Interview (#1): Javier Acción

Javier Acción is the founder of Acción Inversiones. With 15 years of experience in financial markets and after working at Banco Santander and Barclays, he decides to create an independent financial advisory service in 2014. Javier is a financial advisor to Acción Global FI, a small fund with €17 million under management that invests in high-quality companies with a truly long-term time horizon.

Javier is not only one of the best Spanish investors I know, but he is also a generous, kind and humble person who exudes a passion for investment. Although we have known each other for several years, I have been fortunate enough to exchange ideas and work on a less intermittent basis more recently. I can assure you that his way of thinking and reasoning does not leave anyone indifferent.

I am particularly excited about this interview because part of my family's assets is invested in Javier's fund. Those of us who know him are aware of his exponential development as an investor in recent years and we have no doubt that the future holds nothing but great results for him.

Hi Javier. Thank you for accepting my invitation and stopping by. I know that you are changing your communication policy a bit and adopting a lower profile so I am even more grateful that you can share your thoughts and ideas with me and the rest of the subscribers of this blog.

Thank you very much for the invitation. I am delighted to collaborate with a blog of such quality as Finding Moats.

Could you tell us a little more about yourself and the fund you work for? How did you start investing and what has been your work process and daily habits that have led you to where you are now?

Of course. I first started investing as a private investor the summer before my first year of university, back around 2000-2001. Later, my professional career began in 2006 as a Credit Risk Analyst at Banco Santander – the knowledge I obtained was very useful for the fundamental analysis of the companies in which I invested privately – and later in my spare time helping family and friends. Then, when the crisis hit the banking business in Spain (I had already been working in banking for 7 years and along the way I had switched from Santander to Barclays) I began to consider the possibility of turning my passion into my profession, and combining my job and my studies, I started the process to get certified and all the permits to register with the Spanish National Securities Market Commission as an EAFI (Financial Advisory Company). Finally, with the support of several close people who became clients, I was able to opt out of my job in 2013, I got the EAFI certification in 2014 and from 2015 I began to work as an advisor. Later, in 2016, we were able to turn the private company where I was managing a portfolio as Joint Administrator into an investment fund where I am a Registered Advisor – and that is where the Acción Global project began.

What began as a small portfolio of €600k and 12 shareholders has been growing little by little and today it is a small fund of €17M and approximately 150 shareholders, and represents 95% of my work.

Comparing Acción Global's portfolio holdings with those of the first years, it could be said that the fund’s philosophy, or the criteria for investing in certain companies, have been changing little by little.

Yes, that's right. I believe that we must keep learning constantly and, as we evolve as investors, it is inevitable for the portfolio to also evolve. In addition, there is another circumstance that adds up for us – the fund's investment policy for the first 5 years was quite different from our most recent one. Let's say that we are completing stages to ensure the viability of the project in the really long term. All this is explained in the letters to shareholders.

Would it be fair to think that you are more interested in companies that have a different quality than the rest? Why the change?

Yes, it would be fair to think that we are interested in companies with above average quality. There are three key factors for this transition to quality. In the first place, throughout my experience as an investor, what I have been observing and learning from successes – but especially from mistakes – is that usually the highest rate of investment mistakes tends to be concentrated in companies that are not protected from competition. Commoditized businesses that are easily replicable, dependent on external variables on which the management team can do very little, or businesses with low differentiation where contracts are won by the one offering the best price. This is very destructive for margins in the long term, and businesses with low margins are poorly protected against recessions, since the operating leverage or the burden of fixed costs makes them quickly go into losses due to falls in billing.

Second, once we have found companies whose returns are protected from competition, if we want a snowballing effect in our portfolio (compound interest), why not look for several compounders to help grow our portfolio? There is nothing complicated about it –you need to invest in companies that reinvest the highest % FCF possible at the highest possible rate (ROIIC). As the great sage Charlie Munger says, if you really invest for the long term, the multiple re-rate and de-rate will have a marginal effect on your IRR, and in the end the return on your investment will be very close to the rate at which your company reinvests.

Finally, there is an external factor that greatly affects valuation models and that has been recurring over the last 40 years (so we can no longer consider it temporary): the constant fall in interest rates in developed markets (which is mostly where we invest). The risk-free rate affects the DCF, and in an environment of low interest rates (and consequently low discount rates), growth has much more present value than in a high interest rate environment. This is a paradigm shift that is here to stay and except for hyperinflationary periods that force interest rates to rise abruptly, we must take this into account when assessing our investment alternatives. And at the risk of being wrong, I do not consider this high and prolonged inflation in the west highly probable, due to technological development and the inverted demographic pyramid that we suffer.

