Lipper’s Jake Moeller reviews highlights of a meeting with Gemma Hurtado, Fund Manager of Mirabaud Equities Spain Fund, on November 2 & December 15, 2015.
For the domestic investors of a country, a parochial geographical bias in equities is often expected or explicitly sought and outside of that, a broad-based geographical exposure suffices. A Spanish equities fund might then appear to have little to offer to investors outside the Iberian Peninsula. However, any follower of European politics will be aware of the lack of regional homogeneity that is currently testing its union. The differences in regional markets too can be notable at times and potential opportunities missed where a broad brush is applied.
Table 1. Regional European Stock Market Performance YTD 2015 in Local Currency.
Source: Lipper for Investment Management.
The Spanish equities market is small with only around 110-120 stocks listed on its stock exchange. The Lipper Global Equity – Spain Equities classification only consists of 66 funds in a cross border European market of some 10,000. However, for fund manager Gemma Hurtado, this has established the foundation of her process - intimacy. “Spain is not a discovery market” she states, “but it is a deep knowledge market”. This manageable universe allows Ms Hurtado to follow every listed stock in great detail. She can review every quarterly result and meet management several times each year to build up an intimate knowledge of a company, its strategy and assess what qualitative factors betray or justify its determined value.
This fund is highly concentrated with only 25 or so stocks with active share over 60%. It can loosely be described as a GARP style fund (growth at a reasonable price). An initial liquidity screen filters out the smallest and riskier companies in the market and then a proprietary modelling process is applied. Financial statement analysis is undertaken to determine key factors such as debt and profitability and internal P/E, P/CF and P/B metrics built and then compared with the market consensus. An internal valuation is established using a DCF model. It should be noted that the assumptions on which the DCF model is based are quite conservative - the WACC is set at 9% and there is a 1.5% growth assumption.
Despite being a trained mathematician, Ms Hurtado places great emphasis on qualitative factors. Key for her is to understand competitive pressures, revenue generation and how these might change in relation to external events. BankInter for example, is a large portfolio position which was implemented in 2012 when Spanish banks generally were out of favour. “Back then, our ten-year bond yield was at 7.5% and nobody wanted a bank in their portfolio” states Ms Hurtado.
“BankInter was trading at 0.3x price-to-book but only had 5% exposure to property”. This prompted Ms Hurtado to take out a position in the stock. A long-term hold, BankInter has performed strongly and in 2015 grew its loan book by over 4% in 2015 compared with other Spanish banks which are averaging -4% over the same period.
Table 2. BankInter Five Year Share Price History (to Dec 16, 2015)
Source: Thomson Reuters Eikon.
Tecnicas Reunidas is a holding (currently 4%) which has conversely faced a number of headwinds. “It's a quality company with high top line visibility, well diversified by client and geographical exposure and with sound financials” states Ms Hurtado. The stock was acquired at €29 at a target price of €46 but has struggled on the back of a weak oil price affecting client orders. Ms Hurtado maintains a watching brief on the stock but remains sanguine: “Their order book has seen a 14% yoy increase. The falling oil price has only affected down payments (10% of contract values) reducing net cash but that is still stands at a healthy €350 million”.
Table 3. Tecnicas Reunidas Five Year Share Price History (to Dec 16, 2015)
Source: Thomson Reuters Eikon.
Most investors will be familiar with the recent economic travails faced by Spain. Ms Hurtado paints a reasonably favourable outlook for the region and Spanish equities. “The Spanish market in aggregate terms is compelling”, she states “It’s trading at 13 times and supported by ‘healthy’ economic growth (not underpinned by debt), above 3%. This is pretty good for Europe” states Ms Hurtado. Similarly, an improvement in corporate investment is evident. Ms Hurtado says most of the chief executives she is meeting are “expansionary” in outlook although she expects further consolidation in the country’s banking sector. Upcoming elections at the end of December are potentially looking favourable for the economy if the ruling Popular Party can form a working majority.
Table 4. Five Year Performance of Mirabaud Equities Spain Fund to November 30,2015
Source: Lipper for Investment Management
The fund has a strong track record under Ms Hurtado’s tenure, proving particularly resilient in the heavy Spanish draw downs in 2010 and 2011. Over the five years to November 2015 it has beaten the IBEX 35 NR index (see Table 4) by over 12%.
For investors willing to drill into their European equities portfolio this fund offers a high active share, a pedigree of alpha generation and uniquely, exposure to a fund manager who covers every stock in her investable universe.