Two Decades of Finding European Value
Omaha, May 2012
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ABOUT US

Incorporated in 1987. Shareholder structure: 100%-owned by Acciona Group (Quoted and
Ibex-35 member). Three fund managers and three analysts (one based in Shanghai).
Fund managers: Profit sharing agreement and 100% of financial assets invested in the funds.

Spain’s leading independent fund manager
€5,7Bn AUM and 37,000 customers (95% equities).
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
Focused on returns not volumes under management. No marketing or distribution agreements.

Investment philosophy based on “Value Investing”. Long only. No leverage. No derivatives.
No activism.

Two portfolios: 20% AUM Iberian (Spain and Portugal) and 80% AUM Global (mainly
Europe).
BESTINVER: OUR PERFORMANCE
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COMPARATIVE PERFORMANCE
BESTINVER SPANISH EQUITIES vs. BENCHMARK
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YEAR
BESTINVER IBERIAN EQUITY
BENCHMARK
Relative perf.
1993
43,91%
46,67%
-2,76%
1994
5,28%
-11,70%
16,98%
1995
10,33%
12,30%
-1,97%
1996
41,01%
38,96%
2,05%
1997
41,01%
42,22%
-1,21%
1998
29,03%
37,19%
-8,16%
1999
-10,98%
16,22%
-27,20%
2000
13,91%
-12,68%
26,59%
2001
21,22%
-6,39%
27,61%
2002
8,25%
-23,10%
31,35%
2003
38,31%
27,44%
10,87%
2004
29,97%
18,70%
11,27%
2005
27,07%
20,56%
6,51%
2006
37,36%
34,49%
2,87%
2007
4,84%
5,60%
-0,76%
2008
-35,16%
-40,56%
5,40%
2009
34,56%
31,37%
7,33%
2010
3,68%
-15,24%
18,93%
2011
-12,66%
-16,23%
3,57%
30/03/2012
1,55%
-3,80%
5,35%
Return since 1993
1406,51%
266,93%
1139,58%
Average annual return
15,16%
7,00%
8,16%
* Returns for BESTINFOND to 31/12/1997 and B. BOLSA from 01/01/1998
* BENCHMARK is a weighted average of IGBM of IGBM (70%) (Madrid Stock Exchange Index) and PSI (30%).
* All Bestinver returns are expressed as net, after expenses and commissions.
COMPARATIVE PERFORMANCE
BESTINVER INTERNATIONAL EQUITIES vs. MSCI
YEAR
B.GLOBAL EQUITY
MSCI World Index
Relative perf.
1998
-14,13%
16,51%
-30,64%
1999
47,87%
44,75%
3,12%
2000
18,39%
-8,24%
26,63%
2001
16,59%
-13,36%
29,95%
2002
-26,95%
-33,02%
6,07%
2003
32,70%
8,83%
23,87%
2004
19,01%
4,71%
14,30%
2005
30,47%
23,95%
6,52%
2006
24,05%
5,51%
17,98%
2007
-4,61%
-3,41%
-1,20%
2008
-44,71%
-39,08%
-5,63%
2009
71,85%
23,02%
48,83%
2010
25,75%
17,16%
8,59%
2011
-10,07%
-4,53%
-5,54%
30/03/2012
9,36%
8,15%
1,21%
Return since 1998
266,83%
17,21%
249,62%
Average annual return
9,55%
1,12%
8,43%
* Returns for BESTINVER INTERNACIONAL
* MSCI = Morgan Stanley global stock market index
* All Bestinver returns are expressed as net, after expenses and commissions.
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PHILOSOPHY: FOUR KEY CORNERSTONES
COMPANIES WITH:
GOOD PRICE DUE TO:
• Competitive advantage:
• Shareholder structure (family owned)
• High ROCE
• Type of shares (preferred, non-voting, etc.)
• Sustainable
• Geographical reasons: business and
• Correct attitude with generated cash-flow
shareholders in different zones
• Long term projects (impatient market)
• Small caps (unnoticed by the market)
• Asset organization (Holdings..)
AUSTRIAN SCHOOL OF ECONOMICS
TIME
• Economic general structure
• Patience
• Human behavior
• Psychological preparation
• Non-predictable consequences in stocks
• Client education
• Euphoria / Panic
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THE AUSTRIAN SCHOOL
Practical points from the school
Austrian “concepts”
 Markets are never in equilibrium:
o Excess returns are squeezed by investor down to
the opportunity costs.
Exceptions: sustainable competitive advantages.
Aplications
 Profit from these adjustments.
 Search for sustainable competitive advantages.
o No returns: Capital leaves the industry, to search
for better profitability.
 Growth is based on division of labour (via productivity)  Growth in China is sustainable.
and savings to finance it.
 Manipulation of interest rates by governments lead to
overinvestment and bubbles. USA, Spain, Ireland, etc.
 Avoid those countries that are not tackling
overinvestment and lack of real savings.
 The natural state of an economy is deflationary:
Thanks to productivity increases we produce more
goods with the same amount of money every year.
But governments do not like deflation because they
are leveraged.
 Most probable outcome is inflation. The extent of
which will depend on the confidence in each
currency.
 Lack of anchor currency (gold or similar) implies a
permanently depreciating currency.
 Avoid monetary investments. They do not protect
from currency depreciation  additional risk.
 Own real assets (at reasonable prices): Equities,
Commodities, Real Estate.
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ECONOMIC SCENARIO: WHAT SHOULD WE BE LOOKING AT?
 Estimated GDP growth for China in 2012 is 7x higher than the potential combined
contraction for the southern European countries
$bn
2007 (1)
Italy
2,116
2,060
2,014
2,042
-45
Spain
1,442
1,417
1,393
1,417
-24
Portugal
232
224
217
223
-7
Greece
305
283
275
275
-8
Total
4,095
China
3,494
2011est (2)
3,984
7,301 (4)
2012est (2)
2015est (3)
Ch. 2012est
Fuente: Capital Economics
3,899
3,958
-85
7,900
10,025
599
(1)
World Bank, current figures.
(2) IMF growth estimate.
(3) Bestinver growth estimate.
(4) Current figure at close of 2011.
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8
HOW CHINA GROWS:
 Average productivity growth of 4% from 1990 to 2008 (*)
 Growth is increasingly driven by internal development
 Exports net of imports now hardly contribute to economic growth:
1% in 2011
 Outside the state-owned sector (30% of the economy) it is the world’s
most flexible and dynamic market.
 Despite the surge in investment, the capital stock per capita is not even
15% of Korea’s.
China’s rail network is smaller than America’s was in 1880
* Source: The Economist , 14 November 2009
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HOW CHINA GROWS (II)
 Very high savings rates of >50%; for families this is 20%
 Financial system has very little borrowings:
• Loans to deposits ratio: 0.66 (Spain 1.40)
• In the last Chinese banking crisis (2000), this figure was 0.90
• Reasonable interest rates: Mortgages (6%), and account for a mere
13% of loans. Borrowing from banks to buy land is not allowed.
 Increase in property prices similar to that of available income: 10% a year.
 Little government debt; including local bodies, this is 75% of GDP. The
value of state enterprises is estimated at over 100% of GDP.
CEO of Coca-Cola: “It is easier to do business in China than in the USA”
(FT 26/09/2011)
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EUROPE VS. USA
 Europe is a less efficient market:



