Theme and Background
This chapter is Azvalor’s quarterly letter to investors, aimed at reviewing the performance of the Iberian portfolio and elaborating on its long-term investment philosophy and analytical approach. The author emphasizes that while short-term market fluctuations are frequent, the portfolio’s long-term value depends on the quality of the holdings and the purchase price.
Core Thesis
The author’s core investment argument is: The current Iberian portfolio holds high-quality assets at low purchase prices, offering significant upside potential in the future. Specific judgments include:
- The portfolio’s estimated future value is approximately €200 per unit, implying a 45% upside.
- Market volatility benefits the portfolio, as greater price swings provide better buying opportunities for high-quality companies.
- In the current environment where fixed-income assets yield near zero, the portfolio’s absolute returns will be attractive.
Key Arguments and Data
The author supports the thesis with historical performance and specific case studies. Key data are as follows:
| Metric |
Value |
| 2017 Iberian portfolio absolute return |
19% |
| Excess return relative to benchmark |
Nearly 6 percentage points |
| Cumulative portfolio return since inception |
36% |
| Benchmark index return over the same period |
10% |
| Number of companies currently held in the portfolio |
27 |
| Portfolio estimated future value |
€200 per unit |
| Potential upside |
45% |
Case Study: Mota Engil Investment Analysis
- Entry Timing: Late 2015 to early 2016, when the stock had fallen over 70% from its mid-2014 high.
- Market Consensus: The market believed the company was “bankrupt,” citing reasons including high debt, exposure to African and Latin American operations hit by the commodity price crash, and a fragile balance sheet.
- Azvalor’s Contrarian View:
- The company’s competitive position and management’s reputation were strong (tracked for nearly 10 years).
- High debt was not fatal because the company held significant non-core assets (e.g., port, water, and highway concessions) that were valuable but underperforming in terms of profit contribution.
- Commodity prices in early 2016 were at unsustainably low levels over the long term, and a strong cyclical recovery was expected.
- Due Diligence Process: The author’s team conducted in-depth analysis, including:
- Meetings with construction industry experts (former employees, competitors, clients) in Portugal, Poland, Mexico, and Spain to assess the company’s culture and risk calculation prudence.
- Verification of accounting standard prudence with the company’s former finance executives.
- Discussions with Portuguese financial industry experts to understand banks’ views on the company.
- Forensic accounting analysis of the company’s books, focusing on unbilled production, overdue unpaid bills, inter-subsidiary debt, and profitability of non-core assets (analysis not performed by sell-side analysts).
- Multiple trips to Portugal for meetings with the company’s chairman, CEO, CFO, and other senior executives.
- Investment Outcome:
- Entry price: Approximately €1.68 per share, with a position close to 5% of the portfolio.
- Current price: €4 per share, delivering significant returns.
- Since 2015, the company has sold several non-core assets (ports, water, highways) at very attractive valuations, substantially reducing debt.
- Order books for construction operations in Africa, Portugal, and Poland are at record highs.
Companies/Assets Involved
- Mota Engil: Core holding case study. The author is bullish, believing the company is mispriced by the market, with multiple catalysts including competitive position, management reputation, non-core asset value, and a commodity cycle recovery. Entry price €1.68, current price €4, already generating significant returns.
- Iberian Portfolio: Holds 27 companies overall, which the author believes are highly relevant in their industries, well-managed, and purchased at attractive prices.
Investment Insights
- Adhere to Long-Term Contrarian Investing: During market panics (e.g., Mota Engil’s 70% stock price decline), position based on deep fundamental analysis rather than market consensus. Superficial risks like high debt may be offset by non-core asset value.
- Value Non-Core Assets: For seemingly high-debt companies, carefully assess the monetization potential of non-core assets (e.g., concessions, real estate), which can be key to reducing debt and unlocking value.
- Leverage Market Volatility: The author explicitly states, “The greater the volatility, the greater the gains.” Investors should view market declines as opportunities to buy high-quality companies, not as risks.
- Current Portfolio Offers 45% Upside: Based on the author’s estimate of the portfolio’s future value (€200 per unit), the current price provides a significant margin of safety, suitable for long-term holding.
Theme and Background
This chapter focuses on the performance and investment philosophy of the Azvalor International portfolio in 2017. The report notes that although the portfolio achieved only a 3% return in euro terms, significantly underperforming the benchmark, the author characterizes this period as a "sowing phase" and reiterates that the essence of value investing is a cycle of sowing and harvesting. The current market is at historical highs (up 4x over the past 10 years), while the assets held in the portfolio are priced at only a fraction of their levels six or seven years ago.
Core Thesis
The author's core investment argument is: The current period is a sowing phase, and a bountiful harvest will follow in the medium to long term. The portfolio's potential upside is 100%, but short-term volatility is unavoidable, and sharp declines are even possible. A counterintuitive insight is that despite the low euro-denominated return in 2017, the dollar-denominated return was 17%, which is competitive with top-tier US asset management firms. At the same time, the author warns that the market's extreme indexation of holdings could amplify panic.
Key Arguments and Data
- 2017 Returns: 3% in euro terms, significantly below the benchmark; 17% in dollar terms, competitive with US peers.
- Historical Comparison: The market has risen 4x over the past 10 years, but the portfolio's asset prices are only a fraction of their levels six or seven years ago.
- Upside Potential: Azvalor International's potential upside is 100%.
- Investment Case: Shutterfly
- Market Position: Market share is 9x that of the second-largest competitor, with significant brand and scale advantages.
