Cobas Asset Management's 1st Quarter Shareholder Letter

Discussion of markets and holdings from Francisco Garcia Parames' firm

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May 20, 2019
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A fter a complicated 2018 in which we saw how our funds obtained negative results, at the beginning of this year we have obtained posi-tive returns supported mainly by the good performance of many of the stocks that performed nega-tively last year. For example, Aryzta went up by +25%, Teekay LNG by +36%, Teekay Corp by +17% and Dixons by +22%; therefore the International Portfolio went up during the first quarter by 10.8%, while the Iberian Portfolio went up by 8.3%.

During the first quarter, most of the companies in which we are invested obtained results in line with expectations, but the rise in share prices was largely due to good market performance, which has not yet revealed their true potential. It is logical that, after several years of a European market with little change, a slight recovery should begin for prices, which are at reasonable levels.

We remain very optimistic with our portfolios because, to the undervaluation mentioned on other occasions, we bring an increasingly detailed knowledge of the companies. In addition, some of them are taking the necessary steps to recognise that value (Teekay LNG repurchases shares, CIR and COFIDE merge and repurchase shares and other similar initiatives).

We remain very optimistic with the potential for reassessment of our portfolios

In this context, in the International Portfolio there have been no major changes and most of them have been of less than 1%. Quite the opposite has happened in the Iberian Portfolio, where we have taken advantage of the volatility to adjust our portfolio, resulting in, for example, the banking sector at the end of March having a significant weight, of around 12.5%.

Why do we have more confidence in target prices in april 2019?

As in the December quarterly letter we explained in detail our main investment assumption and there have been hardly any substantial changes in the International Portfolio during the first quarter, we want to emphasise in this letter the confidence we have in the target prices of our portfolios. This is nothing other than the weighted sum of the target prices of each of the companies that are present in them. As we commented in the previous quar-terly letter and in our annual conference in February, with the passage of time (and as a general rule) these target prices end up being reached. For example, in 2011, when Thales traded at €28, we thought its value was €56, today Thales trades at €107.

This confidence is supported by the knowledge we have about the companies in which we invest. This knowledge is the result of the quality of our analysis process, a pro-cess that we have developed over the years and that we continue to improve day by day. In addition, this knowledge is reinforced with the passage of time: The more time we spend analysing a company, the better we know it.

This analysis is carried out prior to the incorporation of a company to the portfolio, when we carry out a very in-depth study of each company. But it is an ongoing process, which never ends, as companies are living entities, subject to continuous change. That's why we dedicate 90-95% of our time to continuously studying the compa-nies that we have in our portfolio.

This improvement in knowledge could be compared to a marriage. Normally before we get married we get to know our partners for a while, we go out to dinner, to the cinema, etc. And after that period, we decide to take the leap and get married. Two years later, don't we know our partner much better? Something similar happens with investments, although we have spent a great number of hours getting to know each of the companies before buying them, two years later we know them much better than at the time of purchase.

It is also important to highlight that this knowledge of companies is the basis of the value investment. The value investor, by definition, has to swim against the tide, since in order to obtain different/greater yields than those of the market, it is necessary to do things different-ly compared to the market. Knowing the companies in which we invest and knowing what they are worth is key to coping with the short-term ups and downs of the market.

That is why we have our savings invested in Cobas funds and 50% of our variable remuneration is paid in shares of our funds, as we believe it is a good way to obtain an alignment of interests between you (the investors) and us (the investment management team).