Banks control distribution networks. Different goals  Asset gatherers.
Less developed financial culture.
Fewer value investors.
 Significant public family-controlled companies:




Long term view.
Major shareholders supervise management directly.
Organic growth, with prudent M&A.
Less attention from investors.
80% of our investments are in family-controlled businesses.
 Technical factor: Most of the European Funds are quasi tax-exempted within the Fund.
Easy to rebalance portfolios.
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PORTFOLIOS MAIN FEATURES
Iberian Portfolio
Global Portfolio
Companies based mostly in Europe
Average ROCE:
Earnings Yield:
P/E:
Upside:
48.0%
23.0%
7.1x
110%
Sales Breakdown
 Europe:
- Northern Europe
- South Europe
 USA
 UK
 Switzerland
 Emerging markets
 Cash
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40.2%
25.9%
14.4%
17.0%
11.8%
5.1%
20.2%
5.8%
Average ROCE:
Earnings Yield:
P/E:
Upside:
Sales Breakdown:
20.0%
12.0%
6.3x
138%
 Spain
 Portugal
 ROW
 Cash
20.9%
19.8%
54.2%
5.2%
TWO EXAMPLES OF INVESTMENT
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BMW PREFERRED SHARES
BMW Ordinary:
Price €
Market Cap, bn€
67.4
44.1
15.1
 Net Cash
7.9
 BV Financial Division
8.1
 Non core assets
 Adj Provisions & LT liabilities 6.9
24.2
Adjusted Net Cash, bn€
19.9
EV 2013e, bn€
BN€
Revenues
% inc
Ebitda
% inc
Ebit
% inc
Margin
FCF
% inc
BMW P&L
2011 2012 2013e
Price/Free Cash Flow
5.8x
4.1x
Price €
Market Cap bn€
EV 2013e, bn€
43.2
28.3
4.1
2011 2012 2013e
Price/Free Cash Flow
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3.0x
1.5x
11.6
7.5
11.8
5.2
2012E
66.4
5
13.5
17
9.2
23
13.9
5.8
10
2013E
71.7
8
10.4
-23
5.9
-36
8.2
3.5
-40
5.7x
2013:
BMW Preferred:
2011
63.2
1.5x
-
We use a normalized operating
profit of 8.2%.
Company guidance is 8-10%.
-
Operating profit in 2012 is expected
to be 14%.
BMW PREFERRED SHARES
Luxury Stocks:
Why
Preferreds:
-
Price/Free cash flow
Burberry
Coach
Richemont
Hermes
Luxottica
LVMH
PPR
Prada
Ferragamo
Tiffany
Tod's
Average
Drawbacks:  Liquidity 75.000 shares/day.
 No voting rights.
Slightly higher dividend by company statutes.
Employees incentive plans are done through
preferreds.
Average discount of 5 largest german stocks
with dual shares: 4%.
Source: Factset
FORD
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Market cap, bn€
Adj Net Cash
EV 2013e
33,5
1,7
31,7
Free cash flow
2011
4,1
2012
4,3
2013
4,9
Price / Free cash flow
8,1x
8,2x
6,5x
2012
2013
22,8 x
21,3 x
23,6 x
63,1 x
23,4 x
22,1 x
14,7 x
30,1 x
22,4 x
38,7 x
22,5 x
27,7 x
19,9 x
19,1 x
18,9 x
42,8 x
20,8 x
18,0 x
10,9 x
21,3 x
22,1 x
22,2 x
18,1 x
21,3 x
EXOR
Holding controlled by the Agnelli family, founders of Fiat
€ mn
Main investments
Fiat Industrial
Value at market price
Bestinver Value
Case New Holland (agricultural and construction equipment), Iveco
(trucks and commercial vehicles), FPT Industrial (engines and
transmission systems).
2.948
4.622
Fiat Auto
Cars (Fiat, Chrysler, Alfa Romeo, Lancia, Ferrari, Maserati), Fiat
brand commercial vehicles and components.
1.593
3.259
SGS
Global leader in verification, inspection, control and certification
activities
1.662
1.696
Cushman & Wakefield
Largest privately held company for real estate services
417
417 *
Alpitour
Largest integrated Italian tourism group
240
240
Sequana
Leading European group in the distribution of paper and packaging
products
59
59
201
201 *
Net debt and others
Juventus, Banca Leonardo, etc.
Total value
7.119
10.494
Value per share
€ 31,3
€ 46,2
Exor preferred share price (Milan Stock Exchange)
Upside
€ 15,5
102%
€ 15,5
198%
* Book Value
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APPENDIX
