We Must Find A Balance Between Cyclical And Quality Companies


Panza Capital begins its journey next week with the official presentation of the firm and the management team, which Beltrán de la Lastra is expected to join , and the investment funds, pending approval by the CNMV. There will be three international stock. One focused on quality firms, another that will focus on companies with attractive valuations and the one that will be the main strategy, a combination of the previous two.

Ricardo Cañete, one of the founding partnersand with extensive experience in the world of investment, he explains what type of companies they are beginning to analyze. He assures that at this moment of uncertainty in the market, the ideal would be to balance the portfolios with quality and value firms, although he does not hesitate to affirm that if the situation worsens, it will be an opportunity to invest more in cyclicals.

Why are they not going to have a Spanish stock market fund in their range of products?

Limiting yourself to Spain is a shame when we have thousands of companies in Europe with a lot of sectors that are not represented here. So the global strategy makes more sense. It is not that we do not want to invest in Spain, what we do not want is to be forced to invest only in Spain.

What ideas and in what sectors are you looking to invest in the funds?

We are looking at consumer firms, where we could differentiate the finalist from the intermediate. In final consumption we look at companies such as the Unibrew brewery or JD Peet. In intermediate consumption, Barry Callebeaut or Treatt. In the industrial sector, distributors such as Brentag or Univar, or machinery companies such as Sanvik or linked to the automobile, differentiating between suppliers and manufacturers.

On the subject of quality of life, there are high quality companies at reasonable prices like Roche, and related to the energy sector, we are looking at things related to oil like TGS Nopec. And in what we call the productivity business, Accenture. But it doesn’t mean that these firms will eventually end up in portfolios when we start the investment process.

What is going to be the best time: this last quarter or the first of 2023?

It is impossible to anticipate because there are so many variables, such as the decisions of central banks or governments, that we do not try to anticipate. We try to build robust portfolios, with companies with good corporate governance, sustainable competitive advantages over time, reasonably diversified and with reasonable growth. You always have to compromise on something, but that’s the important thing, without relying on a risk factor. When will the returns come? That cannot be known, and it is not our way of managing. That is why we ask our investors to have a long time horizon, at least five years.

In this construction of portfolios, is a type of company like Roche going to predominate more now or is there going to be a balance?

Right now we have to find a certain balance because we don’t know where we are going. There are risks that we do not know if they are going to materialize and, therefore, we are going to have a balanced portfolio. Extreme portfolios don’t make much sense.

But it does not mean that the worse things are, the more Roches we are going to have. It’s just the other way around. The worse things get, the less Roches we’re going to have. What happens is that these types of companies are going to help us get through the road. The more deteriorated the environment, the more attractive cyclical companies will become. We identify companies with a deep value, such as CIE or Gestamp, which are not far from a very complicated situation.

But what is the point of a part of the portfolio being in companies that are perfectly recognizable to any investor?

A portfolio has to be well diversified in case a complicated situation arises. We need a portfolio where one of the legs is cash-generating companies, without exposure to possible errors that take it away. In our concept of portfolio construction, Roche fits perfectly.

Portfolio construction is not simply selecting good companies, but how you incorporate them, the weight you assign to them, not depending on a single sector, because we are going to make mistakes, so we cannot make the profitability of the portfolio depend on a few companies. That’s why we like to combine good companies at reasonable prices and reasonable companies at good prices. If we only selected companies, we would be analysts and not managers.

How strong is buying a brewer like Unibrew, which is smaller than ABInBev?

The case of the Danish Unibrew is a very clear example of things that we are identifying. It is true that it does not have the size of Anheuser, obviously, but there are many sectors in which you do not have to look at size, but rather how you compete. And in many sectors you don’t compete globally, but locally. And they are number two in distribution where they are present (Baltic countries, France). The main shareholder is a foundation, which has a longer time horizon than the management teams.

This company operates in a conservative manner, thinking about the long term. They have a very high market share and quite powerful distribution contracts, because they have agreements with Pepsi and Heineken. In distribution, size at the local level is everything, because you gain in efficiency if you are able to fill the trucks,

What kind of ratios do you offer?

Normally, these types of companies where the brand is less relevant tend to be listed at a discount compared to the big brands. It has good ratios locally. They have powerful brands, but in their area of ​​influence. The multiple is important, they are at a PER of 12-14, but we must bear in mind that the PER is a short-term multiple. And investors don’t see it as having interesting competitive advantages, but compared to other branded brewers it’s a fantastic company.

