“At MAPFRE AM we make long-term investments in businesses. We don't speculate”

Interview with Manuel Rodríguez López de Coca, Equities Manager at MAPFRE AM

1.- You have been the Equities Manager for Collective Investment Institutions and Pension Funds since 2018. Can you give us some details about your functions at MAPFRE AM?

My main role is to coordinate the investment team and ensure that we have the best possible conditions to make investment and disinvestment decisions when it comes to CIIs and Pension Funds, taking into account both financial and non-financial factors.

2.- You studied industrial engineering. Why did you decide to go into the world of asset management?

Since I was a child, as early as first grade, this world of share prices and numbers attracted my attention. Right after finishing university, and while I was doing my final project on a cheese factory, I entered this world and I didn't want to leave.

3.- When analyzing companies, what criteria or methodology do you use and what factors would lead you to conclude that a company may be an attractive security for the portfolio?

The most important criterion we use is common sense. We analyze the company in as much detail as possible, to the point of considering factors such as its future owners. Also, we have to make calculations with a set of variables that will allow us to understand it and thus determine whether it is a quality company that can keep up a high return on capital employed; whether its business is difficult to replicate; whether it does not require significant leverage, etc., factors that we believe make a company an attractive security for the portfolio.

4.- The end of the year is now approaching. What is your assessment of 2022 for the equity markets and what do you expect for the year ahead?

From a general perspective, I believe that the markets this year have reacted harshly to the reversal of a number of trends that investors thought were medium to long-term, such as:

i) a change in monetary policy dynamics after the crisis, from a very expansionary stance towards normalization.

ii) the slowdown in globalization: the war is causing structural changes in trade relations. In general terms, we can speak of the beginning of the end of globalization, which had brought with it a generalized deflation due to cost reduction. It will now be gradually replaced by a regionalization of trade and will involve an inevitable rise in costs, since production will no longer be decided solely on the basis of economic criteria, but will be increasingly influenced by geostrategic factors.

iii) a more challenging geopolitical context, China-Taiwan and China-U.S. relations, Russia-Ukraine-Europe, etc.

The main driver of the poor stock market performance is higher than expected inflation, which in turn has led to a more aggressive tightening of monetary policy. Equities have reacted mainly through a decrease in valuations, Per, Price to sales, etc., and not so much through a decrease in companies' earnings per share. That is, the sharp and surprising rise in inflation, a larger and faster than expected rise in interest rates and bond yields, and investors' expectation that profits will ultimately decline (even if they have not yet done so) have led to the significant drop in risk asset valuations this year.

5.- It is assumed that the Christmas season might provide a good indicator of consumption. What are your forecasts and what impact might it have on the market?

Of course, any indicator that sheds light on the big question the market is asking, whether there will be a recession or a soft landing in 2023, is important.

6.- Which sectors would you say are likely to benefit and which ones harmed in this change of cycle?

We think that there are certain companies that will be adversely affected by what I mentioned earlier about the end of globalization; for example, we must be especially careful with those that are highly dependent on production in China.

While the long-term outlook for China is challenging, given geopolitical tensions and negative structural growth, its reopening may be a significant near-term opportunity. From a sector standpoint, it will depend on the macro performance in 2023, hence our efforts to seek out quality companies that are theoretically better protected.

7.- At MAPFRE AM, we are committed to investing in ESG criteria. What progress are we making in this area?

ESG criteria, as I mentioned in the first question, are already part of our investment methodology. To put it simply and straightforwardly, companies that meet the sustainable challenges will survive; those that do not will have a more uncertain future and will tend to disappear.

8.- Do you believe that active management has provided more value during this difficult year?

Two concepts in the same question that I would like to separate. It makes no sense to limit stock market performance considerations to one year. We buy businesses, and we don’t speculate with shares; also, active management is fundamental to add value to the investments we make.

9.- Are you a fan of any stock market guru in particular that you look up to or follow?

I’m not a fan of any in particular, but there are several whose writings I consider worthwhile: Aswath Damodaran, Terry Smith, and John Hussman.

Hobbies:

Sailing; going out with Hípico to fish, going on a journey, or simply testing myself in difficult sea conditions.

A dish:

T-bone steak with french fries, peppers, and a good wine.

A city/country:

Any city in Spain. Bilbao, San Sebastian, Gijón, Oviedo, Coruña, Madrid, and so on.

A musical group:

I would say Los Secretos, Joaquín Sabina, but lately I can't help but enjoy listening to Manuel Turizo, Quevedo, Bad Bunny, and others.