Can you briefly tell us about some investment by Acción Global that meets your desired requirements?

We have quality companies of different types, from micro caps to big caps.

But perhaps what they all have in common are aligned and focused management teams, businesses with above average returns on invested capital, with high reinvestment capacity, one or preferably several competitive advantages that protect their business from competition. Although I could mention several companies from our portfolio as examples, I think that talking about lesser-known ones can add way more value. So, two good examples would be NBI Bearings (Spain) and Sdiptech (Sweden).

NBI is a company from the Basque Country (northern Spain) that mainly produces bearings and other industrial metal components. It is a clear example of a business that sounds unattractive, but can end up being a wonderful business through specialization in a niche product. The company has an excellent management team that is cautious but ambitious, working in a huge industry while deploying FCF above 16% ROIIC organically plus opportunistic M&A. NBI is listed on an alternative market in Spain and is extremely illiquid. The company has tripled its value in three years since our investment, without issuing a single share, but the best part is that it is still the beginning of the road. We expect great things from this company in the coming years.

Sdiptech is a serial acquirer of key infrastructure businesses for urban development, with a technology component. Water and waste management, sensors, last-mile cold transportation, management of electrical recharging networks... niche businesses with high margins that are crucial in the value chain, so they cannot be displaced by competitors. The first time we analyzed SDIP (in 2018) it was a company with rather mediocre margins and a fairly leveraged profile that did not look particularly attractive to us. The story changed when they hired their current CFO Bengt Lejdström, coming from Lagercrantz, another Swedish compounder (I highly recommend reading the history of Bergman & Beving to understand why there are so many serial acquirers in Sweden – such an incredible story of enormous generation of value for a century and its valuable cultural legacy in the business world of the Nordic countries). Bengt redirected SDIP towards businesses with more added value, much higher margins and better organic growth, and within 2-3 years of his arrival, after several acquisitions and several sales, the company began to radically change. We arrived in mid-2020, when results were starting to show, deploying capital at rates of 10%, plus 10% organic, plus operating margin expansion, and we were also able to buy it at 15-16 times free cash flow, thus also enjoying a wonderful re-rate process. As a result, we have obtained 3 times our money in our first year in the company. The beauty of this story is that, although we do not expect to enjoy more additional re- rates, simply depending on what the business does, the company's new M&A target, the margins we believe can be achieved, the type of acquisitions and the financing structure it can have (with a very, very low cost of capital with its ESG flag) it is not ruled out to think that it may keep compounding for many years at levels of 25-30% per year. And there are very few companies that can achieve this…

I personally know that you dive deep into your analysis before even considering a company as a candidate for the portfolio. Acción Global is a high conviction fund that focuses on just a few ideas. How do you know when the added value contribution of an extra hour of analysis is insignificant?

Very good question. It is something that I often see among some investors with whom I partner and share information. The depth of some analysis sometimes borders on obsession, especially when it comes to an important position among those of us who like concentrated portfolios, and I firmly believe that an excess of information, an excess of interpretation of short-term data, can sometimes backfire. Entrepreneurship processes are not straight paths – things always come up, problems, disappointing guidance, better and worse quarters, data that can make you doubt... and that does not have mean a crucial change in the long-term investment thesis.

Personally, I believe that in the initial stage of analyzing a new business, you have to spend long hours getting to know the company in depth, and all those hours are necessary, at the end of the process, to have a good understanding of the key factors that will affect the long-term evolution of that business. The determining factors that will make that investment work, or not work. I try to reduce each investment to 4-5 crucial KPIs, and then a stage of constant monitoring new information that comes out begins. And this monitoring stage, beyond a better or worse quarter, should focus on answering the question: are KPIs continuing to evolve as planned? If so, I remain invested in the company even though there may be short-term noise. Ideally, these KPIs will evolve favorably over many years and we will never be faced with the decision to drop a business. Another issue is valuation, which can fluctuate wildly relative to business fundamentals. But this is just one more variable, and by no means the most relevant, that can affect the weight we assign to a company in our portfolio, but not the main decision. Similarly, if there is a fundamental change in the KPIs of an investment, we must be ruthless when making a decision to sell, no matter how many hours we have put into that analysis.

Sometimes one can think that one opportunity is better than others because we may be biased by the difference in hours invested between both analyses. I believe that this kind of trap influences us when assigning a portfolio weight to certain holdings. Has something similar ever happened to you? How do you manage the portfolio weight in Acción Global?

Personally, I consider that the number of dedicated analysis hours depends on the complexity of the business/industry in question, and not on the weight of the investment in the portfolio. And this is important, because there are simpler analyses in which the return per hour spent is reasonable, and there are excessively complex analyses in which the potential return, although high, may not be worth the hours spent. We have 20-25 positions, plus the watchlist… We have to ration our working hours.

