Quarterly Letter

Dear investor,

Seventy-five years ago, Benjamin Graham said that the movements of markets follow a manic-depressive pattern(1). And in view of how they have evolved over the last two years, we must agree —once again— with the father of Value Investing. In this period, stock markets have gone from discounting a severe recession —triggered by inflation, rising interest rates and the war in Ukraine— to trading at all-time highs. Although the environment has been markedly inflationary, with high interest rates and geopolitical instability, the world economy has not gone into recession and corporate profits have not collapsed.

Over the past year and a half, the economy has performed unevenly in different regions of the world. On the one hand, growth in the US has consistently beaten the forecasts, thanks to resilient consumption, demand for services and employment.

This strength contrasts with China’s weakness, which has dragged Germany and other northern European countries into recession. On overall terms, however, global economic activity has outperformed market projections, and GDP estimates have been mostly revised upwards.

The same has been true for inflation, which has been more persistent than expected due to stronger economic growth. As a result, expectations of interest rate cuts in 2024 have moderated significantly in recent months. Unlike two years ago, when the market reacted with falls in response to any hint of higher rates, this time such expectations have been greeted with strong upward movements on the stock exchanges. Why? Because in the current environment, high rates are perceived as a symptom of good economic health and, in a healthy economy, companies’ profitability increases.

This outlook of higher returns has been particularly favourable for our companies, and funds such as Bestinver Internacional, Bestinver Consumo Global and Bestinver Norteamérica have ended the quarter with gains exceeding 11%. Overall, our equity funds have averaged a return of 10%. Fixed income securities also performed extraordinarily well, overcoming a difficult environment in which 50% of their competitors incurred losses over the quarter. At quarter end, Bestinver Corto Plazo was up 1%, Bestinver Renta was up 2% and Bestinver Deuda Corporativa rose by 4%. These results reflect another of Benjamin Graham’s key lessons: for long-term investing, what really matters is the performance of companies’ earnings and the valuation of their shares.

Looking ahead, our funds’ performance should maintain this positive trend, driven by the strong fundamentals of our companies. In this respect, we consider relevant the statements of a number of managers indicating that business productivity is improving rapidly thanks to technology. If this phenomenon spreads across sectors, the economy could enter a period of sustained growth, controlled inflation and positive interest rates, which would be very favourable for stock markets. Therefore, beyond short-term uncertainties, such as the outcome of the US elections, developments in monetary policy or geopolitical tension, we see a major opportunity for investing in quality companies with attractive valuations.

As Benjamin Graham explained, the market being manic-depressive is not a problem; we simply need to be aware of it and not be driven by the same instincts. Therefore, rather than trying to predict short-term stock market movements, value investors use them to invest in good businesses, buying when their shares fall and are cheap, and selling when they rise and cease to be cheap. This is the strategy which, in accordance with the teachings of Benjamin Graham, we have followed at BESTINVER for more than 35 years.

On another note, I am pleased to announce that last February we launched Bestinver Bonos Institucional IV, F.I., which will continue to be marketed until June this year. In this fund, we aim to offer an estimated portfolio IRR of 4% —with an estimated net investor APR of 3.9%— while maintaining a credit quality of BBB+, maturing in June 2028.

I invite you to read the letters from our managers below, and thank you for your trust in us.

Yours sincerely,

Mark Giacopazzi.

(1) Graham, B. (1949). The Intelligent Investor. A guide for the general reader to wise investment practice under today’s financial conditions. Harper & Brothers.