Theme and Background
This chapter discusses the investment performance and strategy adjustments of Azvalor funds in the third quarter of 2021. The report notes that despite the overall market being overvalued, the fund's holdings remain severely undervalued, and it emphasizes enhancing the portfolio's intrinsic value through asset rotation (selling rising stocks and buying falling ones) rather than relying on macroeconomic forecasts.
Core Views
- The fund portfolio remains severely undervalued: Taking the Azvalor Internacional fund as an example, its target value is €320 per share, while the current price is only €150, implying a potential upside of over 100%.
- The price-to-value (P/V) ratio is 0.5, far below historical levels, which the author believes is key to achieving high returns.
- Counterintuitive judgment: Predicting inflation or interest rates is not a prerequisite for successful investing; understanding why a company's stock price is only half its value is a more reliable and less error-prone way to generate profits.
- Asset rotation strategy: By selling stocks whose prices have risen close to fair value (e.g., Range Resources, Suncor) and buying high-quality companies whose prices have fallen, the portfolio's value is continuously enhanced.
Key Arguments and Data
- Simplified view of inflation causes: The report argues that U.S. production has been hampered by the pandemic, while demand has risen due to transfer payments, leading to inflation. However, whether inflation is "permanent" depends on multiple variables and political decisions, making forecasts highly error-prone.
- Effectiveness of asset rotation: The fund achieved a return of nearly 40% in 2021, yet the P/V ratio remains at 0.5, indicating that the portfolio's value has grown faster than its price.
- Iberian portfolio: Zardoya Otis received a takeover offer from its parent company Otis at €6.94 per share (31% above the previous day's stock price), but the author believes the offer is far below the company's actual value. Otis's own valuation multiple is much higher than its offer for Zardoya, and its cost of debt is lower than Zardoya's dividend yield.
- International portfolio sell cases:
| Company |
Gain at Sale |
Purchase Price |
Sale Price/Context |
| Range Resources |
+65% |
~$9.0/share |
Natural gas prices rose from $2.5/million BTU to nearly $6.0, stock price exceeded $24 |
| Suncor |
+59% |
~CAD 18/share (late summer 2020) |
Crude oil prices recovered, stock returned ~60% recently |
| Major Drilling |
+38% |
Not disclosed |
Small position, sold to raise funds |
| Philip Morris |
+21% |
Not disclosed |
Same as above |
| Vertu |
+28% |
Not disclosed |
Same as above |
- New buying directions: Increased exposure to Canadian Natural Resources and Bonanza Creek, while selling Cabot Oil & Gas, Total Energies, and Galp (due to insufficient remaining potential).
- Portfolio valuation: Iberian portfolio has a per-share value of €195 vs. a price of €100; Azvalor Blue Chips has a per-share value of €272 vs. a price of €130 (also implying a 100% upside).
Companies/Assets Involved
- Zardoya Otis (core holding in the Iberian portfolio): Spain's elevator leader, with high ROCE and strong entry barriers. Received a takeover offer from its parent company Otis at €6.94 per share; the author considers the offer too low and retains most of the position for now.
- Range Resources (sold): U.S. natural gas producer, purchased at ~$9.0/share, sold at +65% as natural gas prices rose from $2.5 to $6.0/million BTU.
- Suncor (sold): Canadian oil sands producer, purchased at ~CAD 18/share, sold at +59% as crude oil prices recovered.
- Canadian Natural Resources (increased): Canadian energy company, replacing sold positions.
- Bonanza Creek (increased): U.S. energy company, replacing sold positions.
- Top five holdings (nearly 40% of the Iberian portfolio): Tubacex, Galp, Elecnor, Técnicas Reunidas, Logista.
- Azvalor Internacional's top 15 holdings account for 59%; Azvalor Blue Chips' top 15 account for 63% (the latter has an average market cap of €20 billion, with 41 stocks in total).
Investment Insights
- Focus on value, not macro: Investors should concentrate on the divergence between a company's price and its value (P/V ratio), rather than trying to predict inflation or interest rates. Currently, Azvalor's portfolio has a P/V of 0.5, a rare historical level, suggesting it may outperform the market in the coming years.
- Asset rotation strategy is replicable: Selling energy stocks (e.g., Range Resources, Suncor) after significant gains and rotating into other undervalued assets is an effective way to enhance the portfolio's intrinsic value.
- Beware of undervalued takeover offers: The Zardoya case shows that parent company acquisition offers may be far below actual value; investors should make decisions based on company fundamentals (e.g., ROCE, industry position) rather than short-term premiums.
- Structural opportunities remain in the energy sector: Although some energy stocks with large gains have been sold, increased holdings in Canadian Natural Resources and Bonanza Creek indicate that there are still assets in the sector whose prices do not fully reflect long-term value.
Theme and Background
This chapter focuses on the operational performance and investment logic validation of the Azvalor Managers fund since its inception. As of the end of September 2021, the fund achieved a year-to-date return of +38%, while several companies in its portfolio received acquisition offers significantly above the fund's average cost, confirming the effectiveness of its deep value strategy.
Core Thesis
The author's central judgment is that buying high-quality companies at prices significantly below their intrinsic value and waiting for market corrections (such as acquisition events) is a reliable path to outperforming the market over the long term. Counterintuitively, despite the fund already achieving nearly 40% year-to-date returns, its portfolio still trades at a discount of over 50% relative to global equity markets, implying substantial upside potential going forward.
Key Arguments and Data
- Acquisition Premiums Validate Value: Several portfolio companies were recently acquired at prices far exceeding the fund's average cost, with specific data as follows:
| Acquired Company |
Acquisition Offer vs. Fund Average Cost Premium |
| CAI International |
+80% |
| Domtar Corp. |
+171% |
| Fly Leasing |
+37% |
| Shinsei Bank |
+36% |
| American National Group |
+130% |
- Valuation Discount Provides Margin of Safety: The fund's overall valuation ratio indicates that its portfolio trades at a discount of over 50% relative to global equity markets. The author believes this discount level offers a "broad margin of safety" for outperforming the market over the coming years.
Companies/Assets Involved
- CAI International: A container leasing company, with an acquisition premium of 80%, validating the fund's undervaluation assessment.
- Domtar Corp.: A pulp and paper producer, with an acquisition premium of 171%, the highest among the cases cited.
- Fly Leasing: An aircraft leasing company, with an acquisition premium of 37%.
- Shinsei Bank: A Japanese bank, with an acquisition premium of 36%.
- American National Group: A U.S. insurance group, with an acquisition premium of 130%.
All cases are fund holdings, and the acquisition events occurred within the reporting period. The author uses them as direct evidence of the success of the investment philosophy (buying undervalued high-quality companies).
Investment Implications
- Adhere to the Deep Value Strategy: Even after the fund has achieved significant returns, the portfolio still trades at a discount of over 50%, indicating that current prices have not yet fully reflected intrinsic value. Investors should continue to hold or add to positions.
- Monitor Acquisition Premium Signals: The premium range of acquired companies (37%-171%) suggests that the market will eventually correct significant undervaluation, but patience is required to wait for catalysts such as acquisition offers.
- Avoid Premature Profit-Taking: The fund's year-to-date return of +38% may appear substantial, but relative to the target value (e.g., Azvalor Internacional fund at €320 per share vs. €150), the current price remains at "half of the value," and long-term holding could yield higher returns.