The weight in the portfolio, in our case, depends on a mix between the potential return of an investment, the certainty that I have that this return will occur, and the possibilities that the thesis will not go as expected and we may suffer losses. All of this is a mix of the quality of the business, the quality of the management team, growth prospects for the next 5 to 10 years, and the price at which we are acquiring this investment.

Devoting hundreds of hours to understanding a business model, its corporate culture and constantly monitoring the reports that are published can create a certain “emotional bond” with an investment. Somehow it is like creating a puzzle that you are assembling and understanding little by little for many days. In your experience, do you think that this kind of bond can make it difficult to sell an investment when the tables turn?

I understand that it may be difficult for some people. For me it’s not. I'm completely ruthless in that regard. Over the years I've learned that when you start having doubts about an investment (doubts about the fundamentals of investing), you sell first and ask questions later. It’s tremendously painful to carry doubt in your head for a while and then realizing you were right and suffering losses and more losses. Much more painful than making a sale decision and later realizing that your doubts were unfounded and the investment would have ended up going well.

A tool that I find useful to try to avoid that emotional bond with the decision of selling is the learning process. Analysis is not a zero-sum game. It is cumulative. Just like when you dedicate many hours of analysis to a business and you end up making the decision not to invest, but what you learned will serve you for the future, or when you have to let go of an investment: you will no longer have that company in your portfolio and its evolution will no longer affect your performance, for better or for worse, but everything you learned during those hours of analysis will undoubtedly serve you well in the future. In the end, it's all about becoming a better investor with each passing year. It is a long-distance race.

And be careful, you never know when a business that you know very well can improve its KPIs again and then the opportunity will arise for it to return to the portfolio. And you will need very few hours of analysis for it. You would already have much of the work done. There, the return of each marginal hour of analysis would be very high...

It is often said that investment is a continuous learning process where mistakes have to be seen as lessons. Could you tell us about an investment mistake? What initially led you to consider that investment and how was the process of realizing that the situation was not as you had initially thought?

I've made many mistakes. The vast majority of them have been because of investing in poor quality businesses. But perhaps the most notorious of the public management stage was Burford Capital, because I had written extensively about the company and it also had an important weight in our portfolio, and although thanks to the knowledge I had about the company I was able to reduce the position when shares were still close to highs, in the last stage we did suffer significant losses with our remaining shares.

The main mistakes in Burford, to which I had dedicated hundreds of hours of analysis and had to sell relentlessly when I realized that I was wrong (but, as I mentioned before, it has been a huge lesson for me) were the following:

1.- Initially I thought that the management was of enormous quality and later I realized that they were simply quite promotional.

2.- Investing in a financial business with high accounting complexity, which required absolute integrity and transparency from the management (and I accepted this because of my initial mistake in point 1).

3.- It took me a while to understand that a business that was apparently of great quality and enjoyed great competitive advantages had actually a much higher binary risk than I expected and the apparent diversification of the portfolio, in reality, was not so much, since returns came from a reduced number of cases.

4.- The cash conversion cycle was much longer than I estimated, and initially I could not know that, because the portfolio had just increased a lot in size recently and we had to wait for it to mature.

All these points occurred as a result of it being a fairly new business/industry, with practically no other companies to compare it to, nor history to analyze. And assigning a high weight under these circumstances was itself a mistake. I thought too much about the potential return and too little about the possible loss.

I became aware of all this when I delved into the analysis, when I visited the company in its NYC offices and after analyzing the points that MW included in its bearish report on the company.

There is a lot of discrepancy when it comes to selling among investors who focus on quality companies and invest for the long term. Big investors have regretted selling big companies because valuation seemed too high at the time. How do you see this paradigm between excellent companies and valuations that seem too high?

The truth is that, just as there is no cheap enough valuation for a terrible business, there are businesses that are so extraordinary that their valuation has to be really extreme for it to be justified to get rid of them.

That said, valuation matters. Although it seems that sometimes the market does not care, in the medium-long term it will make you see that it did matter. Too high a valuation can turn a wonderful business into a terrible investment.

In my head I try to reduce it to the following question: what percentage of the FCF can the business reinvest and what ROIIC can be obtained? In product/service companies that do not require reinvestment, how big is the TAM and how much of that TAM could the business have penetrated in 10 years? All this to try to answer the key question: can the FCF per share growth for the next 10 years justify an attractive IRR even if the stock de-rates? If the net return that I can obtain even withstanding that de-rate continues to be higher than the available alternatives, I see no reason to get rid of a good business, even if it has become optically "expensive" in the short term...

