Luis García, Equity Portfolio Director at MAPFRE AM, participated in the first online roundtable organized by Zona Value, called Adapting to new investment philosophies due to new market disruption. The manager presented the MAPFRE AM Behavioral Fund, a behavioral economics mutual fund whose main objective is to take advantage of inefficiencies caused by the behavior of market participants.
“Over the past three months, all of us investors have mastered how to deal with emotions, and move from first having to control our fears to now having to control euphoria,” García said.
The fund is a pioneer in Europe in using behavioral economics, which is a strategy that aims to integrate assumptions of psychology in order to understand how, as human beings, we make our decisions, in this case investment decisions. “In the investment world, this psychological aspect is almost more important than accounting and numerical analysis. With some basic training, we would be able to distinguish whether a company is worth 10 or 20, but the most complicated aspect is buying that company when it falls to 5, due to fears, as has happened these past few months,” adds García.
During his presentation, the MAPFRE AM manager explained how the organization understands value investing. For García, it is not just about statistical factors or buying companies that are cheap. “We believe that there may be companies trading at higher multiples, and we have many examples in the technology sector, but they are exceptional value investments,” he says. And he justifies this due to their past growth and likely future growth in the next few years, “it is part of its fundamental value, it is inseparable from the company.”
In this sense, he relies on Benjamin Graham’s philosophy and his intelligent investment. In no way did Graham associate the word “intelligent” with a high IQ, as this is probably not really necessary for successful investments. Instead, he was referring to the investor’s ability to study, learn and make intelligent decisions in a constantly changing and challenging environment. “It is important to study companies, to try to understand the business and management that drives them, and thus make an assessment, and this has nothing to do with having high or low multiples,” explains García.
Another layer of Behavioral Economics is added to this value investing strategy. “In our view, behavioral finance is intimately linked with value investing,” he argues. Their management team relies on many sources to generate ideas: “The best ideas often come from observing reality itself, from what we do in our day to day, the services we regularly use, the stores we always visit, reading the news, books or discussions with other investors like today,” he says. After that, and once companies are selected, fundamental analysis comes next, then number analysis, and on to talking to management and, following this, investment decisions are made, but only in those businesses that can be understand well. “We want companies with solid balance sheets, and this situation that we are experiencing right now reinforces that belief (strong cash-generating capacity and little debt),” he adds.
The MAPFRE AM Behavioral Fund has an average of 35 portfolio companies with more exposure to the technology, industrial and consumer industries.