Vadevalor - The Bet!
Vadevalor's Bet on Active Management, Our Vision of the Sector...
Dear long-term investor,
Vadevalor has been born in a period of change in the asset management sector in Spain.For the last years new asset management companies have been set up, led by fund managers who have
been obtaining extraordinary results for many years and are totally focused on achieving the best possible returns for their clients.
In spite of the increase in the number of asset managers with excellent academic backgrounds who, following value investing principles, have invested very successfully over long periods of time, there is more scepticism than ever about the value that active management brings. In our first letter, we want to publish our vision of the sector.
Why do we believe that a group of disciplined investors will perform better than the average?
Read about our views below...
In spite of the good results of some fund managers who have proved to be at good valuing companies in the long term, capital is not flowing to them as fast as one could imagine. For instance, according to Inverco data, Caixabank, Santander Asset Management, BBVA, Sabadell and Bankia manage 58% of all assets invested in domestic and international mutual funds in Spain. Regardless of their results, which historically have left a lot to be desired, money keeps on being poured to them thanks to their strong distribution networks and the lack of financial literacy of a great proportion of Spanish savers.
A high percentage of funds sold in Spain as active funds, in reality replicate the benchmark of the geographic area in which they invest. However, these funds charge commissions which are often higher than 2%, which is unacceptable. According to the report “Active Fund Management: International Evidence”, 42% of equity mutual funds in Spain do this. It is also mentioned that this doesn’t just happen in Spain, for instance, in France around 29% of equity mutual funds do it, 36% in Italy, 56% in Sweden and 15% in the United States. The report was published in 2015 and it analysed 24,492 mutual funds in 32 countries, from 2002 to 2010.
The more money flows to those fund managers who have achieved good historical results and who try to achieve the best possible returns for clients, the more efficient markets are and the more attractive passive investing is. However, we see how there is much more money going to entities with strong distribution networks than to those fund managers who have performed extremely well. Furthermore, the influx of money to indexes, which just invest in companies because of their size and don’t question the capacity of companies to keep on performing well, distort valuations. This is easy to understand, if everyone wanted to buy S&P 500 ETFs, the valuations of the largest American companies would keep on increasing and increasing, causing bubbles. As with any investment, it is important to understand what you are buying and at which price you are buying it.
“It is a big advantage for us that there’s more dumb investing, money invested in the basis of not thinking” – Francisco Garcia Parames
“As an active fund manager, the dream position you want to be in life is to survive to be the last active manager left in the world, cause every other piece of money would be invested in the basis of not thinking”- Terry Smith.
At Vadevalor, we have been seeing for a long time that there is persistency in results for some fund managers who follow value investing principles and whose mutual funds don’t replicate any indexes, and just try to find undervalued stocks. We especially like fund managers with their own money invested in the investment vehicles they manage, and whose professional success only depends on the results they achieve.
The bet that the main supporters of passive investing in Spain did not want to accept.
We consider that to measure the persistency in results we must focus on the fund managers performance on an individual basis and not on mutual fund results (regardless of fund manager changes) as other research have done.
With the goal of doing this research, a few months ago we wanted to make a bet with some firms which sell passive investing funds. We said that we wanted to choose 6 mutual funds run by AAA fund managers who appear on our website and compare the results with an index with the same geographical exposure. If after 5 years, active fund managers had outperformed the index we would win a trip to Omaha to see Berskhire’s shareholders meeting and if not, they would win it.
Although they didn’t take the bet, we have decided to keep on tracking the performance and at the end of january we gave Rankia and Value School an envelope with a list of 6 AAA fund managers. As we have already mentioned, we are tracking their performance since february.
>> Vadevalor AAA (geographic exposure of the 6 funds: 75% Europe, 10% North America, 8% United Kingdom, 6% other, 10% cash)
>> Vadevalor AAA (adding the return of the benchmark to the % in cash)
>> Index with the same geographic exposure (80% Stoxx All Europe Total Market, 10% S&P500,10% MSCI World)
Mixed equity funds are the most popular type of fund in Spain. Although the fixed income market has been very attractive for investors for the last years, one must take into account that valuations of investment grade bonds are at record levels, often reaching irrational levels.
We also think that savers who don’t want to invest all their assets in equities, would obtain better results if they create their own mixed equity fund instead of investing in the top-selling funds in the market.
We think that even investing 50% of your money in those AAA fund managers and with 50% in deposits (we don’t advise to keep idle cash if you are not going to need it because cash losses purchasing power with the passage of time, but we use it as an example), the returns achieved will be higher than the returns achieved by investing in a group of the top-selling mixed equity funds in Spain, whose maximum legal exposure to equities on average is almost 60% and have lately had between 40 and 50% exposure to equities. Many of the top-selling mixed equity funds are funds of funds which charge commissions which are extremely high for the value they add.
>> Vadevalor AAA (50%), Deposits (50%)
>> 10 Top-selling mixed equity funds in Spain (Santander Select Moderado cl.s €3.272M, Caixabank Crecimiento €1.657M, Bankia soy así flexible €1.248M, Sant. Pb cartera moderada €1.077M, BBVA consolidación 85, €984M, Santander Tandem 20-60, €748M, BBVA mi inversión mixta €537M, Bankinter cart. Privada moderada, €526M, Bankia Fonduxo, €279M, Fondmapfre bolsa, €272M).
At the same time as we look up to and recognise the great work of those fund managers who have been achieving great results for a long time and have shared their knowledge, we want to recognise the effort and good work of those professionals who haven’t been managing money for that long but who we think will make many investors happy over the next years.
That’s why we have decided to launch Vadevalor Promesas with Rankia and Value School. The goal is to identify those fund managers with less than 5 years of track record and less than €50M under management with an investment philosophy and value creating approach for their investors similar to the A and AAA fund managers.
Thanks to this collaboration, fund manager fact sheets, webinars, blogs and events will be done.
Javier Ribas Meneu
Diego Sánchez Arboleya, CFA