Azvalor Asset Management is known for investing in good businesses that offer sustainable competitive advantages over time, have high returns on capital employed, are led by a strong management team that oversees its shareholders’ interests and whose intrinsic value is not reflected in their share price.
The Spanish investment firm is led by Alvaro Guzmán de Lázaro, founding partner, CEO and co-chief investment officer, and Fernando Bernad, founding partner and co-CIO.
The two fund managers answered questions about investing and the market that GuruFocus readers asked recently. This is the second part of that interview. You can read the first part here.
You can also check out some of the firm’s current portfolios here.
GuruFocus question: Do you think index funds and ETFs are good options for average private investors? Why or why not?
Fernando Bernad: Index funds are OK for someone who does not want to do the work or lacks the emotional setup needed. They’re cheap, and this is already a lot when compounding many years. My advice for the user of them is: One, spread your purchases over five years to avoid concentrating all the investment in what could prove to be a market top. And two, Use the more diversified index of stocks. I do not really believe in rightly picking sector rotation via ETFs for the long term…
Question: When looking at Global Projected Market Return charts, Spain is listed very much at the top. What is it that going forward makes Spain a better investment place than other countries and regions, and what industries and companies do you consider worth looking at in Spain?
Alvaro Guzmán de Lázaro: The main factor for long-term returns is the starting point of valuations; the lower the starting valuations, the better the long-term returns. Spain as a service economy has suffered massively due to Covid, but I would not dare to venture that Spain will be a superior investment place. We are just stock pickers and generally run away from these sorts of top-down statements. There are some very well-run businesses in Spain, some still quite undiscovered and others whose value is well reflected in their stock price.
Question: What other European markets, and beyond, do you think offer good value opportunities currently?
AG: Again, price and value are the only North Stars. I am excited by bargains, but they do not share a common denominator beyond a good and aligned management, a solid competitive position and a cheap stock price.
Question: One major issue in the global markets right now is the Russia-Ukraine war. How do you expect the conflict will affect your strategy and investments in the coming months?
AG: If you give me the outcome of the conflict, I am not sure we would change the slightest bit... This is a complex (and very unfortunate) situation where lots of elements interplay with each other, making it impossible to handicap. Our way to deal with it as investors is just building a portfolio of resilient companies that can withstand adversity for a long time.
Question: Inflation is another big concern right now. From your perspective, how will it impact global markets? Are you concerned about its potential long-term effects?
AG: We are concerned, but there is always something going on. Last time “everything was OK with the world” that I remember was the summer of 1999 and 2007. Both terrible starting points to invest as markets fell 50% after both. The key is to pick the right companies, and if you do it at the right price, you will be able to navigate pretty much all environments.
Question: What kind of companies will work better for investors in an inflationary environment?
FB: History shows commodities in general and low capital intensive businesses. But, of course, provided their valuation is not excessive to start with.
Question: You own gold mining stocks in some of your portfolios. In your opinion, is the commodity a good way to hedge against inflation?
FB: Our gold mining companies are making more money than at any point in the last 10 years, yet their stock prices are not far from where they were when gold was at $1,300 per ounce in 2016. They have good balance sheets. Good managers. Barrick (GOLD, Financial) with Mark Bristow is, in our opinion, a MUCH, MUCH better company than before Bristow. It has a better balance sheet and a more resilient earnings power. Yet the shares are barely above their Aug. 16 level where gold was $600 lower and Bristow had not yet landed. We love it.
Question: Value stocks have lagged growth stocks for more than a decade. Do you believe that the reversal of the mean will occur at some point, and value will start outperforming growth going forward?
AG: Well, I think it is ALREADY occurring, at least for us. We underperformed like most of our value colleagues in 2017 to 2019. Now since the Covid lows of March 2020, our main fund’s net asset value has gone from 59 euros ($62.12) to 210 euros. That is a 256% gain. In the same period, the S&P500 is up 62%. So you get an idea of how enormous the catch up is being here.
As we have said already, starting valuations are the key for long-term returns. That is why I expect value will continue to outperform. But I would be a bit cynical with the definition of value in such a disruptive era as we think we are in today. You gotta be sure your market position will not be eroded and your cash flows will grow, or else you will fall into many value traps. This is not captured in the value versus growth debate, or not entirely at least.
Question: What advice do you have for investors that are just starting out?
AG: Build a portfolio with real money. Value is so intuitive and so well articulated by great investors in books, podcasts, etc., that it almost seems too easy at first glance, and attracts many young smart people like a siren’s song. My experience is that the market will eventually test your nerves. Some will do great, others will succumb. The sooner you realize if this is for you or not, the better. There is nothing like a real portfolio with real money to have your entire skin being put in the game.
FB: If you are not a professional and do not want to become one, conduct as hard a due diligence you can on what manager you want to rely on and abstain from directly investing yourself. If you want to become a professional investor, read a lot about the legendary investors, work hard to master accounting, statistics, read about the Austrian School of Economics and soon start buying stocks in anything that you could think of as your circle of competence (maybe there is an industry or sector you know about). I would also recommend learning from the great investors of today, track and analyze your mistakes and try to find a partner or friend to work “hand in glove.”
Question: What do you know about investing now that you wish you knew when you started?
AG: It is not like I am in a place to pontificate. The world changes all the time, so you need to keep learning all the time. Munger says this is what is so surprising in Buffett; that he does not seem to stop learningyear after year. Back to the concrete question, when I started in ‘97 I was giving a lot of importance to the incentives governing the ecosystem that a corporation is. I wish I would have given 3 times or 5 times more importance to it!
FB: I wish I had been even more wary of the dangers of debt and had known about Nassim Taleb and his “Incerto” collection.
Check out the first part of the interview here.
