Owners manual

- The asset management industry

There is a great amount of academic studies demonstrating that most investment funds “do not deserve the fees they charge”. In other words, such funds are not able to outperform their respective benchmarks.

May we highlight amongst others the one elaborated by Pablo Fernández, professor at IESE, on the performance of investment and pension funds in Spain. In summary, during the 2000-2015 period we find out the average annual performance of investment funds (+1.90%) was lower than investing in 15-year Spanish government bonds (5.40%) or investing in Spanish IBEX 35 Index (4.62%). Only 18 out of the 632 funds with 15 years of history outperformed the yields of the 15-year government bonds, only 27 outperformed the returns of IBEX 35 and up to 82 had negative returns.

Many reasons explain these results, the most common being reputational risk, also known as the fear of losing your job. The main consequence is the proliferation of index funds or linked to the main benchmarks. Broadly speaking, a portfolio manager will tend to make low-risk decisions, commonly accepted as “little further away from the benchmark”, fearing to obtain much different results to the crowd. The consequences of a bad result are less painful when such result is shared with other people.

This result is the cardinal point of the supporters of the efficient market theory, which in summary comes to confirm the impossibility of systematically outperforming the market, since all relevant information is instantaneously incorporated therein.

It is true that it is very difficult to systematically outperform the market, both theory and evidence prove it, but it is not impossible. In fact, there is also evidence the other way around.

There is a small percentage of portfolio managers, generally below 15%, which are able to systematically outperform the market in the long term.

Warren Buffett is possibly the greatest exponent that corroborates this thesis. His performance in the last 48 years (1965-2015) proves it, with an annualized return of +20.8% versus +9.7% of S&P 500.

But it is not the only one as there are other great investors which have also been able to achieve similar results. Buffett himself honored some of them in a talk given in 1984 at the University of Columbia titled “The Superinvestors of Graham-and-Doddsville”, commemorating the 54th anniversary of Benjamin Graham’s “Security Analysis”.
Walter Schloss, Tweedy, Browne, Bill Ruane, Munger, Rick Guerin or Stan Perlmeter were amongst the featured investors at such conference.

More than 30 years later many of them are still doing as good, along with other reputable investors such as: Seth Klarman, Howard Marks, Peter Lynch or Jean Marie Eveillard.

They are few but consistent, and the common denominator of them all is their philosophy based upon value investing.

At Magallanes we are loyal followers of such philosophy, we understand and support there is no other way of achieving consistent returns in the long term.

Therefore, it is our task to recommend the investing public to procure investing in strategies in line with such principles.


- Why invest in magallanes

In general, the quality of portfolio management by the asset management industry has been below the expectations of most investors.

It is frequently the case that many of those investors do not exactly know the type of fund they have bought, the portfolio manager in charge of their investments or are not clear about the management fee they are paying. Sometimes they can even be invested, without being aware, in investment strategies not in line with their risk/return premises.

The result of the foregoing is unhappy clients, with products they do not want or they do not even understand.

The main reason is the lack of alignment of interests between portfolio managers and investors. In most occasions the management activity is driven more by commercial criteria than by purely investment criteria. This problem will last in time as long as the industry remains dominated and controlled by large financial groups, whose business strategies are based on the massive sale of financial products.

At Magallanes, our clients come first.

At Magallanes we manage the money of our clients as if it were our very own; in fact, a significant part of our savings is invested in our funds. We co-invest with our clients.

We are fully committed with the quality of our management which prevails over size. Given the moment and depending on the conditions of the market, such commitment could lead into a soft or hard closing of the strategies managed.

We treat our clients how we would like to be treated ourselves: with dedication, transparency and responsibility.

Magallanes is an equity-asset management company with value investing philosophy, where our main goal is to preserve and increase the capital of our clients generating higher returns than the market in the long term.

Long term, patience, continuous work and effort are our identifying marks of our day to day.

The main hallmarks of our philosophy are:

 – Co-investment with our clients
 – Skeptical about benchmarks, sectors and size
 – Focused on the selection and deep understanding of companies
 – High conviction of ideas, concentrated portfolios, low annual rotation and daily liquidity
 – We buy cheap businesses, whose value is above its market price. We look for high margins of safety
 – Investors, not speculators
 – We do not try guess nor predict the future
 – Patient and disciplined managing portfolios in a transparent, simple and honest way. We do not use derivatives nor complex products
 – We avoid both extreme risk and leverage, our priority is to preserve capital


- Considerations to take into account

Our investment horizon is for the very long term, investing in Magallanes demands high doses of patience.

We invest in stocks, an asset which historically tends to fluctuate in a severe form. A calm emotional temperament is required.

Value investing outperforms any other investment strategy in the long term. Nonetheless its behavioral pattern sometimes produces worse results than the rest both in periods of market euphoria and at the end of bull markets.

We may look boring. Low portfolio rotation and absence of popular stocks.

We do not pretend to generate market opinions nor do we elaborate economic predictions; we read, study and analyze the investment environment in search of cheap companies.

We do not invest if we do not find investment opportunities.

We have to be prepared to invest at the highest levels of market pessimism.