Quarterly Letter

Dear investor,

We would like to begin our final report of the year by remembering once again the victims of Covid-19 and their families, and thanking everyone who continues to tackle the virus. 2020 was a year to forget, although it did give us a good opportunity to pause and review some of our priorities.

The pandemic has highlighted our society’s vulnerability but also revealed the large doses of compassion, solidarity and honesty it is capable of. These values and actions have not only helped hold back the tides of adversity we have faced during these challenging times but have also fuelled the search for new and better forms of cooperation, management, politics and business. Ultimately, these will be the legacy of a pandemic that, thankfully, appears to have an expiry date.

We say it seems to have an expiry date because the results of the Moderna and Pfizer vaccines – which have proven to offer a high level of protection against the virus – have provided people and investors with a glimpse of the beginning of the end of the pandemic. This catalyst and the outcome of the US elections and the ever-present central banks led to the equities markets performing extremely well at the back end of the year.

All our funds posted gains in the last quarter, and all have played a major role in the strategies most exposed to the economic cycle that performed the worst in the first half of the year. As we discussed with you at our 19th Annual Investors Conference, market positioning and relative valuations were very extreme; consequently, the turnover we have seen has been understandably high.

Lessons learned in 2020

There are a number of conclusions we can draw from the latter months of 2020, which will go down in history.

The first (crucial) one is the importance of being invested. At Bestinver, we conducted a study showing how a Bestinver Internacional investor missing out on the fund’s best 10 days in the last decade would have seen their return halve from a compound annual rate of 7.6% to 3.2%. Had this been 30 days rather than 10, we would be talking about a negative return. As you can see, the impact is huge and underlines the importance of watching our savings, especially during difficult times, not as a snapshot (showing a moment in time) rather a film (over the long term).

Through our funds, you are the owners of decent, well managed and prudently financed businesses. It can therefore be expected that the goods and services they provide to society will continue to be valuable for a long time to come. One should also not overlook the management teams who invest time and money in enhancing the flexibility and productivity of these businesses’ operations. In view of this, their capacity to generate value for society and therefore for us – their shareholders – may undoubtedly be weakened by the economic cycle but not damaged forever.

There is also an additional layer of protection we should not overlook: price. What do we mean by this? That our work not only involves finding businesses that work for us during good and bad times, but also that we must prudently project the results these businesses will generate, that we demand an adequate return from them, and that we then apply a margin of safety in case things do not turn out as we expected or we have slipped up in our analysis. Only then can we sit back and patiently wait until the market affords us the opportunity to acquire positions in these businesses at prices we believe, based on our analysis, to be right.

And the second big lesson is, again, recognising the importance of patience in the world of investments. The last quarter highlighted the value that existed in a group of companies or sectors trading at extremely discounted prices and that, we believe, presented an extraordinary investment opportunity. This value is something we have been able to benefit from thanks to our patience and which we are sure we will once again be able to benefit from in the future.

What we expect in 2021?

Turning to the year we have just started, the consensus is that the economy will struggle in the first half due to what is still a fragile recovery, although the market will continue to offer positive returns. There is considerable consensus – at least now – that the group of shares comprising the global indexes with a “value” style are going to outperform the “growth” indexes.

While we believe such suppositions are worthy exercises of extrapolating the present, what is most important is that they are completely irrelevant when it comes to investing. Well, they may be if what one wants to do is speculate. They generate noise and volatility, prompting many investors – or more accurately, speculators – to jump ship when the markets do not do what they had expected. At Bestinver, we see such movements as opportunity (and value) being transferred from one part of the market to us (to you) to build stronger portfolios.

The situation is still extremely complicated. Large doses of prudence and a long view are needed and we must be aware that the pandemic has and continues to pose a tremendous challenge to the economy and society as a whole. However, at the same time we should acknowledge that it has also accelerated trends and been a catalyst of changes that should lead us to a very different world – a world in which we at Bestinver place our trust and which we will strive to make better.

Inclusion of ESG criteria

Last September at our 19th Annual Investors Conference, we announced our pledge to integrate Environmental, Social and Corporate Governance (ESG) criteria into our fund management processes and investment strategies. These criteria are a perfect fit with our investment philosophy: fundamental analysis, risk management and a long view.

It is worth emphasising that this integration will help us – is helping us – to identify, audit and assess additional risks in the companies we look at in our search to maximise yields on our funds in the long term.

We firmly believe that, as managers of your savings, we have a role to play in moving towards a more prosperous and sustainable world through the companies in which we invest, allocating our capital to those that not only turn a profit but also make a positive contribution to society.

In this entire process, Bestinver will avail of specific ESG resources that complement and strengthen our capabilities to drill down into the business models we analyse. We will enhance our analysis by drawing on the support of top-notch external providers, while the investment team will be responsible for examining and interpreting their ratings and factoring them into our investment decisions. We have also developed an in-house scoring system that weights the importance of these factors. The scores will be an additional input that is feed in when assigning intrinsic value to the companies we analyse.

The most controversial companies insofar as ESG is concerned will only be included in Bestinver’s investment universe if they have a clear road map to improve their performance in this area (quantifiable milestones to decarbonisation, pay linked to certain objectives, changes in corporate governance that ensure best practices in the organisation etc.). Companies will be excluded if we deem these improvements are not possible due to the nature of their businesses or if their management teams fail to act or lack initiative.

Bestinver also commits to proactively influencing the companies in which it invests through policies and actions that we will document and report periodically to our unitholders and the market.

