of the Catalan crisis, the markets started to go down and we are reasonably constructive in the long term and bought undervalued businesses and growing businesses and business where we are aligned with the managers and so invested all the cash.

“This sounds very logical but it takes a lot of hard work and people with patience and time to see it work and overcome their emotions.”

The pair moved from that 22 per cent cash position in its Iberian portfolio down to less than 5 per cent by the beginning of November, as other shareholders sold out of quality Spanish companies. The ‘value grab’ has boosted the long-term upside potential value of the Iberian fund by 55 per cent up from 40 per cent – so giving an indicative value of up to EUR200 per share. Guzman and Bernad point out that while nothing is guaranteed, were the value that they perceive in the portfolio to be realised, then over a three-year period, investors would receive a 15 per cent annual compound return from the current market value of EUR130 – or 9 per cent if value is realised over five years, which is a normal time horizon for their investment style.

The duo’s focus for new investment has been in Iberian stocks such as Almirall, FCC and Jeronimo Martins, while increasing the weight in Tecnicas Reunidas.

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