Two Decades of Finding European Value Omaha, May 2012

Two Decades of Finding European Value

Omaha, May 2012

ABOUT US

Incorporated in 1987. Shareholder structure: 100%-owned by Acciona Group (Quoted and Ibex-35 member). Three fund managers and three analysts (one based in Shanghai). Fund managers: Profit sharing agreement and 100% of financial assets invested in the funds.

Spain’s leading independent fund manager €5,7Bn AUM and 37,000 customers (95% equities).

Focused on returns not volumes under management. No marketing or distribution agreements.

Investment philosophy based on “Value Investing”. Long only. No leverage. No derivatives. No activism.

Two portfolios: 20% AUM Iberian (Spain and Portugal) and 80% AUM Global (mainly Europe).

BESTINVER: OUR PERFORMANCE

* Returns for BESTINFOND to 31/12/1997 and B. BOLSA from 01/01/1998* BENCHMARK is a weighted average of IGBM of IGBM (70%) (Madrid Stock Exchange Index) and PSI (30%).* All Bestinver returns are expressed as net, after expenses and commissions.

BESTINVER SPANISH EQUITIES vs. BENCHMARK

COMPARATIVE PERFORMANCE

YEAR BESTINVER IBERIAN EQUITY BENCHMARK Relative perf.

1993 43,91% 46,67% -2,76%

1994 5,28% -11,70% 16,98%

1995 10,33% 12,30% -1,97%

1996 41,01% 38,96% 2,05%

1997 41,01% 42,22% -1,21%

1998 29,03% 37,19% -8,16%

1999 -10,98% 16,22% -27,20%

2000 13,91% -12,68% 26,59%

2001 21,22% -6,39% 27,61%

2002 8,25% -23,10% 31,35%

2003 38,31% 27,44% 10,87%

2004 29,97% 18,70% 11,27%

2005 27,07% 20,56% 6,51%

2006 37,36% 34,49% 2,87%

2007 4,84% 5,60% -0,76%

2008 -35,16% -40,56% 5,40%

2009 34,56% 31,37% 7,33%

2010 3,68% -15,24% 18,93%

2011 -12,66% -16,23% 3,57%

30/03/2012 1,55% -3,80% 5,35%

Return since 1993 1406,51% 266,93% 1139,58%

Average annual return 15,16% 7,00% 8,16%

* Returns for BESTINVER INTERNACIONAL* MSCI = Morgan Stanley global stock market index* All Bestinver returns are expressed as net, after expenses and commissions.

COMPARATIVE PERFORMANCE

BESTINVER INTERNATIONAL EQUITIES vs. MSCI

YEAR B.GLOBAL EQUITY MSCI World Index Relative perf.

1998 -14,13% 16,51% -30,64%

1999 47,87% 44,75% 3,12%

2000 18,39% -8,24% 26,63%

2001 16,59% -13,36% 29,95%

2002 -26,95% -33,02% 6,07%

2003 32,70% 8,83% 23,87%

2004 19,01% 4,71% 14,30%

2005 30,47% 23,95% 6,52%

2006 24,05% 5,51% 17,98%

2007 -4,61% -3,41% -1,20%

2008 -44,71% -39,08% -5,63%

2009 71,85% 23,02% 48,83%

2010 25,75% 17,16% 8,59%

2011 -10,07% -4,53% -5,54%

30/03/2012 9,36% 8,15% 1,21%

Return since 1998 266,83% 17,21% 249,62%

Average annual return 9,55% 1,12% 8,43%

AUSTRIAN SCHOOL OF ECONOMICS

• Economic general structure

• Human behavior

• Non-predictable consequences in stocks

• Euphoria / Panic

GOOD PRICE DUE TO:

• Shareholder structure (family owned)

• Type of shares (preferred, non-voting, etc.)

• Geographical reasons: business and

shareholders in different zones

• Long term projects (impatient market)

• Small caps (unnoticed by the market)

• Asset organization (Holdings..)

COMPANIES WITH:

• Competitive advantage:

• High ROCE

• Sustainable

• Correct attitude with generated cash-flow

TIME

• Patience

• Psychological preparation

• Client education

PHILOSOPHY: FOUR KEY CORNERSTONES

THE AUSTRIAN SCHOOL

Practical points from the school Austrian “concepts” Aplications

Markets are never in equilibrium:

o Excess returns are squeezed by investor down to the opportunity costs. Exceptions: sustainable competitive advantages.

o No returns: Capital leaves the industry, to search for better profitability.