ESG and value investing

Incorporating these values will strengthen our value investing philosophy. The ESG agenda should not compromise profitability and the generation of wealth, rather promote and drive it. This does not mean putting achieving a series of socio-environmental goals before our fiduciary duty to you. Instead, it entails enhancing our performance as savers, influencing and improving the corporate culture of companies and creating ties with those that encourage the use of responsible practices concerning the environment and their employees, suppliers and, of course, shareholders.
It is clearly and objectively beneficial to everyone when a company or industry aims to serve society as best it can or, if it is not doing so, has a credible plan to do so without eroding the long-term value for shareholders. It is a completely different story if all this

is discounted in the current price – and therefore has no value – or if the plans are not fulfilled or are achieved to the detriment of generating wealth for the company’s owners – thus destroying value.

At Bestinver, we are clear in our minds. We do not have any qualms about buying a company with fantastic ESG credentials, if it is cheap. We also do not if it is a company with an ESG profile that is not currently class leading but which we believe will improve; again, if it is cheap. We obviously do not demand the same profitability from one or the other and this profitability, of course, depending on many other factors. However, in both cases we do need the price we pay for them to be lower than the actual value of their businesses. This is what is defined as being a value investor.

It is about doing things right. We believe the obsession with labelling and associating a
concept – value – with a series of attributes such as growth, sustainability, governance and quality is a mistake and a fundamental error, even though, in this case, they are all absolutely marvellous. Bestinver is not going to enter into this type of futile debate. What we think is better for you – for everyone – is to try and be relevant, have an impact on decision-making, identify risks and opportunities and, ultimately, connect ESG agendas with competitiveness, differentiation and profitability. These are all essential ingredients to create (sustainable) value.

We are of the view that, like us in the way we manage your investments, a company without defined and appropriate competencies vis-à-vis environmental, social and corporate governance matters is not duly prepared to protect and nurture long-term value creation. We use fundamental analysis – the basis of our investment decisions – to determine these capabilities. We will therefore try to identify the parameters that help us determine the financial and non-financial risks to which we are exposed when investing in a business. Similarly, we will strive to quantify those variables that dictate the sustainability of that business’s competitive position, growth and profitability. Ultimately, none of this new for us. It is about continuing to do what we have always done, albeit in somewhat more of an explicit and documented fashion: analyse from a qualitative and quantitative perspective the different aspects that make a company valuable.

Bestinver’s competitive advantages

Greater awareness in society and a more stringent regulatory framework have led to ESG agendas being spotlighted in most listed companies. There is a risk, in some instances, that this shift becomes a mere formality to attract investments (or finance). In other words, the act of meeting a series of criteria to be rated not qualified.

It is therefore vitally important that as savers, we do our homework and are able to separate the wheat from the chaff. In other words, discriminate between commendable and important practices and others that are totally pointless or, even worse, corrupt. In a world increasingly dominated by passive investing, these risks are extremely significant.

At Bestinver, we are going to ensure the companies we invest in have a clear desire to implement policies that include environmental, social and corporate governance criteria. We are also going to verify that such plans are real, honest and, above all, in line with the fiduciary duties these companies have to their shareholders. We are aware that these strategies sometimes require sacrifices; sacrifices that Bestinver will applaud and support.

In such a short-sighted world that judges major corporate strategies in quarters rather than years and demands instant returns on investment without the necessary maturation periods, in markets in which we see with astonishment that the average time investors hold shares is five months, Bestinver’s corporate culture is acknowledged by companies wanting to generate long-term value.

We have a competitive advantage that we know how to and must exploit. Thanks to your faith and support, our size and investment philosophy matter. We are the leading independent investment management company in Spain and have a top shareholder that provides robustness and constancy. This often means we hold majority stakes in the companies in which we invest. This privilege, and also responsibility, allows us to put forward ideas to these businesses’ management teams and oversee their strategies and their impact on generating value for their shareholders and society as a whole.

The aim of this letter is not to talk about passive management (a term that has all the hallmarks of being an oxymoron), but it does appear to be difficult to carry out such an exhaustive screening as what we have set out here in a passive manner. It also does not seem possible to passively replicate our involvement with the management teams we have just described. We have the impression that active management and investing with ESG criteria in mind must go hand-in-hand in the years ahead.

An opportunity we must exploit

As we said at the start, the pandemic has given us time to reflect. We are aware that every crisis brings with it an opportunity. How we react after though depends on the model of society we want to move towards.

Incorporating ESG criteria more comprehensively and formally into our analysis process not only provides us with another tool to better manage the risks and profitability of your portfolios but also represents our contribution to speeding up construction of a better world. This is not a latent desire or ambition, rather a firm commitment to invest in more sustainable businesses that aspire to create wealth without renouncing social progress and respect for the environment.

Bestinver will continue to provide you with tools you can use to build your long-term investments, but we also aspire for you to see us from now on as a vehicle that can serve to champion and channel the changes that will boost the well-being of current and future generations. You, through your savings, and us, by managing them, will be able to nurture the clear synergies that exist between corporate success and the progress of society as a whole. We cannot think of a better legacy of the pandemic which, thanks to all our efforts, now appears to have an expiry date.

New infrastructure fund

At a corporate level, we are very pleased to inform you of the launch of Bestinver Infra: our venture capital fund investing in infrastructure. The prevailing low interest rates and performance of this type of asset on the side lines of the economic cycle are attractive for those wanting to diversify their investments. Bestinver Infra will open the door to institutional and retail investors alike to global investments in top-notch infrastructure. Francisco del Pozo and his experienced team will lead on managing the fund, following the principles that are shared throughout Bestinver: fundamental analysis, appropriate risk management and an investment time horizon that is common to investors and fund managers alike.

We will now leave you with a round-up of the management of each of our funds, giving you a chance to find out about the specific vision of each of their managers and the main movements in the individual portfolios.

The investment team

BESTINVER