JDPeet is just the opposite: world leader, branded. What is the investment thesis?

Behind this company is the Reimann family, who started with a cafeteria and have been growing. They also merged Mondelez’s coffee business. Everyone thinks of the big coffee makers, but then you find a firm like this that handles 8% of the global coffee that moves in the world. They have the brand and the volume. Its positioning is global and quite important. If there is someone who has a local brand that wants to make a global distribution, they should do it through them.

TGS Nopec sells seismic data…

It is a very well managed company, throughout its history. They have an extraordinary asset, because they analyze photographs of underwater soil for oil extraction companies. And they analyze the type of soil, the magnetism of the area and the risks of seismic movements. The sector has gone from having 40 companies to having 12 because they have gone bankrupt or have become too small. They have a tight size and are not very capital intensive. If the price of oil goes well, they are going to get a lot of jobs. If it’s not going so well, because they don’t have fixed assets, they can go for long periods of time without getting much income. If you have to have exposure to the energy sector, it is one of the companies that can make sense.

How do you see the general tone of the oil sector, when we are heading towards a world recession and its price is above 100 dollars?

There are a lot of factors that we don’t control in the economy, so positioning the portfolio based on what oil can do doesn’t make sense, because we don’t know if the expansionary fiscal or monetary policy is going to prevail, the war or OPEC. There are so many things that we don’t control that making directional bets on whether one thing or the other will happen doesn’t make sense.

On the part of industrial companies they prefer chemical ones. Why do they like this sector and, in particular, Brentag and ?Univar?

In the case of Brentag, the thesis is corporate governance and its positioning. It is the largest distributor of chemical products in Europe. If you want to buy 1,000 liters of any chemical for industrial processes, you have to turn to Brentag. That distribution capacity is worth a lot. The value of the asset is difficult to replicate. They also have products with higher added value, and the relationship they have with customers is quite intimate and allows them to build another barrier to entry that makes long-term returns very consistent. What we are not going to do is bet on something cyclical for the mere fact that it has fallen a lot, we have to be sure that we are going to generate consistent returns over time.

In neither of them is there a particularly interesting remuneration policy…

What you have to see is how much it generates and how it is distributed. There are many times that you are not generating dividends because you are reinvesting in the business, and we think it is fantastic if it is reinvested well. There are times when companies’ capex is quite high. That is not going to come in the form of a dividend in the short term, but it is going to flow in the form of growth because normally those companies are going to grow significantly.

A well-known Spanish value manager assures that he cannot conceive of thinking about returns that are not 15% annualized for the next few years with the portfolio he currently has. Are we at such a value moment as to ask for a loan to invest or is it excessive?

It is true that when you see the behavior of the stock market, it can seem extremely cheap, but you have to put it in context. In recent years the market has priced multiple times that we were entering a recession, and that is what is being discounted now. What happens is that when you really go into a recession, and I don’t know if we’re going to go in or not, some problems start to appear in areas where we didn’t see them. And there are many open fronts. Thinking in the long term, which for us is a minimum of five years, the value part of the portfolio can be above 10% and the highest quality part, above 7%, but we must not ring the bells on the fly because we can still have complicated situations. We have been with monetary stimuli for more than ten years and this is going to be restricted.

Soon we are going to have fairly significant rises in the cost of mortgages, that is going to have an impact. And I’m not sure if the market is already pricing in a slowdown in this very important segment. There are many governments that have been financing themselves cheaply and the indebtedness is heavy. The cost of energy is skyrocketing. Therefore, speaking of returns above 15% seems a bit exaggerated.

What is the degree of conviction on the part of the growth portfolio, taking into account the moment of the market?

Growth is one of the parts we look at when we analyze a company. It is important but it is not everything. Today in all sectors we are able to find suitable companies. The definition of growth does not fit us. We all want growth, but the important thing is how it is achieved: is it cyclical or stable? Does the business have threats or not? To focus only on growth is to miss an important part, because it is more important, for example, corporate governance. We can give in at times when growth is not as much as we would like, but where we do not pass one is in corporate governance.

And in that part of corporate governance, what are the points where they have the most impact?

The best way to see it is with an example. Just as our clients place their trust in Panza Capital because their interest is above everything else, we do the same with the management teams of the companies where we invest. We must be aware that directors have a series of responsibilities towards stakeholders, but we expect them to behave towards shareholders in a responsible manner. For example, it is usually seen in a company where there is a family in the shareholding. Sometimes a management team uses the free cash flow of a company to make purchases of companies that may make sense or simply to enlarge it, without meaning that it will do better.