Profit from these adjustments. Search for sustainable competitive advantages.

Growth is based on division of labour (via productivity) and savings to finance it.

Growth in China is sustainable.

Manipulation of interest rates by governments lead to overinvestment and bubbles. USA, Spain, Ireland, etc.

Avoid those countries that are not tackling overinvestment and lack of real savings.

The natural state of an economy is deflationary: Thanks to productivity increases we produce more goods with the same amount of money every year. But governments do not like deflation because they are leveraged.

Most probable outcome is inflation. The extent of which will depend on the confidence in each currency.

Lack of anchor currency (gold or similar) implies a permanently depreciating currency.

Avoid monetary investments. They do not protect from currency depreciation additional risk.

Own real assets (at reasonable prices): Equities, Commodities, Real Estate.

Fuente: Capital Economics

Estimated GDP growth for China in 2012 is 7x higher than the potential combined contraction for the southern European countries

(1) World Bank, current figures.(2) IMF growth estimate.

(3) Bestinver growth estimate. (4) Current figure at close of 2011.

8

$bn 2007 (1) 2011est (2) 2012est (2) 2015est (3) Ch. 2012est

Italy 2,116 2,060 2,014 2,042 -45

Spain 1,442 1,417 1,393 1,417 -24

Portugal 232 224 217 223 -7

Greece 305 283 275 275 -8

Total 4,095 3,984 3,899 3,958 -85

China 3,494 7,301 (4) 7,900 10,025 599

ECONOMIC SCENARIO: WHAT SHOULD WE BE LOOKING AT?

Average productivity growth of 4% from 1990 to 2008 (*)

Growth is increasingly driven by internal development

Exports net of imports now hardly contribute to economic growth:

1% in 2011

Outside the state-owned sector (30% of the economy) it is the world’s

most flexible and dynamic market.

Despite the surge in investment, the capital stock per capita is not even

15% of Korea’s.

* Source: The Economist , 14 November 2009

China’s rail network is smaller than America’s was in 1880China’s rail network is smaller than America’s was in 1880

HOW CHINA GROWS:

Very high savings rates of >50%; for families this is 20%

Financial system has very little borrowings:

• Loans to deposits ratio: 0.66 (Spain 1.40)

• In the last Chinese banking crisis (2000), this figure was 0.90

• Reasonable interest rates: Mortgages (6%), and account for a mere

13% of loans. Borrowing from banks to buy land is not allowed.

Increase in property prices similar to that of available income: 10% a year.

Little government debt; including local bodies, this is 75% of GDP. The

value of state enterprises is estimated at over 100% of GDP.

CEO of Coca-Cola: “It is easier to do business in China than in the USA”(FT 26/09/2011)

CEO of Coca-Cola: “It is easier to do business in China than in the USA”(FT 26/09/2011)

HOW CHINA GROWS (II)

EUROPE VS. USA

Europe is a less efficient market:

Banks control distribution networks. Different goals Asset gatherers. Less developed financial culture. Fewer value investors.

Significant public family-controlled companies:

Long term view. Major shareholders supervise management directly. Organic growth, with prudent M&A. Less attention from investors. 80% of our investments are in family-controlled businesses.

Technical factor: Most of the European Funds are quasi tax-exempted within the Fund. Easy to rebalance portfolios.

PORTFOLIOS MAIN FEATURES

Global Portfolio Companies based mostly in Europe

Average ROCE: 48.0% Earnings Yield: 23.0% P/E: 7.1x Upside: 110%

Sales Breakdown

Europe: 40.2% - Northern Europe 25.9% - South Europe 14.4% USA 17.0% UK 11.8% Switzerland 5.1% Emerging markets 20.2% Cash 5.8%

Iberian Portfolio Average ROCE: 20.0% Earnings Yield: 12.0% P/E: 6.3x Upside: 138% Sales Breakdown:

Spain 20.9% Portugal 19.8% ROW 54.2% Cash 5.2%

TWO EXAMPLES OF INVESTMENT

BMW PREFERRED SHARES

BMW P&L BN€ 2011 2012E 2013E Revenues 63.2 66.4 71.7 % inc 5 8 Ebitda 11.6 13.5 10.4 % inc 17 -23 Ebit 7.5 9.2 5.9 % inc 23 -36 Margin 11.8 13.9 8.2 FCF 5.2 5.8 3.5 % inc 10 -40

2013: - We use a normalized operating profit of 8.2%.

