Michael Morosi, Global equity manager of MAPFRE AM
There is nothing like a crisis to test our resolve and challenge our assumptions. In addition to copious handwashing, we have spent recent weeks doing considerable reflection on our investment process and taking prudent action that will improve the long-term quality and performance of our portfolio.
The MAPFRE AM Good Governance Fund invests in the top 1% of business leaders globally. With a concentrated portfolio of 30 companies and a universe of over 3,000 companies to choose from, we can afford to be selective of the people with whom we invest.
We define “good governance” across a number of metrics. First, we expect the board of directors to be excellent leaders with an established track record of success in their industries. We also expect boards to value on opinions and experiences that are representative of the diversity of their customer bases. We expect management to deliver exceptional performance relative to their peers on the metrics that matter. Finally, we expect the interests of all key decision makers are firmly aligned with ours as investors and members of the broader community.
We have found this focus on governance as the primary thrust of our ESG analysis has served us well during this exceptional period. Below we highlight some of the ways we have used recent volatility to increase our investments in these great companies.
Confidence to Buy the Dip
Long-term investing requires one to combine confidence with humility. Investors must simultaneously remain steadfast in the belief that executing our investment process will result in superior long-term results, while having the humility to acknowledge that we are acting amid uncertainty and the odds of making a “mistake” are high when measured on a short-term basis.
We initiated positions in three new investments in the weeks leading up to the COVID-19 outbreak. Each instance involved a company that we had been following for months, if not years, waiting for an opportune time to invest. Each company is also levered to long-term trends around electric vehicles (Valeo), Internet of Things (Infineon), and electronic payments (Nexi) that will endure well beyond the current epidemic.
As the extent of the COVID-19 crisis became apparent, these companies’ stock prices plummeted from what we had perceived to be attractive valuations to outright fire sales. Had we based our decisions solely on fundamental analysis at a time when operational visibility was – and remains – unprecedentedly low, we may have risked inaction and anchored to our “mistake” of having previously invested at higher prices.
However, our strategy of investing in outstanding people prevailed. Armed with the confidence that these managers are capable of navigating even the most challenging situations, we overcame the prevailing fear and continued building these positions into the heart of the panicked selling in mid-March.
Great Companies on Sale
We also took advantage of the sell off to initiate investments in some of the truly best global brands during rare moments of weakness.
For example, the day after we initiated an investment in Disney, one of the most beloved and best-run consumer companies in history, the company announced they would be closing their flagship theme parks in Florida and Paris. In response to the news, the stock rallied more than 10%.
How is it possible for a stock to rally in light of such bad news? We would postulate that it is because anyone investing in Disney the day before – ourselves included – was acting under the assumption that COVID-19 posed a serious threat to Disney’s Theme Parks business.
In fact, based on our math, we were investing in Disney at a valuation that assumed the Theme Parks business, which generated $6.7B in profits in 2019, was worth nothing. While it may take quite some time, we are confident that Disney’s parks will be delighting families for years to come.
Meanwhile, a franchise like Disney has other options to continue serving its generations of happy customers, including its new and particularly quarantine-friendly Disney+ streaming offer, which has surpassed over 50 million subscribers globally since its launch just five months ago.
The stocks of global leaders like Disney, Amazon, and Salesforce.com, and breakout technology companies like Adyen and CrowdStrike Holdings, rarely trade at a discount. Market dislocations like those that we experienced in mid-March are exactly the time to invest in these great companies on sale.
Going forward, we maintain a high degree of confidence that the global economy will eventually recover from the COVID-19 crisis. However, short-term visibility remains exceptionally low.
Our intention is to position for this eventual recovery while the market remains fixated on the short-term economic impacts of the closures. This means we are inclined to increase our investments in leading companies operating in the more economically sensitive sectors of the economy, whose stocks have been disproportionately penalized recently, including industrials and basic materials.
We already own shares in companies in the United States and Europe that fit this description – like transportation and logistics company FedEx, industrial technology firm Fortive, and family-owned copper miner Antofagasta – and we have a backlog of potential new investments to act on when the price is right.
Our plan remains, as always, to act prudently, with humility, and without compromising on our strategy of investing in only the very best business leaders in the world. There may very well be days or weeks that don’t go our way, but we are emerging from this crisis with even greater confidence in the long-term merits of our investment process and its focus on governance.