Theme and Background
This chapter reviews the performance of Azvalor's various funds in the first quarter of 2022 and explains the sources of excess returns. The author emphasizes that the current portfolios remain at a significant discount, with further upside potential, but cautions investors to remain prudent amid favorable market conditions.
Core Thesis
The author's core investment argument is: Buying high-quality companies at prices below intrinsic value is the fundamental source of long-term excess returns. Currently, there remains a significant discount between the net asset value (NAV) and intrinsic value of all portfolios, implying considerable future return potential. The counterintuitive judgment is that despite substantial fund gains (e.g., Azvalor Internacional rising over 100% in 18 months), the author believes this is merely a partial reversion to value, not a market peak.
Key Arguments and Data
- Valuation Starting Point Determines Future Returns: The author stresses that the lower the purchase price of an asset, the higher the potential future return. Azvalor's core metric is the ratio of NAV to intrinsic value, with all current portfolios trading at a discount.
- Performance Comparison: All funds significantly outperformed their benchmark indices in Q1 2022, with specific data as follows:
| Fund Name |
Quarterly Return |
Benchmark Return |
Current Price (€/share) |
Target Price (€/share) |
Potential Upside |
| Azvalor Iberia |
+11% |
-0.3% |
~116 |
209 |
~80% |
| Azvalor Internacional |
+30.8% |
Euro Stoxx 600: -6.5%, S&P500: -4.9% |
~207 |
365 |
~76% |
| Azvalor Blue Chips |
+26% |
Same as above |
~176 |
292 |
~66% |
| Azvalor Managers |
+8.9% |
MSCI ACWI NR: Not provided |
8x P/E (Index 17x), 0.9x P/B (Index 2.5x) |
Not provided |
Significant discount |
| Azvalor Lux SICAV |
+24.9% |
MSCI Europe TR Net: Cumulative 43.5% |
~1,774 |
3,216 |
~81% |
- Historical Performance: Since the COVID-19 low in 2020, Azvalor Internacional has risen over 3.5 times; since its inception in 2015, most investors have doubled their principal.
- Portfolio Discount: The Azvalor Managers fund is valued at half the global equity market (8x P/E vs. 17x P/E, 0.9x P/B vs. 2.5x P/B).
Companies/Assets Involved
- Azvalor Iberia: New holdings include Atresmedia and Catalana Occidente; increased positions in Logista, Técnicas Reunidas, and Línea Directa Aseguradora; exited Zardoya Otis (due to a takeover bid); reduced holdings in Galp Energía and Altri SGPS. Top five holdings are Tubacex, Elecnor, Técnicas Reunidas, Prosegur Cash, and Logista.
- Azvalor Internacional: Added Ferrexpo, Iamgold, and Central Puerto; exited Tenaris, Chesapeake Energy, and International Seaways; increased positions in Suzano, Agnico Eagle Mines, and Aurizon Holdings; reduced holdings in Civitas Resources, Teck Resources, and Kinross Gold. Major holdings include Arch Resources, Consol Energy, Barrick Gold, and Whitehaven Coal (bullish).
- Azvalor Blue Chips: Added Grifols and Bayer; increased positions in Aurizon Holdings, Agnico Eagle, and Fresnillo; reduced holdings in Tenaris, Teck Resources, and Total Energies (bearish on some energy stocks).
- Azvalor Lux SICAV: Added Bayer and Petra Diamonds; reduced holdings in Tenaris and Canadian Natural Resources (as prices approached intrinsic value). Major contributors were Arch Resources and Whitehaven Coal (bullish).
Investment Implications
- Continue Holding or Increasing Positions: All funds' current prices remain 60%-80% below target prices, with significant valuation discounts (e.g., Azvalor Managers' P/E is half the market's), indicating substantial upside potential for the portfolios.
- Focus on Resource Stocks: Major holdings are concentrated in resource stocks such as coal, gold, and mining (Arch Resources, Barrick Gold, etc.). These companies have performed strongly amid inflation and geopolitical risks, and the author believes their value has not yet been fully realized.
- Watch for Energy Stock Reduction Signals: Reductions in positions like Tenaris and Canadian Natural Resources suggest some energy stocks are nearing intrinsic value, and investors should avoid chasing highs.
- Long-Term Perspective: The author emphasizes that "the valuation starting point determines returns." The current discount implies future return potential, but patience and caution are required to avoid excessive optimism due to short-term gains.
Theme and Background
This section concludes the quarterly letter of the Azvalor fund, primarily elaborating on its investment discipline and reflections on new market paradigms. The author emphasizes that despite recent strong performance, the future will not be easy, requiring humility and adherence to an investment process validated over the past 20 years.
Core Views
- Contrarian Judgment Against Market Consensus: The author argues that traditionally the safest fixed-income assets (bonds) have failed to protect savers' purchasing power, while the most "fashionable" companies of the past year (such as Amazon and Netflix) have also experienced sharp declines. This overturns the market's ingrained perceptions of "safe assets" and "growth stocks."
- Investment Discipline: The author adheres to the "prudent principle" of selling when a company's stock price rises, a fundamental discipline consistently applied over the past 20 years. The same process will continue in the future, waiting for attractively priced companies to join the portfolio.
Key Arguments and Data
- Failure of Fixed-Income Assets: The report points out that theoretically the safest fixed-income assets have failed to protect savers' purchasing power, implying negative real returns or underperformance relative to inflation.
- Sharp Declines in "Fashionable" Companies: Amazon, Netflix, and others have experienced "sharp declines" over the past year, though the original text does not provide specific decline figures.
- Validation of Historical Discipline: The author emphasizes the consistent application of the "sell when prices rise" discipline over the past 20 years, using it as a basis for future operations.
Companies/Assets Involved
- Amazon: Listed as a representative "fashionable" company, experiencing a sharp decline over the past year (bearish signal).
- Netflix: Also listed as a representative "fashionable" company, experiencing a sharp decline over the past year (bearish signal).
- Fixed-Income Assets: Noted as failing to protect purchasing power, implying a decline in their investment value.
Investment Implications
- Implications for Investors: Do not become complacent due to past correct investments, as future markets may continue to be volatile. Adhere to disciplined investing, selling for profit when stock prices rise, and patiently wait for buying opportunities at low prices. Fixed-income assets and popular growth stocks may no longer be safe havens, requiring a reassessment of risk-return profiles.