The use of that free cash flow for us is very relevant. Analyze if they are paying dividends or share buybacks… It makes sense to make small purchases to complement the company geographically or expand its range of products, but buying a company to double its size, you have to analyze it more deeply because that entails risks in which the management team may not be thinking about shareholder value. For this reason, when there is a reference shareholder, the alienation of interests improves a lot.

And that would be the biggest differential point when building the portfolio?

It is very relevant how they use free cash flow within corporate governance. Another is transparency when communicating. It has happened to me to read the report of a 400-page company and at the end not knowing what it does. And in others you understand perfectly how the company evolves and what its drivers are, its organic sales growth, its evolution of margins, costs… One of the best ways to seek profitability is to make sure you don’t lose money and avoid corporate governments in which we have no confidence.

“Rockwool will invest up to 13% of sales”
A theme to take into account within the industrial part, in the opinion of Ricardo Cañete, is that of isolation. “40% of the energy consumption we make of primary energy, that is, of all the energy we use, is to heat and cool buildings. When we want to reduce CO2 emissions, the obvious thing is to improve the heating of houses, but not It makes a lot of sense if you haven’t improved the insulation before. If you insulate the house well, you can save up to 60% of energy consumption,” he says. In line with this, many funds from the European Union are going to be distributed locally to finance home renovations, and one of the most relevant points is insulation, which can be done in different ways.

One way to invest in it is through companies like Rockwool, a Danish company with more than 80 years of history. “They have good corporate governance and they are quite transparent,” he notes. As with other companies that Panza Capital likes, a foundation (Rockwool Foundation, a charity founded in 1981 by six members of the Kähler family, each contributing 25% of their own shares) controls Rockwool. “We like their way of thinking, since it is not to try to optimize profits next year but to try to make a company that lasts over time and is profitable. They do not pay much dividend because they are investing internally everything they they can,” says Cañete. “They are investing 10% of sales and are going to invest up to 13%, which is outrageous,

“Roche has been ahead of all trends”
Within the health sector, one of the names that attracts Panza Capital is Roche, the largest in Europe. When asked why this is the case, Ricardo Cañete explains that his directors have proven “to be from another world and have been able to anticipate all the trends that have occurred in the world of pharmaceuticals.” They bought, for example, the leading company in the genetic development biotechnology segment, GenMark Diagnostics. In terms of pulmonary fibrosis, they have also bought a specific company. “In terms of genetics, they are far ahead of other competitors and have been selling businesses that were not complementary,” says Cañete. In addition, “corporate governance is extraordinary, they have a series of businesses that today are leading, the largest,

It is not the only large company that is recognizable to an investor that draws the attention of Panza Capital. They have also looked, for example, at Accenture, which trades at a PER of 20 times. “At Accenture we see corporate governance and we really like a segment that we call productivity,” says Cañete. “When a company needs to improve or implement digital changes, convert processes that are manual to digital, you look for consulting companies to help with those processes. And normally you are going to hire the leaders, not a small consulting firm that nobody knows, and Accenture is the undisputed leader. Furthermore, he continues, “the brand is capable of attracting talent and that is relevant.”

“We like CIE Automotive and Viscofan”
Although in the Panza Capital product offering there will not be a Spanish stock market fund as such, in order not to be forced to invest only in Spain, two national listed companies do appear on their radar.

One of them is CIE Automotive, within the automotive services segment. Ricardo Cañete explains that “it meets what we ask of a management team and a company. The management team is top, and they have a large diversification by clients”, unlike other comparables such as Gestamp, which is highly dependent on Volkswagen. Regarding Gestamp, he indicates that “it is also a good company, but it has less good attributes than those of CIE. Its indebtedness has historically and consistently been higher, but the way of investing is very similar. They reach an agreement with the suppliers to do product development in the next 15 years.

And the other company that can fit in with Panza Capital’s way of investing is Viscofan. “It has benchmark shareholders who have done things very well, with a long-term time horizon, with very reasonable indebtedness, who have been paying dividends and have repurchased shares… They have done the things that we like in the past,” he describes. In addition, “their assets are very good because they have been reinvesting a lot and have created impressive entry barriers, difficult to replicate, because they have brutal market shares.” On the negative side, Cañete points out that Viscofan has some problems, such as meat consumption being in doubt. “It is true that they are developing other types of vegan products, and they have always been able to find ways out of problems,” he adds.