Quarterly Letter

Dear investors,

The conflict in Ukraine and its possible consequences on the world economy were the protagonists of the quarter. Its impact has been felt on all types of assets. Equities closed the period with drops of 5% in the United States, 6.6% in Europe, 3.1% in Spain and 7.3% in emerging markets. Also, raw materials rose significantly, particularly energy and agricultural raw materials. Lastly, bonds declined in response to the expected acceleration of interest rate hikes in the current inflationary context.

Before the start of the hostilities, economic growth was recovering and we were beginning to see a decline in supply chain disruptions.  The world was returning to normal. However, the Russian attack on Ukraine interrupted this trend and the reaction of the markets was
understandably negative. In view of the severe drops in asset prices —or vertical rises in many raw materials— it is generally assumed that the conflict has put an end to the normalisation process. We believe that it has only slowed it down.

The context is difficult, but we must not forget that the world is already learning to co-exist with COVID-19 —which is mainly responsible for the economic imbalances in recent years—. In addition, the consequences of the war will eventually fade away, as has been the case in all conflicts in recent decades. Inflationary pressures have been exacerbated by the geopolitical environment, but we do not believe that these price levels are sustainable. Similarly, economic agents’ confidence has been severely impacted. Despite everything, the underlying dynamics and inertia of the world’s major economies remain strong.

Bestinver’s philosophy

As explained by our managers in the comments on each fund, we believe that what happened in the first quarter of 2022 is a pause in the process of the return to normality. A pause that we must leverage.

In this situation, many investors seek new formulas to invest in times of war. In our opinion, however, there is no difference with respect to investing in times of peace. Environments change, but to generate good returns we must always do the same: understand what we are investing in and pay an adequate price for it.

That is why Bestinver’s philosophy is founded on value investing based on fundamental analysis, risk management and a shared time horizon with our investors. It is to this philosophy that we dedicate this editorial.

Fundamental analysis

In order to know a company we must understand its business model, the value offered by its products, its competitive advantages, the expertise of its management team, its corporate culture, etc. The idea is to ascertain why a company will be profitable in the future and its capacity to address crises. At Bestinver, we obtain that knowledge using fundamental analysis. Studying it makes us think like entrepreneurs and focuses our attention on the causes that determine the long-term value of a business.

This knowledge allows us to analyse reality with perspective and, at times of widespread panic, helps us keep calm and act rationally.

During the first days of the Russian attack, fear gripped the market and the share prices of many companies plummeted. At Bestinver we are not experts in geopolitics or military strategy, we are investors. We do not try to imagine the future consequences arising from international politics, but rather focus only on the relationship between the price of an asset and its value. Thus, armed with the same fundamental analysis as always, we asked ourselves the questions that have helped us to invest in all the crises we have faced: What degree of exposure do companies have to the conflict? What resources do they have to overcome it? How will the war impact future years’ profits? According to our analysis, the market exaggerated its reaction in many cases.

This approach, focused on the reality of business, allowed us to find good opportunities during the past quarter. We explain some of them in the comments on the management of our funds.

Risk management

At Bestinver, risk management has a single objective: to minimise the probability of suffering an unrecoverable loss. To this end, we begin with the right selection of values. Low-indebted companies, with business models protected by competitive advantages and with good management teams, meet the necessary conditions to survive any crisis. In addition, we are careful about the price we pay for them to avoid the danger of buying too expensively. Lastly, we structure the portfolios in a balanced manner so that no individual loss is unassumable for the strategy as a whole. Therefore, our risk management is based on the characteristics of the businesses, the value of the shares and the structure of the portfolios.

When war broke out in Ukraine, the share prices of our companies fell parallel to the market. This did not lead us to think that our risk management was failing. On the contrary, given the circumstances, losses were kept under control and within the recoverable limits for each strategy.

Furthermore, by knowing that the probability of unrecoverable loss was minimal, we were able to face the falls with determination and took advantage of the opportunities that arose out of panic. Risk management, contrary to what one might think, is not a defensive pillar of our philosophy, but rather is extraordinarily offensive. It is designed to win in the long term.

The time horizon shared with our investors

All investments always need time. In accordance with the asset invested in, it can be long (equities or infrastructures) or not so long (mixed fixedincome or in short-term fixed-income). What matters is that investors and managers get the maximum return from each strategy. That is what the shared time horizon is about: being aligned with the strategy and acting accordingly with the objectives we pursue.

Every investment requires necessary maturity periods. Nearly all of them consume time before giving the expected results. In some cases, we must wait for them to recover from a circumstantial loss before becoming profitable and, in others, we must wait for the magic of compound interest to act for the capital to grow exponentially. In all cases, the essential common denominator for investing properly is always the same: patience.

We estimated the importance of the current crisis for company profits in an investment horizon of three, five or more years and the impact is minimal in all cases. The amount of value that our companies will generate in the coming years far exceeds the possible short-term losses arising from the armed conflict. The declines caused by this type of events, those arising from an economic recession or those caused by a global pandemic have always represented good investment opportunities. They have all demonstrated the importance of the long term when managing our savings. The crisis caused by the Ukraine war should not be an exception.

