Quarterly letter 4Q2022
The most representative equity indices in the United States and Europe have had a difficult 2022 and closed the year with significant declines. Azvalor’s funds, on the contrary, have performed exceptionally well, offering returns between 20% and 40% on the overall assets under management in 2022.
Warren Buffett warned years ago that the true test to know how conservative a portfolio is comes in a bear market. We feel very proud, therefore, to have succeeded in protecting our co-investors from both downturns and inflation. Congratulations to all of you for your patience, now is the time to celebrate.
However, at Azvalor we are already looking ahead to the next five years. And we do so by sticking to the same investment process that has been valid for over 20 years, and by avoiding making predictions. A process that has been put to the test and has proven its worth throughout milestones such as 9/11, the Financial Crisis of 2008, Brexit in 2016, the COVID-19 pandemic and the recent war between Russia and Ukraine. The key to this process lies in analyzing each company with a surgeon’s scalpel, seeking to buy good assets at good prices, while ensuring the necessary security to withstand market onslaughts, which are both inevitable and unpredictable. Buying cheap is the reason for the positive performance of our funds despite an environment of steep market declines, and it is the backbone of our expectations of attractive long-term returns from these levels.
Naturally, we are very pleased to have achieved something almost unprecedented in favor of our co-investors (outperforming the market by more than ever—in some cases above 50 percentage points in a single year), but this good result raises the bar even higher and forces us to stay watchful and focused on improving the potential and the quality of our portfolio. We know that good decisions rarely spring out of success. That is why we must continue to analyze companies with the same intensity, with the same depth, and study their history, their management, their assets, their competition, and their financial structure. Today we face high levels of debt in most Western countries, a global energy crisis and inflation rates unprecedented in 40 years. To make sound investments in this uncertain environment, we continue to focus on the same old principle: excellent bottom-up company by company research and take advantage of market pessimism to acquire good businesses at attractive prices.
Our demanding rotation process (selling at a profit, generating liquidity and reinvesting when prices are low) is allowing us to continue to create value. In particular, market declines in the third quarter and our high liquidity have enabled us to increase the target value of the Azvalor Internacional fund to €450 per share, which translates into an upside of more than 100%. This estimated value is 4.5 times the price of €100 per share at which we launched Azvalor Internacional more than seven years ago.
The net asset value of Azvalor Iberia increased by +19.3% in the year compared to the flat growth of +0.4% of its benchmark.
As of the date of publication of this letter, the target value of Azvalor Iberia stands at €237 per share2, vs. its current price of €128 per share.
The portfolio maintains a high level of concentration, with the top ten positions accounting for approximately two thirds of the portfolio. The top positions are Técnicas Reunidas, Tubacex and Prosegur Cash. We believe that in all three cases we could be close to a very significant improvement in earnings after many years of “crossing the desert”.
We took advantage of the good performance of Galp and Logista during the quarter to reduce their exposure. On the other hand, we strengthened positions in Grifols-B and Prosegur Cash. There were no additions of national stocks with a weight of more than 1%.
During this period, it is worth mentioning the significant corporate operation of Sonae’s takeover bid for Sonaecom, with a 25% premium over its last price prior to the announcement of the bid. We believe that the offer clearly undervalues the company and therefore do not plan to participate, unless the regulator forces us to do so by approving the “squeeze-out” and delisting.
Azvalor Internacional delivered a return of +45.8% compared to the -9.5% drop recorded by its benchmark. The fund’s strong divergence from its benchmark (and all indices for that matter) remained constant throughout 2022, outperforming it by more than 55 percentage points.
It is important to highlight the fund’s attractive potential as its target value stands at €450 per share2 vs. its current price of €225 per share3.
During the last quarter of the year the biggest weight gains have been in British American Tobacco, Vallourec, Pan American Silver, Endeavour Mining and Petrofac, while we took profits in stocks that excelled last year such as Whitehaven Coal, Arch Resources, Teck Resources, NOV Inc, Vale and Logista.
The revaluation of the portfolio led to the divestment of numerous companies (Civitas Resources, DHT Holdings, Euronav, Gold Fields, Schlumberger, Tenaris, Trican Well), as well as to a significant number of new additions (Ashmore, B2Gold, Elis, Grifols ADR, Howden Joinery, Semapa), but none with a weight of more than 1% as of yet.
Azvalor International Sicav Luxembourg
The Azvalor International SICAV Lux has reached new high of €280M of assets under management at the end of the year. The subfund, available for international investors, has a similar strategy to the domestic Azvalor Internacional, including a percentage of the portfolio invested in Iberian stocks. During 2022, the board of directors agreed to amend the prospectus to allow the subfund to be more flexible, allowing the management team to invest in the best equity opportunities without any constraint in terms of currency exposure (previously, it was limited to a maximum exposure of 45% in non-euro currency). This amendment will also help align the future performance of the vehicle vs the domestic version – Azvalor Internacional.