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THE AUSTRIAN SCHOOL
Essential differences between the Austrian and neoclassical schools
Points of comparison
Austrian paradigm
Neoclassical paradigm
1.
Concept of economics
(essential principle)
A theory of human action, understood as a
dynamic process (praxeology).
A theory of decision: maximization subject to
restrictions (narrow concept of “rationality”).
2.
Methodogical outlook
Subjectivism
Stereotype of methodological individualism
(objectivist).
3.
Protagonist of social processes
Creative entrepreneur.
Homo economicus.
4.
Possibility that actors may err a priori, and
nature of entrepreneurial profit.
Actors may conceivably commit pure
entrepreneurial errors that they could have
avoided had they shown greater entrepreneurial
alertness to identify profit opportunities.
Regrettable errors are not regarded as such,
since all past decisions are rationalized in terms of
costs and benefits; entrepreneurial profits are
viewed as rent on a factor of production.
5.
Concept of information
Knowledge and information are subjective and
dispersed, and they change constantly
(entrepreneurial creativity); a radical distinction is
drawn between scientific knowledge (objective)
and practical knowledge (subjective).
Complete, objective, and constant information (in
certain or probabilistic terms) on ends and means
is assumed; practical (entrepreneurial) knowledge
is not distinguished from scientific knowledge.
6.
Reference point
General process which tends towards
coordination; no distinction is made between
micro and macroeconomics, each economic
problem is studied in relation to others.
Model of equilibrium (general or partial);
separation between micro and macroeconomics.
7.
Concept of “competition”
Process of entrepreneurial rivalry.
State or model of “perfect competition”.
8.
Concept of cost
Subjective (depends on entrepreneurial alertness
and the resulting discovery of new, alternative
ends).
Objective and constant (such that a third party can
know and measure it).
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THE AUSTRIAN SCHOOL
(continued)
Points of comparison
Austrian paradigm
Neoclassical paradigm
9.
Formalism
Verbal (abstract and formal) logic which
introduces subjective time and human creativity.
Mathematical formalism (symbolic language
typical of the analysis of atemporal and constant
phenomena).
10.
Relationship with the empirical world
Aprioristic-deductive reasoning: radical separation
and simultaneous coordination between theory
(science) and history (art); history cannot validate
theories.
Empirical validation of hypotheses (at least
rhetorically).
11.
Possibilities of specific prediction
Impossible, since future events depend on
entrepreneurial knowledge which has not yet been
created; only qualitative, theoretical pattern
predictions about the discoordinating
consequences of interventionism are possible.
Prediction is an objective which is deliberately
pursued
12.
Person responsible for making predictions
The entrepreneur
The economic analyst (social engineer).
13.
Amount of “human capital” invested
A minority, though it is increasing
The majority, though there are signs of dispersal
and disintegration.
14.
Type of “human capital” invested
Multidisciplinary theorists and philosophers;
radical libertarians
Specialists in economic intervention (piecemeal
social engineering); and extremely variable
degree of commitment to freedom.
15.
Most recent contributions
 Critical analysis of institutional coercion
(socialism and interventionism).
 Theory of free banking and economic cycles.
 Evolutionary theory of (juridical, moral)
institutions.
 Theory of entrepreneurship.
 Critical analysis of “social justice”.