Company guidance is 8-10%.

- Operating profit in 2012 is expected to be 14%.

BMW Ordinary: Price € 67.4 Market Cap, bn€ 44.1 Net Cash 15.1 BV Financial Division 7.9 Non core assets 8.1 Adj Provisions & LT liabilities 6.9 Adjusted Net Cash, bn€ 24.2 EV 2013e, bn€ 19.9

2011 2012 2013e

Price/Free Cash Flow 5.8x 4.1x 5.7x

BMW Preferred: Price € 43.2 Market Cap bn€ 28.3 EV 2013e, bn€ 4.1

2011 2012 2013e

Price/Free Cash Flow 3.0x 1.5x 1.5x

Página 15

BMW PREFERRED SHARES

Why Preferreds:

- Drawbacks: Liquidity 75.000 shares/day. No voting rights.- Slightly higher dividend by company statutes.- Employees incentive plans are done through

preferreds.- Average discount of 5 largest german stocks

with dual shares: 4%.

Luxury Stocks: Price/Free cash flow 2012 2013

Burberry 22,8 x 19,9 x Coach 21,3 x 19,1 x Richemont 23,6 x 18,9 x Hermes 63,1 x 42,8 x Luxottica 23,4 x 20,8 x LVMH 22,1 x 18,0 x PPR 14,7 x 10,9 x Prada 30,1 x 21,3 x Ferragamo 22,4 x 22,1 x Tiffany 38,7 x 22,2 x Tod's 22,5 x 18,1 x Average 27,7 x 21,3 x Source: Factset

FORD Market cap, bn€ 33,5Adj Net Cash 1,7EV 2013e 31,7

2011 2012 2013Free cash flow 4,1 4,3 4,9

Price / Free cash flow 8,1x 8,2x 6,5x

EXOR

Holding controlled by the Agnelli family, founders of Fiat

€ mn Main investments Value at market price Bestinver Value

Fiat Industrial Case New Holland (agricultural and construction equipment), Iveco (trucks and commercial vehicles), FPT Industrial (engines and transmission systems).

2.948 4.622

Fiat Auto Cars (Fiat, Chrysler, Alfa Romeo, Lancia, Ferrari, Maserati), Fiat brand commercial vehicles and components.

1.593 3.259

SGS Global leader in verification, inspection, control and certification activities 1.662 1.696

Cushman & Wakefield Largest privately held company for real estate services 417 417*

Alpitour Largest integrated Italian tourism group 240 240

Sequana Leading European group in the distribution of paper and packaging products 59 59

Net debt and others Juventus, Banca Leonardo, etc. 201 201*

Total value 7.119 10.494

Value per share € 31,3 € 46,2

Exor preferred share price (Milan Stock Exchange) € 15,5 € 15,5Upside 102% 198%

* Book Value

APPENDIX

Página 18

THE AUSTRIAN SCHOOL

Essential differences between the Austrian and neoclassical schools

Points of comparison Austrian paradigm Neoclassical paradigm

1. Concept of economics

(essential principle) A theory of human action, understood as a dynamic process (praxeology).

A theory of decision: maximization subject to restrictions (narrow concept of “rationality”).

2. Methodogical outlook Subjectivism Stereotype of methodological individualism

(objectivist). 3. Protagonist of social processes Creative entrepreneur. Homo economicus. 4. Possibility that actors may err a priori, and

nature of entrepreneurial profit. Actors may conceivably commit pure entrepreneurial errors that they could have avoided had they shown greater entrepreneurial alertness to identify profit opportunities.

Regrettable errors are not regarded as such, since all past decisions are rationalized in terms of costs and benefits; entrepreneurial profits are viewed as rent on a factor of production.

5. Concept of information Knowledge and information are subjective and

dispersed, and they change constantly (entrepreneurial creativity); a radical distinction is drawn between scientific knowledge (objective) and practical knowledge (subjective).

Complete, objective, and constant information (in certain or probabilistic terms) on ends and means is assumed; practical (entrepreneurial) knowledge is not distinguished from scientific knowledge.

