Quarterly Letter

Dear investors,

A resilient economy and strong corporate earnings have kept markets calm for most of the third quarter. However, in the final stretch increasing crude oil prices caused indices such as MSCI World and MSCI Europe to end the quarter with falls of -0.39% and -2.84%, respectively. These falls have provided us with the opportunity to buy some of the companies on our radar at significant discounts to their true value and thereby increase the long-term potential of our portfolios. Having completed this period, Bestinver’s equity funds have accumulated a weighted return of 17.7% so far this year, while fixed income funds achieved a figure of 3.2%.

As in previous quarters, the private sector has continued to shore up global economic activity. After a decade of deleveraging, corporations and households have kept healthy balance sheets, thanks to which they are able to weather —at least for the time being— the impact of rising interest rates. Together with strong employment, this solvency has helped to keep consumption and demand for services at high enough levels to offset the negative repercussions of China’s economic downturn on the global manufacturing sector. As a result, regions in which the importance of the services sector is relatively high, such as the US and Southern Europe, have maintained a much higher level of dynamism than others with greater dependence on the industrial sector, such as Germany and Northern European countries. In overall terms, although the economy cannot be said to be buoyant, its resilience has been an undeniable source of pleasant surprises for investors in recent months.

However, this resilience is not the only factor that has surprised the market: persistent inflation has had an unexpected leading role in the last part of the quarter. Inflation has continued to moderate but at a slower pace than expected, partly due to the recent rebound in energy costs. This situation has forced the Federal Reserve to reiterate its willingness to keep rates high for longer, triggering an adjustment in both bonds and equities. The markets did not like the Fed’s announcement, regardless of its cause. For us, however, the cause does matter. If this is because the economy remains strong, companies are making money and workers are keeping their jobs, inflation and high rates do not seem so bad to us. As with everything in the markets, the interpretation of reality depends on the time frame invested in and for our time frame, which is long term, it is certainly best if the economy, businesses and families are doing well. If this is the scenario we are entering, our companies will be able to cope with the negative side effects of a healthy and strong environment.

Uneven economic growth, persistent inflation and the announcement of high rates for a longer period have not affected all companies in the same way. During the quarter there has been considerable disparity in stocks’ performance, with double-digit rises and falls for many of them, creating the ideal environment for the type of active management we believe in at Bestinver. As we explain in the individual fund newsletters, this disparity has allowed us to realise gains on shares that have risen the highest and reinvest them in shares that have fallen below their true value. The cases of Exor and Whirlpool, which we explain in the Bestinver Internacional and Bestinver Norteamérica, reports, respectively, are good examples of this. We have also encountered fine opportunities in fixed income which, with an expected return or portfolio IRR as high as 4.3% in Bestinver Corto Plazo, 6.5% in Bestinver Renta and .7% en Bestinver Deuda Corporativa, continue to be excellent alternatives for short and medium term investors.

Although the quarter has been challenging, we should not ignore the positive economic dynamics from which our funds will continue to benefit: inflation remains on track, the rate hike cycle is nearing its end, the manufacturing sector is showing signs of improvement, private sector balance sheets remain healthy, corporate earnings continue their unexpected climb and our companies’ valuations are at very attractive levels. The world economy is continuing the process of monetary normalisation that began last year, leaving behind a decade of zero interest rates. This process is necessary and will have positive effects in the medium and long term, although in the short term it may lead to some bouts of market instability. These bouts, as has been the case in the latter part of the quarter, will afford us the opportunity to continue to buy solid businesses at attractive valuations.

On a different matter, we are very pleased to announce that we have now registered our first Private Equity fund —Bestinver Private Equity Fund, PEF— which completes our alternative investment offering together with Blackrock, the best possible partner worldwide. We have also recently launched the BESTINVER educatio, programme, the result of BESTINVER’s commitment to disseminating and promoting financial literacy. BESTINVER educatio is a programme aimed at anyone interested in improving their financial education, starting with the basics and moving up to advanced subjects which will be taught by our team of experts. To participate in the programme, simply download the BESTINVER educatio mobile app. We hope you find it interesting.

I wish to conclude by inviting you to read the management commentaries on each fund that follow this statement. They explain the managers’ expectations for the coming years, the investment cases of some of their companies and the main movements occurring in the portfolios in recent months.

Thank you for your trust.

Mark Giacopazzi.