Half-year letter 1H2023

Theme & Background

This chapter discusses the performance and investment strategy of Azvalor funds in the first half of 2023. The market environment exhibited extreme divergence: the S&P 500 rose nearly 16%, but gains were highly concentrated in a handful of tech giants, with the remaining 490 companies up only 3% and still not cheap in valuation. The report argues that the overall market is currently expensive, while Azvalor's portfolio is relatively cheap, a pattern similar to that seen at the end of the first half of 2022.

Core Thesis

The author's core investment argument is: Performance over the next five years depends on the starting valuation, not on the ability to predict individual stocks. The current ratio of fund price to intrinsic value is attractive, but the overall market rally is misleading. The counterintuitive judgment is: the more expensive the market, the cheaper the Azvalor portfolio, and the greater the potential for future returns. The report emphasizes that investment success depends on strict valuation and buy/sell discipline, not on chasing short-term trends.

Key Arguments & Data

• Performance: Azvalor Iberia +9.4% in H1, Azvalor Managers +7.2%, with other funds roughly flat. Since inception approximately eight years ago, cumulative returns are +27%, +113%, +76%, +41%, and +82%, respectively.
• Market Divergence: The S&P 500 rose nearly 16%, but just 10 companies contributed 82% of the gains, while the remaining 490 companies rose only 3%.
• Valuation Comparison: Azvalor Iberia's estimated value is €226/share, with a current NAV of €132/share; Azvalor Internacional's estimated value is €440/share, with a current NAV of €222/share; Azvalor Blue Chips' estimated value is €345/share, with a current NAV of €184/share.
• Investment Process Example: Tenaris was sold at approximately €17, and JC Decaux was bought at approximately €12; after JC Decaux rose to €22, it was sold, and Tenaris was repurchased at below €12 (the latter having fallen 30%).
• Azvalor Managers: The portfolio currently trades at 4.15x P/E and 0.87x P/B; two takeover bids were received: PDC Energy at a +132% premium (above average cost), and Copper Mountain Mining at a +75% premium.

Companies/Assets Involved

Company/Asset	Role	Key Data	Bullish/Bearish
Tenaris	Global leading steel pipe manufacturer	Sold at ~€17, repurchased below €12	Bullish (repurchase)
JC Decaux	Global outdoor advertising leader	Bought at ~€12, sold at €22	Bearish (sold)
Tubacex	Largest holding in Azvalor Iberia	Management recently achieved key milestones, indicating strong performance over the next 3-4 years	Bullish
Línea Directa	Increased position in Azvalor Iberia	Increased exposure	Bullish
Catalana Occidente	Increased position in Azvalor Iberia	Increased exposure	Bullish
National Oilwell	Major holding in Azvalor Internacional	—	Bullish
Barrick Gold	Major holding in Azvalor Internacional/Blue Chips	—	Bullish
Arch Resources	Major holding in Azvalor Internacional	—	Bullish
Noble	Major holding in Azvalor Internacional/Blue Chips	—	Bullish
PrairieSky Royalty	Major holding in Azvalor Blue Chips	—	Bullish
NOV	Major holding in Azvalor Blue Chips	—	Bullish
PDC Energy	Received takeover bid	+132% premium above average cost	Bearish (exited)
Copper Mountain Mining	Received takeover bid	+75% premium above average cost	Bearish (exited)
3G Capital	New manager added to Azvalor Managers	Independent boutique manager with decades of double-digit annualized returns	Bullish
SouthernSun Asset Management	New manager added to Azvalor Managers	Same as above	Bullish
Mittleman Investment Management	Exited from Azvalor Managers	Sub-advisory relationship terminated	Bearish (exited)

Investment Implications

• What it means for investors: The current focus should be on starting valuations rather than macroeconomic forecasts. The ratio of Azvalor fund price to intrinsic value shows a significant discount (e.g., Iberia's estimated value is 72% above NAV), suggesting high return potential over the next five years. However, investors should be wary of the risk of extreme valuations in the overall market (especially tech stocks) and avoid chasing short-term trends.
• Specific directions: Bullish on Azvalor's portfolio of cheap cyclical stocks (e.g., Tubacex, Tenaris) and resource stocks (e.g., Barrick Gold, Arch Resources), as well as newly added boutique managers (3G Capital, SouthernSun). Bearish on high-valuation tech stocks and the overall market index.

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Theme and Background

This chapter is the summary section of Azvalor's 2023 first-half investment report, primarily reviewing the performance of Azvalor International SICAV Luxembourg, the industry awards received by the company, capital inflows, and reaffirming its long-term value investing philosophy. The author emphasizes that despite short-term market volatility, an investment approach based on valuation starting points is expected to deliver returns close to historical levels in the future.

Core Thesis

The author's core investment argument is: The current price-to-intrinsic-value ratio of the fund suggests that future returns will approach the historical average of approximately 15% per annum. The counterintuitive judgment is that short-term market concentration in gains (such as the vertical rise of the NASDAQ) is misleading, and true value creation lies in contrarian investing in currently unpopular but fundamentally sound companies.

Key Arguments and Data

• Performance: Azvalor International SICAV Luxembourg posted a return of -0.02% in the first half of 2023, significantly underperforming the benchmark index, which rose by 11.1%. As of the end of June, the estimated value per share of the fund was €3.566.
• Historical Returns: Over the past 20 years, Azvalor's annualized return has been approximately 15%, with initial capital growing 13-fold. The author believes the current valuation ratio indicates that future returns will not be far below this historical level.
• Capital Inflows: Net inflows in the first half of 2023 were close to +€130 million, with over 2,700 new co-investors added, bringing the total number of investors to nearly 23,000.
• Award Recognition: The company and its fund managers received multiple industry awards, including the Expansión-Allfunds Best Independent Spanish Management Company, Best Global Equity Fund (Azvalor Internacional), and Best Spanish Equity Fund (Azvalor Iberia). Fund managers Álvaro Guzmán de Lázaro and Fernando Bernad were named the Best Global Equity Managers of 2023 by Citywire.

Companies/Assets Involved

• Azvalor International SICAV Luxembourg: An investment vehicle for international investors, with a strategy consistent with the domestic Spanish fund. As of the end of June, its main holdings included PrairieSky, NOV, Arch Resources, and Tullow Oil. Performance was flat (-0.02%), trailing the benchmark.
• Azvalor's Funds: Including Azvalor Internacional, Azvalor Iberia, and Azvalor Global Value FP, all of which received industry awards, reflecting market recognition of their management capabilities.

Investment Insights

• Adhere to Contrarian Investing: The author argues that current market returns are highly concentrated in a few companies (such as NASDAQ components), while the majority of stocks are lackluster. Investors should ignore short-term hotspots and focus on high-quality companies with reasonable valuations that are overlooked by the market.
• Focus on Valuation Starting Points: Historical returns indicate that the key to long-term investment success lies in the price-to-intrinsic-value ratio at the time of purchase. The current ratio suggests that future returns may approach the historical average of 15% per annum, but patience is required for market value to revert.
• Signal from Capital Inflows: Net inflows of +€130 million and the increase in new investors suggest that despite lackluster short-term performance, long-term investors are building trust. This implies that market sentiment may be shifting toward value investing.