Theme and Background
This chapter reviews the long-term performance of the Azvalor funds since inception and, based on the current valuation levels of the portfolio, provides a quantitative outlook for expected returns over the next five years. The market environment in which the report is set is characterized by historically high valuations for the U.S. S&P 500 index, while Azvalor's portfolio is trading at significantly depressed valuations.
Core Views
- Historical performance validates the investment method: Since March 2003, long-term holders have achieved a 14-fold increase in investment (13% annualized), substantially outperforming the MSCI World's 4.6-fold gain. This result is attributed to the internally developed "Azvalor Method."
- Current valuation levels point to future returns: The report believes that the current upside potential of the fund's portfolio is close to +90%, placing it in the "high potential" scenario within the historical range. Based on historical experience, at similar valuation levels, the expected annualized return over the next five years is 10%–13%.
- Contrarian judgment: The report argues that current market volatility and negative media coverage are not risks, but rather the "most fertile ground" for generating excess returns. Market declines are viewed as opportunities to increase holdings, not as signals to reduce them.
Key Arguments and Data
- Historical performance comparison:
| Period |
Azvalor Return |
Benchmark Return |
| Since March 2003 |
14x (+1300%) |
MSCI World: 4.6x (+360%) |
| Since inception of Azvalor Internacional |
+137% |
MSCI World: +116% |
| Since inception of Azvalor Iberia |
+48% |
IGBM: +7% |
- Valuation comparison and potential returns:
| Metric |
Azvalor Portfolio |
S&P 500 |
| P/E Ratio |
8x |
22x (next 12 months) |
| CAPE Ratio |
- |
36x |
| FCF Yield |
12%–16% |
4%–6% |
- Historical scenarios and corresponding returns:
| Scenario (Portfolio Upside Potential) |
Time |
Subsequent 5-Year Annualized Return |
| Low potential (<40%) |
Before the 2008 financial crisis |
Below 10% |
| High potential (>150%) |
2009, 2020 |
Above 20% |
| Close to 100% |
Current |
10%–13% |
- Extreme market performance:
- After the 2020 (COVID-19) decline, the portfolio rebounded +62% in 2009.
- In 2022 (S&P 500 fell -20%), Azvalor Internacional rose +45% against the trend.
Companies/Assets Involved
- Azvalor Iberia:
- Role: A highly concentrated, undervalued value fund.
- Key data: Top 10 holdings account for over 60%; weighted average ROCE is 32%; weighted average FCF yield is 16%; currently estimated upside potential +86%.
- View: Bullish. The report believes that the low prices of the portfolio holdings are temporary and that the market will eventually recognize their value.
- Azvalor Internacional:
- Role: A globally diversified value fund focusing on high-quality companies.
- Key data: Net asset value per share EUR 237.4; weighted average ROCE is 25%; FCF yield is 12% (far superior to the 4%–6% of Western markets); currently estimated upside potential +89%.
- View: Bullish. The report notes that it was the equity fund most subscribed on a net basis (approximately EUR 55 million) among Spanish independent management companies in 2024 (as of the first half).
Investment Implications
- Maintain long-term conviction, ignore short-term noise: The core implication of the report is that investors should emulate long-term historical holders and not panic-sell due to market volatility or negative news. Azvalor funds have always rebounded strongly and reached new highs after historical declines.
- View market declines as opportunities to increase holdings: Given the portfolio's historically low valuations, the author explicitly recommends increasing investment during market downturns rather than exiting.
- Focus on valuation rather than macro forecasts: The report does not make predictions about the macroeconomic direction but emphasizes that "cheap" is the key to future high returns. The current 8x P/E of the portfolio stands in stark contrast to the S&P 500's 22x, serving as the cornerstone for constructing expected future returns.
