Quarterly Letter

Dear investor,

2023 has been a year of surprises. Although persistent inflation, interest rate rises and the contraction of the global manufacturing sector raised fears of an imminent recession, in the end it did not happen. It is true that these threats created a climate of permanent uncertainty throughout the year and that, at times, they triggered significant reductions in equities and fixed income. However, the economy in general, and our companies in particular, have proven to be much stronger than their share prices had suggested, creating an environment in which part of the enormous value stored in our funds has begun to emerge.

The reason for the surprises in 2023 is that business activity, corporate results and the financial markets have turned out to be much more resilient than expected at the beginning of the year.

Firstly, with regard to economic activity, GDP in the US and Europe, rather than falling into recession, has ended up growing by 2.4% and 0.6% respectively. Consumption and demand for services, backed by a financially solvent private sector and solid employment, have largely offset the weakness of the manufacturing sector and kept business on a positive track. Moreover, central banks have achieved a balance that seemed impossible just six months ago, with the biggest rate hike in forty years in order to control inflation —successfully it seems— without dampening economic growth. The reality is that, despite the gloomy consensus projections, the economy has proved to have strong fundamentals.

Secondly, companies have been able to protect their profits by controlling costs and seeking efficiencies. Thanks to these measures, which were also boosted by significantly better than expected revenues, management teams have maintained their operating margins and grown earnings per share at rates of 7% in the US and 5% in Europe, in a year in which many expected a collapse in the profitability of listed companies. Again, we have seen how the strongest companies are able to adapt to changes in their competitive environments, gain share over weaker competitors and thereby increase their profitability. This strength allows leading companies, such as those in our funds, to increase their intrinsic value, particularly in the current environment. In other words, our businesses grew stronger in 2023.

Finally, the markets have been supported by valuations which, following a decline in 2022, were setting out from too low a level. In an environment of moderate inflation, falling interest rates and stronger fundamentals, these valuations did not reflect the true value of the businesses. As the strength of the economy and businesses was reflected in macro data and earnings releases, therefore, the indices recovered much of what had been lost during the previous year. In the case of the MSCI World(1), S&P 500(2) and Stoxx 600(3), these increases were 19.6%, 21.4% and 15.8%, respectively.

But this context has been particularly favourable for Bestinver’s investment strategy. Firstly, considering the extraordinary results it has achieved. Our main equity funds, Bestinfond and Bestinver Internacional, achieved an accumulated annual appreciation of 25.3% and 24.6%, respectively. Other funds, such as Bestinver Bolsa, Bestinver Norteamérica or Bestinver Grandes Compañías, also stand out with gains of 25.6%, 22.1% y 24.6%, respectively. The average return on our fixed income funds was 7.6% —9.5% in the case of Bestinver Renta— proving that they are a good alternative to bills, deposits and other traditional savings products.

Secondly, because we have taken advantage of high volatility and dispersion in the markets to increase the potential of our portfolios. Over the last few quarters, we have been able to sell some companies that had posted spectacular results —with rises, in many cases, of over 50%— to reinvest in other companies that had lagged behind and offered more value. As a result, despite their strong performance in 2023, our funds will still be highly profitable over the coming years.

Concerning our perspectives, we cannot overlook that the resilience shown by the economy, companies and markets is a consequence of the solid fundamentals driving the economic normalisation process that started in 2021. The solvency of the private sector, expansionary fiscal policies and the recovery of interest rates as a monetary policy tool are key factors in a process that we consider unstoppable and that will lead economic growth in the coming years. This is our baseline scenario.

It is a process that still has a long way to go before full normalisation is achieved. China’s economy is still not over the slump caused by the pandemic and has continued to weigh down world trade, the manufacturing sector and such significant countries as Germany. In addition, wage increases, housing market developments and geopolitical uncertainty still pose important questions for inflation and growth rates. However, resolving these issues would provide additional impetus for global economic normalisation. This return to normality, beyond what it might imply in the short term, will have a positive impact on the economy and markets over the coming years.

Nevertheless, this process will not be a straight path. Normalisation offers good investment opportunities for active value management but also new risks and challenges for which we must be prepared. To achieve this, we will do what we have always done at Bestinver: build balanced and diversified portfolios and invest in leading, profitable and solvent companies at attractive valuations. Companies capable of generating long term value for their shareholders, which are resilient enough to turn any short-term downturn into a good buying opportunity. For this reason, I am convinced that our funds’ potential will continue to be transformed into high returns for our investors for years to come.

Below, I invite you to read the annual letters for each of our funds. I would like to thank you for your trust and wish you a happy 2024.

Yours sincerely,

Mark Giacopazzi.

(1) MSCI World Net TR EUR Index
(2) S&P 500 Net TR EUR Index
(3) Stoxx Europe 600 NR