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Cobas Asset Management International Portfolio 2nd-Quarter Letter

International Portfolio

Over the first half of 2019, our International Portfolio posted a positive return of 3.7% versus the +16.2% return obtained by its benchmark index, the MSCI Europe Net Total Return. Since the Cobas Internacional FI fund began investing in equities in mid-March 2017, it has obtained a return of -24.8%, while its benchmark index has obtained a return of +10.7% for the same period.

Clearly this result is not good enough, though we do expect to steadily recover the lost returns thanks to: i) the upside potential; ii) our supreme confidence in that potential; and iii) the fact that the management teams of many of the companies in our portfolio are working to unlock the value of their assets. For instance, Babcock held its first Investor Day for years in early June, at which it clearly explained the quality and worth of its business-es. Further examples include CIR and Cofide, which in March announced their plans to merge in order to streamline their shareholding structure. And others, notably the Teekay group, are also in the process of streamlining their corporate structure.

The main underperformers in the portfolio's results in the quarter were Aryzta (-1.7%), Dixons (-1.2%) and Ensco (-1%), although their negative contribution was partially offset by the positive performance of DHT Holding (+0.5%), International Seaways (+0.4%) and Bonheur (+0.3%). Following the revaluation of these latter compa-nies and those of Euronav and Scorpio Tankers, we have reduced our exposure to the tanker sector.

We added G-III (NASDAQ:GIII) and Kosmos Energy (NYSE:KOS) to our portfolio during the quarter, while also strengthening our position in Golar LNG, Babcock and CIR. In these latter names, we our now more confident than ever in our valuations and that they are now priced at multi-year lows. These acqui-sitions have been largely financed by the total sale of Bollore, Scorpio Tankers, Teva and Frank?s International and by reducing our exposure to Aryzta.

The target price of the International Portfolio, EUR179/unit, implies an upside potential of 138%. This target value is 3% higher than we had in December 2018. Note that this is the natural evolution we should expect from the target value, assuming there are no major changes in the port-folio, as each year companies are worth a little more due to the cash they generate.

We understand that it is hard to trust the green line shown on the chart at times like this. Instead, people tend to focus only on the grey line. You may recall that in our previous letter we pointed out how our target prices are being reached as time goes by, citing as an example what happened to the price of Thales. It is also important to remember that many investment ideas take time to "mature". If they did not require such time, they would almost certainly not be so cheap.

"The big money is not in the buying and selling, but in the waiting" (Charlie Munger (Trades, Portfolio)).

As a result of all this potential and our trust in the portfo-lio, we are invested at 98%, close to the legal maximum. Overall, the portfolio trades at an estimated 2019 P/E ratio of 6.8x, versus 14x for its benchmark index, and with a ROCE of 25%. If we focus on ROCE and exclude shipping and commodities companies, it would be 32%.
This article first appeared on GuruFocus.