Our investment philosophy is based on the analysis of the Return on Capital Employed (ROCE) and its sustainability. A well-diversified portfolio of quality companies is the best approach to consistently beat the market in the long term.


RETURN ON CAPITAL EMPLOYED (ROCE)

  • Value creation and Growth: Investing in growth will create value only if the Return on Capital Employed is higher than the Cost of Capital (ROCE > CC).

ROCE = EBIT x (1-t) / Capital “really” Employed

  • Capital "Really" Employed: Our approach is based on the asset side of the balance sheet, as it is the best way to get the “real” return (without financial leverage) of any business. It is the set of assets employed in the core activity of the company.

     CORE FIXED ASSETS + INTANGIBLES EX-GOODWILL (i.e. software, patents, etc.) + WORKING CAPITAL

    • Sustainability: Existence of sustainable barriers to entry (i.e. brands, patents, high market shares in a low margin industry, differential human capital, etc.). Reduced exposure to technological or regulatory changes, structural trends, new materials, etc. 
    • Valuation: A priori there are not absolute levels of traditional multiples (P/E, EV/EBIT, etc.) to differentiate between expensive and cheap. The target multiple of each company depends directly on its sustainable ROCE over the medium term. Therefore, the best way to determine the target price of each stock is the relationship between ROCE and EV / CE. 


    VALUE SEARCHING

    • Analysis of historical data: Analyzing the past is the best starting point to predict future returns. It is convenient to analyze a wide period of 5 to 10 years to cover the complete economic cycle. A company with high and sustainable ROCE means good quality business, as well as a growing adjusted BPA means creation of value for the shareholders.
    • Quality of the top management: The historical capital allocation is the best indicator of the top management skills. The proper reinvestment of the retained benefits is the key to guarantee the ROCE sustainability.
    • Capital structure: The smaller the leverage, the better the ROE over a medium term (M&A, increase dividends, buybacks, etc.)   


    HOW TO CREATE VALUE DURING THE CYCLE

    • Best in class: Businesses with high barriers to entry (leading brands, high know-how, unique assets, high market share in low margin distribution businesses,..)
    • Structural growth: High quality growth even in the through of the economic cycle.
    • Industries in consolidation: EPS and ROCE improvements even without organic sales growth that justify valuation multiple expansion. 
    • Laggards: Companies with lower returns than their peers but with a short-term catalyst that enables the improvement of the ROCE to the levels of its industry.


    INVESTMENT UNIVERSE