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Communication, Education, Honesty

Francisco García Paramés, co-manager, Bestinver, talks about managing expectations of their investors…

Relatively unknown in our part of the world, Spain-based Bestinver Asset Management, which manages €5.8 billion (about Rs37,000 crore), has an unwavering value pedigree and has quietly made a name for itself. Bestinver is managed by the trio of Francisco García Paramés, Álvaro Guzman de Lázaro and Fernando Bernad. The Bestinver Internacional (international portfolio) with assets under management (AUM) of €1.3 billion (about Rs8,126 crore) and the Bestinfond (70 per cent international portfolio and 25 per cent Iberian portfolio) with an AUM of €1.1 billion (Rs6,671 crore) are two of its largest funds. Besides, Bestinver manages other funds, mandates, segregated accounts, and pension funds.

The unwavering focus on quality has delivered results that other fund managers would kill for. The older Bestinfond Fund launched in 1993 has given a cumulative return of 1,757 per cent (as of Feb 28, 2011) as compared to only 416 per cent returned by the benchmark index. That’s a 17.5 per cent compounded annual return (CAGR) over the last 18 years compared to benchmark returns of 9.5 per cent — a record that would put many a fund manager into the shade.

The newer Bestinver Internacional Fund launched in 1998 has given cumulative returns of 278 per cent as against the 16 per cent (cumulative) returned by the benchmark MSCI World Index (as of Feb 28, 2011). That’s a 10.6 per cent CAGR compared to 1.1 per cent returned by the benchmark.

Francisco García Paramés, co-manager, is sometimes referred to as the Warren Buffett of Europe for his penchant for sticking to high-quality businesses and not paying too much for them. Paramés joined Acciona in 1991 to work on mergers and acquisitions. Within a few months he was put in charge of a small fund at the same company.

In a freewheeling discussion with Mohammad Ekramul Haque, Paramés recounts his investing strategy, how his techniques have evolved over the years, and how his relentless focus on high-quality businesses has kept him ahead of his peers. He also speaks about why he has called some shareholder meetings wedding parties.

How difficult it is to manage the expectations of investors in your funds?
It is difficult. That is why we allocate a lot of time to talk and inform our clients properly. We consider our clients and potential clients as co-investors. Thus we need to make sure that they share our values and targets before they take the decision to invest with us (and the decision, very importantly, always rests with the client — we don’t push them to come). This requires an exercise of communication, education and honesty which we have implemented in several ways to guarantee alignment of interest in both directions. If we do our communication job correctly the expectations of our clients (co-investors) should be exactly the same as ours.

How do you reconcile your investors’ ability to redeem their investments anytime with the fact that your portfolio positions are built to be held forever?
The first point is that we openly recommend our clients to invest in Bestinver (and in general terms when they invest in equity) only the money they will not require for, at least, five to seven years. This reduces very much the amount of money someone is able to allocate (thus we avoid short-term investors or nervous money). And we recommend repeating this process annually, renewing their investment commitment only with the portion of money that has this patience at each moment. If the investors are rigorous they will cash out gradually, just keeping the portion of their money with the recommended five to seven-year horizon. Of course this is not a written commitment; it is only a moral commitment to be used as a guide. And majority of our co-investors follow our recommendations.
We also release on a monthly basis the appraisal value of our portfolio versus the market price; it is a very important signal to decide if one should be invested or not. The wider the gap between appraisal and market price, the more they should invest, and vice-versa. If market price is very close to appraisal (thus we have little margin of safety) probably they (we) should review their (our) global investment opportunities looking for a better investment (Mr Buffett stayed two years out of the market playing bridge as he couldn’t find any interesting investment).
This game is not only a matter of being invested for good, but a rational selection process. The only reason to be invested in an asset (i.e. our funds) is a rational selection of alternatives (risk-reward). We consider that our money could not be invested better than in our funds (the businesses and companies in which we are invested are the best risk-reward alternative that we know) but anyone may know other assets which bring a better risk-reward. In that case, they should look at those investments rather than invest with us.
And finally we dedicate a lot of effort to education. We have an annual investors’ meeting in which more than 3,000 investors gather. We write papers to share our views and values with clients. We have interviews and send quarterly letters to investors. We participate in investor summits (limited number but very focused and high-quality). And we have an Investor Department that permanently keeps in touch with investors to inform them about investments of the portfolio, views, news, risks, etc.

You are known to be an avid follower of the Austrian School of Economics. What can an investor learn from the Austrian school?
You can learn a lot of things. For instance, if a company is making a lot of money you will have other companies coming in with more capital and returns will go down. On the other hand, when everybody is losing money then capital goes out and returns will start improving.
You can learn that if you manipulate interest rates you can run into problems. If you lower interest rates too much, that could lead to an incentive to invest too much. That is what has happened in the last six to eight years.
Take another instance. Growth in an economy should be based on savings and productivity growth. If you look at China, you will see a savings rate of 30 per cent with productivity growth of 6-7 per cent every year. We are absolutely confident that China’s growth is sustainable and that’s due to the Austrian economics approach. It helps to have a framework that can help in stock selection.

Being such a fan of Austrian economics, what books on economics do you recommend?
I used to read a Spanish professor called Jesus Huerta de Soto. He is one of the world’s leading Austrian economists. He has written an extremely good book on economic cycles and money and banking that for me was very useful in avoiding banks in Spain and the rest of the world (you can get the book online at http://www.jesushuertadesoto. com/madre2.htm).

Are you invested in any Indian company?
Not really. But we invest in companies in Europe that have operations in India, like BMW, Schindler, etc. We invest in Europe because we think Europe is much less efficient than the US. And it is closer to home. We find very good companies at very good prices of around eight times earnings. So we have not gone far to China or India. Plus, we think travelling too far from your home country to invest makes the investment process weak. We try to avoid that as much as we can.

You invested in Arcelor only a few days before Lakshmi Mittal made a bid for the company. What attracted you to Arcelor?
We invested in Arcelor in the Spanish fund. We used to own Aceralia, a Spanish company that was bought by Arcelor, and then Arcelor was bought by Mittal. It was a commodity business and we bought it when the commodity was still low and was not recognised by the market. We did that five years ago. We bought some of them and we just played the cycle over there.

And how much money did you make out of the whole Arcelor-Mittal acquisition?
It was 50 per cent but that was pure luck.

What is your view on attending shareholder meetings?
We used to attend shareholder meetings of Spanish companies to see how they were doing. But most of the time we like to invest in companies where we like what’s going on. If we don’t like what’s going on, we will sell our shares. We don’t fight management.

You have earlier called shareholder meetings as wedding parties. Why is that?
Oh, that was a long time ago! When I used to attend the shareholder meetings of some Spanish companies, there was only the family attending and it used to feel like I was going to a party of the family or something like that!

How do you relax? What do you do when you are not working?
My main hobby is reading. I spend time with my family, and whenever I can, I play golf. It’s a very simple life.