16.
Relative position of different authors
Rothbard, Mises, Hayek, Kirzner
Coase, Friedman, Becker, Samuelson, Stiglitz.
Source : Bestinver
Página 19
Public choice theory.
Economic analysis of the family.
Economic analysis of law.
New classical macroeconomics.
Economics of information.
New Keynesians.
Source: “The Austrian School”, Jesús Huerta de Soto
Other sources: Mises Institute (www.mises.org)
BESTINVER
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C/ Juan de Mena, 8 - 28014 Madrid (Spain)
 +34.91.595.91.00
bestinver@bestinver.es
www.bestinver.com
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This document has been prepared by Bestinver Gestión, S.A. SGIIC for informational purposes only and can be in no way considered an offer
to participate in its investment funds. The information contained herein was compiled by Bestinver Gestión, S.A. SGIIC from sources it
believes are reliable. However, while appropriate measures have been taken to verify its accuracy, Bestinver Gestión, S.A. SGIIC in no way
guarantees that it is accurate, complete or up to date.
•
All opinions and estimates included in this document reflect the best judgment of Bestinver Gestión, S.A. SGIIC as of the date they refer to
and may be changed without prior notification. All opinions issued herein are general in nature and do not take into consideration individual
specific investment objectives or financial circumstances.
•
Under no circumstances can Bestinver Gestión, S.A. SGIIC, its managers, employees or authorized personnel be held responsible for any
damage resulting, directly or indirectly, from the use of the information contained within this document. Information regarding past returns
does not in any way constitute a promise or guarantee as to future performance.
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All Bestinver returns are expressed as net, after expenses and commissions. They are denominated in euros.
Share redemptions and transfers of securities held for less than one year are penalised with a commission
Source of Bestinver return and fees data: BESTINVER
Source of sector return and fees data: INVERCO
Source of national and international rankings: BESTINVER. Bestinver funds, third-party mutual funds and equity index returns (Madrid SE,
IBEX, S&P 500 and MSCI) are calculated based on the closing level on the date appearing at the bottom of this page.
Source of fund P/Es: BESTINVER
Source of market P/Es and Argentina Charts: Bloomberg
Source of Value Investors: “The Superinvestors of Graham-and-Doddsville”
Sources of Performance of diferent assets since 1800: Jeremy Siegel "Stocks for the long run" Irwin Professional
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May 3 - 4, 2012
Mammel Hall
Omaha, Nebraska