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Why these Spanish value stars' flagship fund is 65% in commodities

Spanish boutique AzValor is making a huge value bet on the natural resources sector with exposure to miners and oil companies.

Why these Spanish value stars' flagship fund is 65% in commodities

AzValor duo Fernando Bernad (pictured) and Alvaro Guzman de Lazaro are making a bold value bet on the natural resources sector, with huge exposure to miners and oil companies.

The €985 million AzValor International, FI fund now has 65% of its assets in the natural resources sector.

The fund has returned 37.5% in US dollar terms in three years to 31 January 2019 against an average return of 27.9% in the global equities sector.

The pair, speaking at AzValor's fourth annual investor conference, said that they expect the natural resources sector to deliver 15% nominal annual returns over the next 10 years.

Bernad and Guzman de Lazaro expect these returns to come from a re-rating of the sector which has been punished by investors since 2011.

The International FI fund is now at half the price/earnings ratio of its 2011 level, while the S&P 500 is at 1.6 times more expensive than it was in 2011.

This makes the fund three times cheaper than the US stock market, according to the PMs. ‘When there are companies that have been punished, the better part of the risk is already over.'

All that glitters…

The two biggest exposures of the fund are to the gold and oil sectors, with 17% of the fund in each.

The gold mining index has fallen 85% since its peak in 2011 which is far greater than the 30% fall in the value of gold itself, according to Bernad.

‘We are speaking about a sector that no one wants. The biggest funds in the world consider it uninvestable,’ he said.

One reason he likes the sector is because there is a consolidation process ongoing where the biggest and best players are taking over the smaller players.

‘We think this is very positive but it hasn’t been reflected in markets. This has allowed us to buy the best gold miners in the world at very interesting prices that aren’t reliant on the prices of gold increasing. We own gold miners that we like at gold prices just above what they are now.'

Moreover, gold represents a true source of value, rather than other securities, and it can provide a hedge against inflation, the pair said.

The fund’s biggest exposure is 11% in Peruvian miner Buenaventura, which is valued 70% below its 2011 value.

Just its participation in copper mining company Cerro Verde reflects its stock market value, according to the PMs, which means that they are literally getting ‘free gold’ when buying this company due to its gold assets as well.

They also like the family control of the company which has smoothly navigated the political crises in Peru and has grown organically.

Oil rush

They also have 17% of the fund in the petroleum sector where they have found low-cost producers at 6x and 8x earnings in Brazil and Ghana.

‘In this sector there has been a pessimism that is completely exaggerated. With oil at $65-a-barrel we are buying low-cost producers at 6 times earnings, for example Tullow Oil, which produces in Ghana for $30-a-barrel,’ said Bernad.

Copper, uranium, coal and natural gas make up the remaining 31% of the natural resources exposure.

They own copper producer Grupo Mexico which trades at 6x earnings, as well as Cameco Group in the uranium sector and coal and gas producer Consol Energy which trades at 4x earnings, making it ‘irresistible’ to the pair.

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