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Beginnings
Completing his MBA in 1990, he went to work for Acciona, a big family owned conglomerate in Spain. Initially he was dealing with mergers and acquisitions. He then went on to become an analyst in the group's small investment business, Bestinver. At that time, 90% of the company's investment money was provided by the family and investments were made only in the Spanish market. At this point, when his boss suddenly quit, he was forced to take over the running of the investment business.
Thrown thus into the hurly-burly of things, Francisco managed to learn the fundamentals of investing by himself. He follows the Austrian Business Cycle Theory and is a strict practitioner of the principles of value investing. "Around the same time, I read Peter Lynch's One Up On Wall Street, which described a way of thinking about investing that was exciting and made a lot of sense to me: Invest when no one else is. Keep things simple. Invest only in things you understand. Invest based on normalized earnings. Be afraid when too much capital is going into a sector, and interested when capital is going out and returns can improve. From that, I read everything I could about investing - especially from Warren Buffett and Benjamin Graham - and was hooked," says Francisco Garcia Parames
He managed Bestinver along with Fernando Bernad Marrase and Alvaro Guzman de Lazaro. Bestinver's portfolio consists of 30 Spanish and 50 international companies, including Hyundai Motor, Swatch, BMW, Thales and Schindler.
Investment style and strengths
He is regarded by his peers as a star investor in the Spanish and Portuguese markets, where he introduced the concept of value investing. He invests in companies with strong fundamentals but which are trading below their real values. Today he is one of the biggest money managers in Spain.
He looks for sound companies with strong managements and which trade at reasonable prices. He concentrates on companies that have high free cash flow yield. Eighty percent of his investments go into family owned companies. According to Garcia Parames, he tries to "understand the competitive advantages of a company in order to give us insight into its standard profit for the following year, to which we apply 15%, the multiple which has been the norm of Standard & Poor's for the past 200 years."
Francisco's great strength is his ability to pick the right stocks. Over the years, his investment experience has served to sharpen this vital skill. Unlike many managers, he avoids Exchange Traded Funds, ETFs. He admits that in earlier years his portfolio hardly had any liquidity. Having learnt a bitter lesson during the 2008 Financial Crisis, he has started to pay more attention to maintaining liquidity in his portfolio. Currently he maintains 20% to 30% in liquid stock as a hedge against sudden downward swings. "We don't really have any new names, but we have increased our stakes. For us liquidity is being right about your valuation. If we are right about our valuation, we will always have liquidity," he says.
Results
The results of his unique home grown style of investing shows up clearly in the results that he has achieved ever since he started his career nineteen years ago. Over the last ten years, Bestinfond, the biggest and oldest mutual fund has seen returns of 21.2%. This sterling performance has put Bestinver ahead of even Morgan Stanley, which manages 3.86 billion euros in the Spanish market. To take another measure, the world reference index's accumulated return was 29% in the 1998-2007 period. Francisco's accumulated yield in the same period was a whopping 201%.
Again during the 2008 Financial Crisis, while Fransisco too lost money, nevertheless he managed to stay ahead of the competition. His determination and foresight paid off when he managed to regain his position as one of the top investment advisors in 2009. Over the five years since then, Bestinver returned 41.6%, while the average returns of the global equity investment managers' was 0.4%, the same as the increase in the MSCI World TR Index. Over the same period, Bestinfond delivered 37.7%, even as the European Stoxx index declined 0.4%, and European investment managers lost 2.1%. Recognition for such superb performances came, when in a first, the Norwegian Pension Fund gave him an equity mandate.
Investment Strategy
Fransisco's strategy is simple. He invests in free cash flow companies trading at multiples of around 11 to 12 times. The target price is at about 15 times, which is the long-term average at which most stocks trade. However there are exceptions to this rule. For cyclical stocks the target price is around 13 times while for really good quality companies the multiple is set at 17 times. He focuses on cash flows, yield stability and the Return on Capital Employed, ROCE. According to Francisco Parames: "ROCE helps us understand the competitive landscape of industries, from which we can try to determine the competitive advantages of different businesses. There is no ideal figure for ROCE. It is a moving number from quarter to quarter and from year to year, but we generally look for companies with consistent returns and so we think around 20% is pretty good. The most important thing is to understand the business prospects. Even if the ROCE looks good based on historical trends or in comparison with the business's competitors, it can still be a trap if the business does not have pricing power going forward. For example, if its profit margin is being squeezed by competition or inflation."
To achieve his objectives he has laid out a standard process to follow in choosing and buying stocks.
Analysing the history of the company until the present day History of the sector/competitors Careful examination of the latest 10 years of accounts. Discounted cash flows. Selective screening of data from a variety of sources, e.g. broker research, industry publications, press etc. Broker industry and peer group research. The historic positions of the regulator if it is a regulated business. The history of M&A activity involving the company and its rivals. Study the Return on Capital Employed (ROCE). The identity of shareholders, their role and their involvement in decision-making. Finding out about the incentive system for executives. Listening to what former employees say. How competitors' view its executives. Talk to/meet company managers. Observe how managers allocate capital. Valuation and price target determination.
Factors behind the success
Francisco Parames, attributes his phenomenal success to the following factors. Firstly, he is free to make investments without an investment committee to answer to. His team is fully empowered to take all the investment decisions. According to Parames, patience is a great virtue while investing. "Returns on investments do not always come in the short term, they must be given time. If we find an investment that we consider attractive, and we decide to invest, we maintain the investment for as long as necessary, provided nothing occurs that alters our valuation of the company," he says.
The next factor is having a superb management team which shares the same philosophy and co-ordinates all activities perfectly. Equally, the team is wholly dedicated to the objectives set out and they treat the work as a labour of love. One of the most important things is the complete confidence that the above have engendered in the team. The team hardly ever makes a mistake.
All the above would be futile according to Parames if they did not adhere to a military type discipline regarding the required IRR, while the management team keeps its valuation skills sharp. This iron discipline is what has made Francisco Garcia Parames, a household name in the Iberian markets.
Final Words
"Ultimately, the conditions for success are those of personality and intelligence, as Warren Buffett has stated on numerous occasions," according to Francisco Garcia Parames.
He commends the words of Charlie Munger as relevant for investors: "All I want to know is where I'm going to die, so I'll never go there."
"An investor doesn't need to make personal investment mistakes to find out what doesn't work," explains Parames, "what's needed is to read about others' mistakes and never follow them."
Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.
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Wise Advice: Learn
Francisco Garcia Parames is known as the 'European Warren Buffet', and with good reason. He has been one of the most sought after money managers in the world, managing nearly 8 billion euros worth of assets, until he left the firm Bestinver in 2014. In the 5 years before he left (2009-2014), when European stocks declined 0.4% and European asset managers on average delivered -2.1% return, Francisco Garcia Parames delivered a 41.67% return.