Note that although the strategy and investment philosophy of both vehicles are very similar, they are not pure clones, thus there will be differences in performances. In this regard, and as an example, current non-euro currency exposure is around 58%.
The subfund delivered in 2022 a return of +34.5% compared to the -9.5% drop recorded by its benchmark., outperforming it by more than 44 percentage points.
It is important to highlight the fund’s attractive potential as its intrinsic value stands at €3,646 per share2 vs. its current price of €1,817 per share3.
During the last quarter of the year the biggest weight gains have been in Vallourec, Bor Drilling, Mandalay, Bayer and British American Tobacco, while we took profits in stocks that excelled last year such as Whitehaven Coal, Arch Resources, Vale, Glencore and JC Decaux.
The revaluation of the portfolio led to the divestment of numerous companies (Civitas Resources, Gold Fields and Mapfre), as well as to a significant number of new additions (Forterra, Ibstock, Sig, Greatview Aseptic Packaging, Semapa or Ashmore), but none with a weight of more than 1% as of yet.
Azvalor Blue Chips
Over the year, the fund has delivered a positive return of +31.4% compared to the -12.8% drop of its benchmark, reflecting, as in the case of Azvalor Internacional, a historical difference in comparable terms. This fund builds on the Azvalor Internacional portfolio and follows the same value investment philosophy but with larger stocks (€20 billion in average weighted market cap).
The good performance of certain stocks during the quarter led to a reduction in the exposure to companies such as Schlumberger, Vale, Tenaris or Glencore, while increasing the exposure to other names such as British American Tobacco, Canadian Natural Resources, Petrofac, Bayer, Pan American Silver or Endeavour Mining. Seven new companies were added to the portfolio during the quarter (B2Gold, First Quantum, Galp, GSK, Liberty Global, Next and Noble Corp) while another four positions were sold entirely (Gold Fields, Prosegur Cash, Southern Copper and Teck Resources).
We still see significant potential in this portfolio, as its target value stands at €348 per share2, at the date of publication of this letter, vs. its current price of €185 per share3.
Azvalor Managers’ performance has remained practically flat in 2022 (+0.54%), while the companies in the portfolio are showing a very positive trend in terms of profit and cash flow generation, which allows them to reduce debt, increase dividends and buy back shares, thus improving their value. This, together with a steep plunge in equity prices over the last year, which has enabled us to invest in some very specific new opportunities, means that the fund now has the best portfolio since its launch, at the most attractive valuations. At the aggregate level, the portfolio currently trades at a valuation of 4.33 times earnings and 0.84 times book value, a level unprecedented in the life of the fund. We believe this offers a high margin of safety and an attractive upside potential over the next few years, in an environment where the valuation divergence between expensive and cheap stock is at historic extremes (94th percentile according to AQR in “The Bubble Has Not Popped”).
Azvalor Managers is a fund that combines the best investment ideas of four independent asset management firms, thus offering exposure to over 100 companies from various regions and sectors, with the advantage that each investment has been selected after an exhaustive research process, as each of the Managers have concentrated portfolios with high conviction positions. All four Managers have remained loyal to their particular investment style and process for decades, and have successfully weathered all kinds of storms, historically generating double-digit long-term returns and comfortably beating the market. Moreover, the portfolio is very different from the market, with almost 100% invested in names that are not in the main indices, thus providing proper diversification.
During the year 2022 net inflows have reached €336M, out of which Pension Schemes hold more than €220M (a semi-permanent capital). More than 4.500 new co-investors have joined our funds, adding up to a total of over 20,000 investors. We would like to welcome all of them and thank them for sharing our long-term vision, which is absolutely essential to deliver healthy returns.
Our funds have fulfilled their objective of being a “safe haven” to protect the savings of our co-investors in the midst of the storm, thanks to our obsessive focus on buying quality at a cheap price.
Looking ahead, Azvalor’s main funds (Internacional, Blue Chips, Iberia, Managers and Azvalor Global Value) all have upside potentials close to 100%.
The current environment is the best we have encountered in a long time for a value investor like us. Our companies have rallied strongly and we have generated capital gains, while the market around us has dropped by 20%. This market decline hides the fact that some companies have plunged by as much as 40% or 50%. In some of them we have found investment opportunities and thus increased the value of the fund.
We will soon announce our 8th Annual Investor Conference, where we will be able to celebrate the good results obtained and explain, at much greater length, our optimism for the future with the current portfolio.
Once again, we wish to express our gratitude for the trust you have placed in our firm, and we invite you to contact our Investor Relations team should you have any doubts or questions.
 Past performance is not indicative of future results.
 The target value indicated herein is calculated as the difference between the estimated value of each of the underlying assets of the portfolios, based on our internal valuation models and the current share prices of each in stock markets.
 As at January 26, 2023.
 Source: Morningstar, as at December 31, 2022.