Theme and Background
This chapter focuses on the operational status, performance, and portfolio characteristics of three funds under Azvalor (Blue Chips, Managers, International SICAV Lux) in the first half of 2024. The current global equity market is characterized by valuation divergence, with small-cap and value stocks still trading at relatively undervalued levels. The report emphasizes that the fund portfolios, built on low valuations and high free cash flow yields, still offer significant upside potential.
Core Viewpoint
The report argues that the current valuation levels of the fund portfolios (average FCF yield of 11.5%, P/E of 9x, and a discount of over 50% to the global stock market) provide a substantial margin of safety for achieving an average annual return of over 10% in the coming years. The contrarian view is that the market systematically underestimates the acquisition value of stable small-cap companies. Over the past few years, 23 portfolio companies have received third-party takeover bids, a trend that continues.
Key Arguments and Data
- Azvalor Blue Chips: Net asset value declined -1.2% in the first half, with cumulative returns of +61.9% since inception. FCF yield of 11.5%, estimated upside potential of +93%. AUM is approximately €70 million, allowing flexible allocation to small and mid-cap companies (slightly over 20% of the portfolio).
- Azvalor Managers: First-half performance of +6.8%, cumulative returns of +61.9%. AUM exceeds €100 million, with over 1,400 co-investors. In 2024, the fund added a new management company, FountainCap Research & Investment. The portfolio P/E is 9x, representing a discount of over 50% to the global stock market; dividend yield exceeds 2%.
- Azvalor International SICAV Lux: First-half return of 0.9% (benchmark +9.0%), FCF yield of 11.5%, ROCE of 23%, upside potential of +89%. Added a new position in Sprott Physical Silver Trust, sold New Gold and Endeavour Mining; Técnicas Reunidas was the best-performing individual stock.
- M&A Events: Five third-party takeover bids occurred within the portfolio in the first half (spanning different industries/countries), all initiated by industrial competitors. A cumulative total of 23 portfolio companies have been acquired.
| Metric |
Azvalor Blue Chips |
Azvalor Managers |
Azvalor Intl SICAV Lux |
| First-half return |
-1.2% |
+6.8% |
+0.9% |
| Cumulative return |
+61.9% |
+61.9% |
— |
| FCF yield |
11.5% |
— |
11.5% |
| Upside potential |
+93% |
— |
+89% |
| P/E |
— |
9x |
— |
| ROCE |
— |
— |
23% |
| Dividend yield |
— |
Over 2% |
— |
Companies/Assets Involved
- Sprott Physical Silver Trust: Added as a new position, reflecting a bullish view on the allocation value of physical silver.
- New Gold / Endeavour Mining: Sold. The specific rationale for a bearish view is not stated, but it may reflect a phased judgment on gold/mining stocks.
- Técnicas Reunidas: Best-performing stock. The driving factors are not detailed, but the stock is a value company that Azvalor has tracked long-term.
- FountainCap Research & Investment: A newly added management company, reflecting Azvalor's expansion in external manager selection.
Investment Implications
- Current valuations offer a high margin of safety: The three funds have an average FCF yield of over 11%, a P/E of only 9x, and upside potential close to 90%, pointing to a potential annualized return of over 10% over the next five years. (Note: This is an internal forecast by the report based on historical valuation relationships.)
- Small-cap value M&A premiums provide an additional source of returns: The persistent occurrence of third-party takeover bids (23 in total) indicates that this strategy features event-driven returns. Investors can expect some targets in the portfolio to be acquired at prices above market value.
- Pay attention to the impact of fund size on strategy flexibility: Azvalor Blue Chips, with an AUM of €70 million, can still allocate to small and mid-cap companies. Azvalor Managers, after exceeding €100 million in AUM, has added an external manager, reflecting a pragmatic adjustment to strategy as scale grows.
- Short-term relative underperformance does not change the long-term logic: Azvalor International SICAV Lux underperformed its benchmark by 8.1 percentage points in the first half, but the portfolio's FCF yield and upside potential are far higher than the index. Mean reversion from low valuations remains the core driver.