6. Reference point General process which tends towards

coordination; no distinction is made between micro and macroeconomics, each economic problem is studied in relation to others.

Model of equilibrium (general or partial); separation between micro and macroeconomics.

7. Concept of “competition” Process of entrepreneurial rivalry. State or model of “perfect competition”. 8. Concept of cost Subjective (depends on entrepreneurial alertness

and the resulting discovery of new, alternative ends).

Objective and constant (such that a third party can know and measure it).

Source : Bestinver

Página 19

(continued)

Source: “The Austrian School”, Jesús Huerta de SotoOther sources: Mises Institute (www.mises.org)

Points of comparison Austrian paradigm Neoclassical paradigm

9. Formalism Verbal (abstract and formal) logic which introduces subjective time and human creativity.

Mathematical formalism (symbolic language typical of the analysis of atemporal and constant phenomena).

10. Relationship with the empirical world Aprioristic-deductive reasoning: radical separation and simultaneous coordination between theory (science) and history (art); history cannot validate theories.

Empirical validation of hypotheses (at least rhetorically).

11. Possibilities of specific prediction Impossible, since future events depend on entrepreneurial knowledge which has not yet been created; only qualitative, theoretical pattern predictions about the discoordinating consequences of interventionism are possible.

Prediction is an objective which is deliberately pursued

12. Person responsible for making predictions The entrepreneur The economic analyst (social engineer).

13. Amount of “human capital” invested A minority, though it is increasing The majority, though there are signs of dispersal and disintegration.

14. Type of “human capital” invested Multidisciplinary theorists and philosophers; radical libertarians

Specialists in economic intervention (piecemeal social engineering); and extremely variable degree of commitment to freedom.

15. Most recent contributions Critical analysis of institutional coercion (socialism and interventionism).

Theory of free banking and economic cycles. Evolutionary theory of (juridical, moral)

institutions. Theory of entrepreneurship. Critical analysis of “social justice”.

Public choice theory. Economic analysis of the family. Economic analysis of law. New classical macroeconomics. Economics of information. New Keynesians.

16. Relative position of different authors Rothbard, Mises, Hayek, Kirzner Coase, Friedman, Becker, Samuelson, Stiglitz.

THE AUSTRIAN SCHOOL

BESTINVER C/ Juan de Mena, 8 - 28014 Madrid (Spain) +34.91.595.91.00 [email protected] www.bestinver.com

• This document has been prepared by Bestinver Gestión, S.A. SGIIC for informational purposes only and can be in no way considered an offer to participate in its investment funds. The information contained herein was compiled by Bestinver Gestión, S.A. SGIIC from sources it believes are reliable. However, while appropriate measures have been taken to verify its accuracy, Bestinver Gestión, S.A. SGIIC in no way guarantees that it is accurate, complete or up to date.

• All opinions and estimates included in this document reflect the best judgment of Bestinver Gestión, S.A. SGIIC as of the date they refer to and may be changed without prior notification. All opinions issued herein are general in nature and do not take into consideration individual specific investment objectives or financial circumstances.

• Under no circumstances can Bestinver Gestión, S.A. SGIIC, its managers, employees or authorized personnel be held responsible for any damage resulting, directly or indirectly, from the use of the information contained within this document. Information regarding past returns does not in any way constitute a promise or guarantee as to future performance.

• All Bestinver returns are expressed as net, after expenses and commissions. They are denominated in euros.• Share redemptions and transfers of securities held for less than one year are penalised with a commission • Source of Bestinver return and fees data: BESTINVER• Source of sector return and fees data: INVERCO• Source of national and international rankings: BESTINVER. Bestinver funds, third-party mutual funds and equity index returns

(Madrid SE, IBEX, S&P 500 and MSCI) are calculated based on the closing level on the date appearing at the bottom of this page.

• Source of fund P/Es: BESTINVER• Source of market P/Es and Argentina Charts: Bloomberg• Source of Value Investors: “The Superinvestors of Graham-and-Doddsville”• Sources of Performance of diferent assets since 1800: Jeremy Siegel "Stocks for the long run" Irwin Professional

May 3 - 4, 2012Mammel Hall

Omaha, Nebraska

Two Decades of Finding European Value Omaha, May 2012

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