The importance for an Asset Management Company of having a presence in London

Why is there an American, living in London, working with Madrid-based Cobas Asset Management?

7 · 3 · 2018

3 minutes

When I found out Francisco Garcia Paramés (FGP) was based in London in 2013, I was surprised. In retrospect, I shouldn’t have been. Why was I there after all?

Early in my career I worked in Frankfurt, Manila and New York. All cities which have their own charms, but in the European investing world, London is the centre.

Many value investors eschew being in New York or London. Warren Buffet in Omaha is a prime example and there is a long list of others. As communications have evolved, physical location has become less relevant. Nowadays, with a laptop and mobile phone, you can do most of the job from anywhere in the world.

In addition, one could make the argument that keeping independent thought and avoiding the herd mentality is easier when you are not surrounded by other investors, bankers, brokers and all the noise that the market can throw at you. You are also probably asked less about your short-term performance, so you can focus better on the long-term. FGP has certainly done well from Madrid.

I find these arguments interesting to ponder but disagree with the conclusions. Personality and being cognizant of behavioural biases can keep you from following the herd, plus staying in London at the centre of commerce and finance has compelling arguments:

From a historical perspective, an investor needed to be in a financial centre to communicate and even deal in shares. London and New York grew in part thanks to their strong legal systems and deep networks of service providers. Even now, our style of value investing requires intense primary research. London has access to companies, industry experts, conferences, other like-minded investors, jobs, qualified employees, services focused on the financial industry and a plethora of other benefits. It is perhaps the most cosmopolitan city in the world with every nationality represented. You can not only meet management from every country, but also work and socialize with people from all corners of the world. There are excellent flights to most major capitals. I believe this is useful for investing across Europe and the globe.

And with its notoriously poor weather, one is rarely distracted from research by a desire to go outside!

I had first heard of FGP in a few news articles, but it wasn’t until I read about him in a book by Ronald Chan (The Value Investors: Lessons from the World’s Top Fund Managers) that I started following his investments closely. His strategy and portfolio construction felt intuitively right, similar to my own ever-developing style. His portfolio included great family-run companies such as BMW, Dassault Aviation and Schindler, discounted holding companies like Exxor, CIR and Wendel and little gems such as SOL. There was a beautiful mix of unloved names – but most importantly they were all significantly undervalued!

I saw him speak at a London Business School Asset Management conference and it was then that I decided to attempt to meet him.

I recall standing outside the Bestinver office off Grosvenor Gardens in central London waiting to meet him for the first time. I admit I was a bit nervous, as meeting such a famous investor and one of my investing role models was daunting. I lucked into the meeting through a friend of mine at London Business School who knew I was a serious value investor and I was very happy to be given the time to meet such an esteemed figure.

Cobas intends to increase its presence in London in the coming years

In that first meeting, I was impressed by his significant knowledge of companies and his relaxed good humour. He listened attentively and acted as a true Spanish gentleman. I pitched him two stocks:

MTU Aero Engines. A high-quality engine manufacturer with a ‘razor blade’ model of selling engines at little or no profit and making money over the following 30 years from spare parts and services. It was facing short-term headwinds from a slowdown in US defense spending and – because they were selling so many new engines at the time – low margins. The market was very focused on short-term quarterly earnings and punished the stock, providing an opportunity for long-term investors to buy cheaply.

Prime Office REIT.  A distressed real estate company facing the pressures of too much debt and a couple of vacant buildings. Oaktree Capital Management had instituted a reverse merger and capital increase at the company, which provided an opportunity to join the recapitalization at a significant discount to its intrinsic value. The market even provided a couple of opportunities to buy below where Oaktree invested.

After finishing my pitches – and despite my nervousness – I executed my bold plan: I asked him for capital to invest. I recall him looking at me closely. He then said he would think about it. Shortly after he left Bestinver. I stayed in contact, with the occasional stock pitch, and met him a couple of times at conferences in London.

MTU eventually more than doubled and Prime Office was purchased by Alstria Office at a price over 50% higher than the pitch.

Since I started collaborating with Cobas AM, FGP and I still meet in London and visit the management teams of our portfolio holdings such as Aryzta, ICL and Babcock.

Babcock, for example, we have met on several occasions and each time we walk away with a stronger view of the company. The market has put Babcock into the same bucket as Carillion, Capita, G4S and other government contractors, which have suffered cost overruns, aggressive contract accounting and thin margins while competing in highly competitive markets with low barriers to entry. Babcock is the polar opposite with conservative accounting, high margins, strong barriers and risk-sharing contracts. The market misunderstands their exposure to the UK’s Ministry of Defence, ignores their successful growth outside the UK (c.25% of sales) and forgets about their strong orderbook and bidding pipeline of (£18.5 and £12.5 billion respectively). We are happy to own Babcock at 8 times earnings and less than 10 times free cash flow.

Even given Brexit worries, Cobas firmly believes that having a presence in London is very beneficial. In fact, it intends to increase it in the coming years. Brexit has also provided opportunities in our portfolio – how else could we have bought Dixons or DFS at such low prices?