Madrid-based ‘direct’ investment boutique azValor has attracted over 16,000 new retail investors, using its ‘direct dialogue’ educational model, in the two years since its launch in 2015.
The concept is based not on high tech solutions, but on directly educating investors to invest long-term, rather than short-term. The whole approach is based on the fundamental principles laid down by the father of value investing Benjamin Graham and further developed by Warren Buffett, his most famous disciple.
Essentially, the azValor model works by maintaining an ‘educational’ dialogue with its clients to encourage them to overcome behavioural biases that would otherwise destroy value during times of market turmoil. In other words, the firm aims to educate its investors to buy when the value of ‘quality’ stocks fall, rather than to sell, and so crystallise a loss.
The two-year anniversary of the firm’s launch has led azValor to launch an audio-visual educational channel through YouTube, their website, and other social media, to extend the dialogue with their clients.
The approach has worked spectacularly well for azValor investors who backed quality investable stocks when European stock markets fell following the UK’s Brexit result in June 2016. In subsequent weeks, azValor took in €75m of assets, with no significant redemptions. The move by their investors paid off as the azValor International Fund has since risen by 12.46% and azValor Iberia by 42.2%
More recently azValor managers Alvaro Guzman and Fernando Bernad, did a classic ‘value’ swoop on Spanish equities after share prices of high quality companies fell during the Catalan crisis. Such moves by azValor come with explanations to customers and a perspective on the potential upside of such moves over three to five years. In their most recent quarterly newsletter Guzman says that the ‘value grab’ boosted the long-term upside potential value of their Iberian fund by 55% up from 40% – so giving an indicative value of up to €200 per share.
Guzman and Bernad point out that while “nothing is guaranteed” from their Catalan strategy, were the value that they perceive in the portfolio to be realised, then over a three-year period, investors would receive a 15% annual compound return from the current market value of €130 – or 9% if value is realised over five years.
Apart from encouraging investors ignore short term volatility in stock prices and to look at their investments long term, central to their direct dialogue approach is transparency and humility. For example, in their latest Quarterly Newsletter, the duo acknowledges the underperformance of their funds throughout 2017 and explain why this is not so important in the context of long term investment, particularly because their investment process they have adopted looks to identify the future sustainable earnings power of the companies in which they invest.
“This is not easy, from a psychological point of view, but there are ‘tools’ that help – chiefly developing a profound knowledge of our portfolio companies through research…. The main objective remains to discern if a company’s future economic returns is more or less sustainable, predictable and to understand why. Unfortunately, no matter how solid our investment process might be it will never eliminate mistakes completely,” writes Guzman.
In the two years since the firm has been established, the strategy evolved by Guzman and Bernad – contrary to their mantra of long term investment – has not had to wait long for true value to be realised. For example, since November 2015 the Iberian fund has returned over 30% and the international fund over 20%. The returns are particularly notable given markets crashed in January 2016 shortly after the firm was established. Since that time the Iberian fund has risen more than 57% and the International fund by more than 48%.
Commercial partner Beltran Parages emphasised the firm’s desire only to acquire the right sort of investor when he said, “We do not seek investors who need to have a short-term outlook, as the chances are that we are not likely to deliver on our promises. All we can say is that the prospects of a good outcome are only with those who can invest over many years. As Warren Buffett says, “in the short run, the market is a voting machine, but in the long run, it is a weighing machine.”