Good things come in small packages

Eugenia Jiménez
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Iván Martín, founding partner and CIO of Magallanes
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Iván Martín, founding partner and CIO of Magallanes

Magallanes' Iván Martín outlines the value boutique's investment principles which, with a long-term horizon, favour quality over size when it comes to performances.

At the end of 2014, Spanish value investing outfit Magallanes Value Investors was co-founded by Iván Martín and Blanca Hernández, whose shared passion for value investing and common interests led them to the launch.

Blanca Hernández, Magallanes' CEO, spotted Martín as she was looking for fund managers who were following a value investing philosophy when she was managing her family office Ebro Foods - a leading company in the Spanish food processing sector. She currently combines that job with her role at Magallanes.

We think that size is enemy of quality when it comes to performances, which is the reason behind our commitment to close our funds when size becomes a problem in managing portfolios.”

She saw on Martín a unique profile, a great stock picker with the adequate temperament, business and long-term mind. "His passion for value as well as his conservative and business-oriented approach convinced me to set up Magallanes," Hernández says.

The Spanish firm's CIO Iván Martín was by that time working as head of equities at Santander AM, a job he quit to partner Hernández in the foundation of Magallanes, in 2014.

Both co-founders describe the firm as an independent boutique, created and controlled by them, which gives them the freedom required in asset management to generate strong long term returns, without any conflict of interest. Martín stresses: "We co-invest with our clients and are committed with quality over size, with a long-term vision, integrity, and independent thinking. Such long-term investment horizon differentiates us significantly from retails banks, which often focus on short-term results."

With such time horizon, they look for a low double-digit annualised compound rate, which they believe can only be provided by companies.

Magallanes, whose assets under management stand at around €2bn now, is partly named after the historical figure Fernando de Magallanes, the Portuguese explorer who arranged the Spanish expedition to the East Indies in 1519 resulting in the first circumnavigation of the Earth. Its name also pays tribute to the prestigious Magellan Fidelity Fund, a strategy managed by the legendary value investor Peter Lynch that achieved an annualized return of nearly 30% during the 13 years in which it was at the helm.

Based in Madrid, 60% of the firm's clients are family offices, 15% are retail clients, and the remaining are institutional clients.

The firm focuses on European equities, long-only, through three different strategies: Iberian Equity Fund,European Equity Fund, and European Micro-caps Equity Fund.

"Big part of our success comes from being loyal to our circle of competence, it means we tend to find our best investment ideas within the European equity arena," states Magallanes' CIO.

As chief investment officer, Martín is responsible for managing and monitoring the funds' portfolios, counting on the support of two analysts and an assistant portfolio manager & trader. He spends most of the time researching companies with the aim to understand their business models and to calculate their fundamental value.

Magallanes' strategy in Spain is committed through the Iberian Equity fund, which invests in companies that trade just in Spain and Portugal, which forms an investment universe of 180 companies roughly.

The Fund has a concentrated portfolio of around 20-30 stocks with a low level of rotation (below 15% per year) in which Spanish stocks account for over 70% of the fund's exposure. Top 10 holdings of the strategy represent 40-50% of the portfolio. Siemens Gamesa, Inditex, Gestamp, and Repsol are the Spanish listed stocks with greater exposure as of the end of March 2019.

The Iberian strategy returned 38.7% over the last three years while the European equity fund achieved a 33.5% return over the same period.

Investors can access Magallanes' funds directly through the firm's website as well as by the main banking institutions and investment platforms in Spain.

The firm also has Luxembourg-domiciled Ucits-funds, which are registered for sale in Luxembourg, Belgium, Spain, Switzerland, Germany, France, and the UK. While Magallanes is the investment manager of them, their administration and distribution is made through different banking institutions and Pictet.

DOES SIZE REALLY MATTER?

When asked by the firm's business plans, Martín says their main commitment is to offer always the best equity investment option to clients. He continues: "We are not a fund supermarket nor an asset management gatherer, it is not what we want for our company. We prefer to offer our clients those products we would invest in.

"We think that size is enemy of quality when it comes to performances, which is the reason behind our commitment to close our funds when size becomes a problem in managing portfolios."

The firm seeks to achieve the double goal of preserving capital while obtaining long-term attractive returns, which they consider as periods of more than seven years.

As an independent boutique, it aims at growing at a pace that allows it to manage its investments in a profitable way. In this respect, Martín explains: "We believe an excessive growth may affect performance, and we prioritize quality management over size. If necessary, such commitment could translate into soft or hard close of the fund.

"In this respect, we soft-closed our Iberian fund (at €500m) and our Micro-caps strategy (at  €100m) in June 2018. Both are now open due to the volatility in market cap."

Martín admits to have embraced the volatility seen in the market in 2018, which he took as a source of opportunities that led him to increase the firm's levels of investment. He believes the firm's portfolios are offering the highest upsides ever. In mid-April, Magallanes' investment levels stood at around 97% against 85% on the first quarter of 2018.

 INVESTMENT PRINCIPLES

As an independent value investor, Magallanes seeks to buy cheap companies, whose market price are below their intrinsic value.

This investment approach requires remaining focused on the long-term prospects of companies, rather than on the short-term trends or market patterns.

Ideas generation comes from three main sources: market observation, companies whose price is in decline (which involves an agnostic market position, many times betting against it), and analysis. These ideas are then passed on to the firm's analysts, who are responsible for the companies' research. Thereafter, Martín takes the final investment decisions.

Since Magallanes is a pure bottom-up investor, it does not seek to invest in any specific country, sector, size, or theme. Martín outlines: "Companies within our portfolio are there due to their own merits. We have no restrictions except those we impose following a deep analysis of companies."

Martín describes Magallanes' approach as highly conservative. "We buy with wide margins of safety aimed at protecting us from the possibility of making mistakes. We do not buy expectations nor businesses we do not understand," he concludes.

 Inditex and Gestamp are among his favourite stocks listed in Spain. At a European level, car makers Porsche and Renault stand as his favourite stocks.