Value investing

Circumstantial declines are good investment opportunities because assets become cheaper while they last. They usually happen when investors become concerned about the economic environment, flee from an unfashionable sector or are wary of the long-term profitability of a business. When these doubts are not well founded, pessimism drives the price of assets below their real value and allows us to purchase them cheaper.

In order to purchase an asset for less than it is worth, we must contradict the market and challenge its pessimism. The conviction that this requires can only be achieved if we know the company well thanks to the fundamental analysis, if we have the security provided by adequate risk management and if we purchase it with the necessary time perspective. Value investing unites and gives consistency to the three pillars of our philosophy and is therefore at the centre of Bestinver’s strategy.

The opportunity in our portfolios

As you can observe in the management comments following this editorial, Bestinver’s philosophy is present in all our funds. Such is the case of Bestinfond, Bestinver Internacional and Bestinver Bolsa. Our “flagship” funds have been taking advantage of the market’s concerns to purchase good companies at excellent prices, the best possible combination to protect and grow our savings in the long term. Their portfolios are formed by companies in which our analysis has identified a substantial improvement in their generation of profit and their return and, however, are quoted at steeply discounted prices compared to their history and the market. But also by businesses that will benefit from higher interest rates. They are balanced portfolios that will generate high returns in the coming years due to the inseparable bond that exists between the price we pay and the value we receive when choosing the companies in which we invest.

Furthermore, a few months ago fundamental analysis allowed our international funds and Bestinver Grandes Compañías to purchase a good company that was perceived as mediocre by the market at extraordinary prices. As explained in its management comment, our analysis allowed us to contradict the other investors, as it was understood to only be affected by circumstantial problems and was in the midst of a restructuring process. The
result? A return higher than 80% with this investment in just over a year and a half. Such is the case of Bestinver Latam. In its comment, two investment cases that explain how fundamental analysis is used to identify opportunities in the fixed-income market are explained in detail.

Bestinver Latam is a good example of risk management. Despite the adverse climate of the region in 2020 and 2021, the fund kept its losses within the recoverable limits of the strategy. Thanks to the 18% return obtained in such a complex quarter as the current one, it recovered from most of those falls and is once again in a position to leverage the high potential offered by the region.

The long term is inherent to Bestinver, but has special relevance in Bestinver Megatendencias and in Bestinver Consumo Global. In the first case, the fund invests in three trends that will govern world development in the next decades: the improvement in the quality of life of people, the digitalisation and automation of companies and the decarbonisation of the economy. The Ukraine war has done nothing but accelerate this process. In the second case, the fund focuses on the winning companies of the 21st century. These businesses will continue to grow at very high rates over the next decades thanks to the enormous investment effort being made. When their investments mature, the true profit-generating capacity of these companies, which is currently hidden, will emerge. In both funds, the current quotation levels represent an excellent investment opportunity.

Bestinver’s culture

The beginning of 2022 is proving complicated. However, the operational performance of our companies is good and their investment theses remain intact. Market declines have lowered valuations, improving the portfolio return profile. Throughout history, the best investments have always appeared, without exception, in pessimistic environments. Therefore, the current situation is the best to generate good returns in the
coming years.

Bestinver’s investment philosophy has been forged on the basis of experiences accumulated over more than three decades. It forms part of the corporate culture and remains therein as a guide over time. In the last 35 years, having firm principles such as those described in this editorial, forming part of a business group as solvent as Acciona and having investors aligned with our investment method has allowed us to gain a clear competitive advantage. Thanks to this advantage, we were able to transform the multiple periods of uncertainty we have experienced into good investment opportunities. The current period is no exception.

We conclude this editorial by expressing our solidarity with the Ukraine people and, as always, thank you for your trust.

Corporate Information

2022 marks our 35th anniversary. Throughout our history, we have learned that acquiring good businesses at good prices is the best formula for generating high returns in the long term and overcoming any type of crisis. The current crisis will be no exception.

In our 35 years we have experienced a multitude of declines. These are inherent to the stock markets. They are the price that must be paid to invest in equities, due to which we must accept them as normal. Not long ago, during the worst moments of 2020, Bestinfond fell 31% in one of the worst crises we can remember. Today, despite the tremendous human, social and economic impact of the COVID-19 pandemic, the losses it generated in our funds have been recovered. Thus, Bestinfond has rallied 60% since its all-time lows from 18 March to the close of the first quarter of 2022. The same happened in 2016 with Brexit, in 2011 with the European periphery crisis or in 2008 with the Great Financial Crisis. Significant falls occurred in all of them that put investors to the test. But we also generated high returns in them with their recovery.

This significant role played by patience and the long term is evident on observing that 13.04% of the annual return generated by Bestinfond since 1993. This has made it possible for half of the EUR 5,500 million managed by Bestinver to be accumulated capital gains of our investors.

Yours sincerely,

The Investment Team.