Bestinver: How to Deal with the Departure of Your Star Manager
Francisco García Paramés, dubbed the Warren Buffett of Europe for the stellar returns of his flagship fund Bestinfond, has been the subject of considerable interest for a while now.
Last September, Paramés broke up with his long-time employer, the Entrecanales family, for reasons which neither of the parties has fully disclosed. Rumors were flying in the months before Paramés’s departure. Some believed the Acciona group, a heavily indebted infrastructure and energy conglomerate, was poised to sell its subsidiary Bestinver — the asset management company for which Paramés worked — in order to raise cash to pay down debt. A spin-off of this rumor was that Paramés and his team were among the suitors looking to acquire Bestinver. By the time the announcement that Paramés was stepping down as CIO was made, the feeling that something dramatic was bound to happen with Bestinver had already been in the air for quite some time.
During his years at the helm of Bestinver, Paramés devoted a huge effort to educating his investors on the philosophy of value investing, putting a wealth of information at their disposal on the company’s website, and establishing incentives to dissuade market timers, among them a 3% early redemption fee for those who withdrew funds within the first year of investing them. He also created a group in Unience, a Spanish social network specializing in investments, in order to keep in touch with investors. An anonymous member of Bestinver’s community on Unience remarked that if investors sounded so happy without having made a single euro (given that a lot of them had entered the fund in 2006), how would they feel if they were not in red numbers? It is no surprise that Bestinver’s funds were able to weather the disastrous results of 2008 without a wave of redemptions, something that allowed them to take advantage of the rebound of 2009. For an outside bystander, it would appear that Paramés’s departure would incite a stampede of investors from Bestinver’s funds.
Nine months after the event, in hindsight, the situation seems to have been anticipated and addressed by Acciona long before Paramés left — apparently he was obliged by his contract to give six-months notice. What makes me say this? In the first place, the company was able to announce the new CIO within a few hours. Indeed, Acciona hired Beltrán de la Lastra, CFA, who had been working for JP Morgan Asset Management, running several funds ranked in the first quartile of their category. Second, Bestinver’s funds had been piling up cash in order to meet potential redemptions. Although cash levels have been historically elevated since the beginning of 2013, as the managers expected a big market correction and were not able to find bargains as easily as in the first years of the bull market, by late September they were as high as 20% of the funds’ assets, according to the quarterly reports filed with the Spanish stock and securities regulator. Third, the transition between Paramés and de la Lastra was piloted by Paramés’ two main collaborators, Álvaro de Guzmán and Fernando Bernad.
Once the dust had cleared, the hit to the assets under management (AUM) figure has been 30% of what it was at its peak — not bad when you consider that two thirds of the redemptions came from institutional investors whose orders were automatically triggered by the change in manager.
At Bestinver’s annual meeting in May, most of the uncomfortable questions about the shift in managers were asked. The message the company conveyed was one of stability. They emphasized that Bestinver remains one of the few independent asset managers in the country — meaning that they are not related to a banking group — and that they do not have clients but co-investors.
The company has seized the opportunity to make some much-needed changes. It hired a specialist in fixed income, Benito Artiñano, to manage all the bond portfolios that, under the previous management, were fully invested in German bonds yielding almost nothing. The new fixed-income portfolios have a higher geographic diversification of issuers, although the currency risk is zero (meaning, they’re all denominated in euros), and the credit quality requirement is to match the same rating as the Spanish sovereign. Besides, the durations are short and the bonds are very liquid to make market risks easier to manage.
On the equity side, the team of analysts has been reinforced with some sector specialists from the major sell-side firms. To showcase the results the company expects to achieve with this new team, representatives at the annual meeting discussed Bestinver’s investment in Lenta, a Russian supermarket chain listed in London in US dollars. The rationale for the pick: Lenta is trading at 13-times 2016 earnings when its main competitor is trading at 18-times and isn’t growing as fast. Lenta is trading at such a discount, Bestinver representatives explained, because of its low liquidity, its short track record as a listed company, and the risk of the main shareholder unloading a significant portion of its stake and creating downward pressure on the stock price — burdens that Bestinver’s managers believe the stock will overcome in the mid-term. In addition, Lenta’s growth, they anticipate, will be fueled by the depreciation of the ruble, causing inflation in sales without inflation in costs (due to the recession). So, they expect the company to beat consensus (a +0.5% growth in margin vs. -0.5% growth expected by consensus) which is also looking closely at 2015 results disregarding the results of 2016. As a reflection, this pick is a clear sign of the current phase of the bull market we are in. We can no longer find asset plays trading at deep discounts. We now have to resort to sector specialists spinning sophisticated stories about the fundamentals of some obscure issue to exploit a divergence in estimates of fractions of a percentage point.
Bestinver’s other recent picks were Indra and Informa, which could be classified, in Peter Lynch’s parlance, as “turnarounds.” Both are cheap stocks with an 18-month business plan, the stated goals of which could act as catalysts for the rise in the stock price if they are achieved. As for the rest of the holdings, the main positions in Bestinver Internacional and Bestinver Bolsa (the two portfolios which all of Bestinver’s strategies are built upon) are mainly the same as before. With the exception of Informa as the main position of Bestinver Internacional, the rest were discussed by the former management in annual meetings held over the last few years. Among these companies are Thales, Wolters Kluwer, BMW, SEMAPA, SONAE, and ALBA. The only change in the portfolios has been a reduction of approximately 20% in the number of positions, leaving Bestinver Internacional with 49 issuers and Bestinver Bolsa with 35 issuers. The changes have been centered in disposing of the low conviction ideas.
To further consolidate the feeling of continuity in the face of the personnel change, the initial presentation was full of pictures and quotes from the legendary investors who had inspired Paramés during his tenure, emphasizing again the principles that guide Bestinver’s investment philosophy.
So, in the end, we could say that Acciona has successfully managed an event that seemed deadly when it was announced. If we compare it to the case of PIMCO, what was supposed to be a tempest has been like a walk in the park.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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