- Problem: Aggressive acquisitions by management and an unreasonable incentive structure caused the stock to trade in the $40-$50 range since 2011, while the broader market more than tripled over the same period.
- Turning Point: The CEO stepped down in late 2015 due to activist shareholder pressure; a new CEO (former Managing Director of Amazon UK with a 10-year track record of outstanding performance) was appointed in March 2016.
- Investment Timing: Azvalor built a significant position at approximately $48 per share, based on the alignment of the new CEO's strategy with its own analysis.
- Outcome: The company streamlined brands, cut costs, and optimized incentives, with key Q4 results driving a 40% stock price increase. Azvalor fully exited at approximately $70 per share.
Companies/Assets Involved
| Company/Asset |
Role |
Key Data |
Bullish/Bearish |
| Shutterfly |
Investment Case |
Market share 9x that of competitor; buy price $48, sell price $70; stock range-bound at $40-$50 since 2011 |
Bullish (sold) |
| Buenaventura |
Field Research |
Mine in Peru |
Bullish (held) |
| Cameco |
Field Research |
Uranium mine in Canada |
Bullish (held) |
| New Gold |
Field Research |
Gold mine in Canada |
Bullish (held) |
| Mandalay |
Field Research |
Mine in Sweden |
Bullish (held) |
| Teranga |
Field Research |
Mine in Senegal |
Bullish (held) |
| CNX Resources |
Field Research |
Pittsburgh, met with CEO |
Bullish (held) |
| Consol Energy |
Field Research |
Pittsburgh, met with CEO |
Bullish (held) |
Investment Insights
- Adhere to a Long-Term Perspective: The current period is a sowing phase; investors must remain patient and avoid panic from short-term volatility (e.g., the pullback after a 45% rally within four months in 2016).
- Focus on Management and Field Research: The Shutterfly case demonstrates that management changes and in-depth analysis (including meetings with industry experts, former executives, and competitors) are key to uncovering value.
- Beware of Extreme Market Positioning: Current indexation of holdings is extreme; short-term declines could trigger panic, but this presents an opportunity for value investors.
- Dollar-Denominated Advantage: For eurozone investors, the strong dollar-denominated return (17% vs. 3%) highlights currency risk and the potential benefits of global allocation.
Theme and Background
This chapter is presented by Azvalor's four founding partners, each reporting on the progress and operations within their respective areas of responsibility, covering compliance, investor relations, the research team, and the company's corporate social responsibility projects. The report aims to demonstrate to investors the company's operational achievements, client growth, and team building in 2017, emphasizing long-term investment philosophy and transparency.
Core Thesis
The author argues that Azvalor's competitive advantage lies not only in its investment performance but also in its stable investor base, efficient operational system, and transparent communication culture. A counterintuitive point is that the company actively discourages short-term capital (investors needing funds within 3–4 years) from entering, which is uncommon in the industry but helps filter out partners who genuinely align with its long-term philosophy.
Key Arguments and Data
- Operational Efficiency: Processed over 17,000 transactions in 2017, with only 3 complaints (less than 0.02% of transaction volume).
- Investor Growth: Added 5,000 new fund holders, bringing the total to 17,000; existing investors made over 7,000 additional investments.
- Assets Under Management: Total equity fund assets increased by €267 million, of which €190 million came from net investor inflows and €77 million from market appreciation. The Luxembourg SICAV fund contributed €117 million in growth, primarily from international/institutional investors.
- Investor Communication: Held over 500 meetings in the office and 1,200 off-site meetings in 2017; the call center handled over 10,700 calls.
- Digital Outreach: The YouTube channel "Azvalor You" launched four months ago, with over 40 videos, accumulating nearly 28,000 views and over 1,500 subscribers.
- Social Responsibility: The daValor project raised over €1 million in donations in less than three months.
| Metric |
2017 Data |
| Transactions Processed |
>17,000 |
| Complaint Rate |
<0.02% |
| New Holders |
5,000 |
| Total Holders |
17,000 |
| Additional Investments by Existing Investors |
>7,000 |
| Total Asset Growth |
+€267 million |
| Net Inflows |
€190 million |
| Market Appreciation |
€77 million |
| Luxembourg SICAV Growth |
€117 million |
| In-Office Meetings |
500+ |
| Off-Site Meetings |
1,200 |
| Call Center Calls |
10,700+ |
| YouTube Videos |
40+ |
| YouTube Views |
~28,000 |
| daValor Donations |
>€1 million |
Companies/Assets Involved
- Azvalor Itself: As an asset management company, its operational data, investor growth, and team building are the core of this chapter. The author emphasizes the professionalism of its compliance, investor relations, and research teams.
- Michael Alsalem: Head of the London office, described as an "extraordinary investor," suggesting he will enhance the company's ability to identify investment opportunities.
- daValor: The company's philanthropic project, not an investment asset, but it showcases the company's culture.
Investment Implications
- For Investors: Azvalor's investor base is stable and long-term oriented (net inflows exceed market appreciation), indicating strong client stickiness, which may help reduce redemption pressure during market volatility. The company's strategy of actively screening investors (discouraging short-term capital) could mitigate the impact of irrational behavior on fund operations.
- For Potential Investors: The company strengthens transparency through multi-channel communication (in-person meetings, YouTube, social media), which helps investors understand its investment philosophy. However, it should be noted that its research team still primarily consists of existing analysts, and the ability to discover new investment opportunities awaits validation from the London office.
- Risk Warning: Despite strong operational data, the company's expansion in scale (asset growth, team enlargement) may increase management complexity. Attention should be paid to whether its compliance and quality control can be sustained.