Acción Global is a fund in which you know the vast majority of investors. I imagine that having direct communication helps to deal with moments of great volatility. Even so, moments of strong volatility can become complicated. How do you manage market drawdowns with a portfolio that is particularly concentrated in few ideas?

For me, this closeness with the shareholders is crucial in my management style. It is such a classic occurrence for the average investor in mutual funds when timing is the opposite of what would be ideal. After a run of strong rises, funds usually have many inflows because they seem like an ideal alternative, and in addition, salespeople from financial institutions use past returns as a sales pitch. And when a bad run comes the opposite happens; investors tend to think that they have made a mistake and usually do not have someone around to reassure them, and they tend to withdraw their money at the worst times, when making additional contributions is what they should be doing.

For me, as a manager, being close to the shareholder base, in addition to explaining our work transparently, helps me calm our clients’ anxiety. An important part of my job is to reassure them when bad times come. In fact, those who have been with us for a long time have already seen falls and rises of all kinds; they are the ones who contact me to ask if it will be a good time to make new investments when they see a losing streak. Let's say they are already “educated”. And the fact that we not only don’t have withdrawals when drawdowns happen, but have new capital inflows allows me to think much more clearly and focus on what is really important (which is taking advantage of these periods to invest all the cash we have left).

Do you think that as the fund attracts new investors, perhaps not as close as the original ones, the essence of the original management can be diluted a bit? Is it important that the investor is the right one or can your management adapt to any profile?

It is a great question. It is a bridge that all funds must cross when they grow and what I like least is having shareholders I don’t know, who come through other platforms and not directly by setting up their account with us, and to whom you cannot talk when bad times come and then inevitably, even if more capital comes in, you're also going to have to deal with higher outflows in bad seasons.

I think that in our case, we will go through that process keeping our fundamental premises of growth intact: our main growth strategy is word of mouth. We don’t do marketing - it is the shareholders who are happy with our work who bring other friends or relatives. And in general, a good client usually brings another good client. And when clients who do not share our philosophy come by chance, over time they end up leaving. And we are delighted that it happens, of course. It is a curing process that takes many years.

In addition, I think the communication policy is also important. Even if there are unknown external shareholders, if you are open, communicative and explain what you do in letters, quarterly files, periodic mailing, etc... Over time, clients who come closer to the project will share our long-term philosophy (even if we don’t know them that much). So, in answer to your last question, it is not so important that they are close, but that their profile is the right one.

Those of us who are passionate about investing do not usually have problems getting down to work. Rather, the difficult part happens usually when we have to turn off the computer. What advice do you have to balance a life with a passion that requires so many hours of dedication? How to avoid the point of burnout or imbalance in which we sometimes fall by neglecting other aspects that are just as or more important such as family relationships, personal fulfillment outside of work, etc.?

Well, it's complicated. This question should be answered by my wife (ha ha).

Now seriously, it is very difficult for me to set boundaries. It is something that I still need to work on. Our job can become obsessive, and I am still not sure that it can be done well enough working only Monday to Friday, from 9 to 5 and switching off completely after leaving the office door. So many things happen and there is so much information to process in a portfolio of 20-25 companies plus the watchlist, that the dedication you must have is total. Despite this, I also try to set time for my family in the evenings and on weekends and what I can’t forgo is physical exercise (necessary not only for our heart, but also for a good mental balance, in my opinion). And I guess that over the years, when we have a greater number of companies with a “never sell” philosophy in our portfolio, I will be able to find a better balance.

Many people who are reading us may consider your professional career as an example to follow. What would you recommend to someone who wants to break into the asset management industry?

I would tell them to just invest, to gain experience as soon as possible in investment, because it is very, very complicated. And that this experience always rests on a fundamental theoretical basis, on absolutely necessary issues such as accounting. Once we have these two premises, theoretical basis + experience, then we will be ready to face the barriers to entry in the industry. And I think there are only two realistic ways: raise capital as soon as possible in case you want to do it on your own (EVERYTHING in our industry relies on raising capital. This is actually the most complicated part – if you have capital the remaining factors are easily solved), or get exposure as soon as possible if you want to do it for someone else. There are many ways to get exposure: writing articles, investment theses, blogs, videos, etc... ideally in English, because your audience is considerably larger. Of course, when someone is interested in you, you will need to have the experience and the resume, so this is the first thing – the necessary, but not sufficient condition. And then, make people get to know you. And knock on many doors. And of course, be good... if you are mediocre, you will not cross those barriers by any of the routes. And I think that in order to be good you must feel a passion for this job, and perhaps, have a rather obsessive edge...

What about someone who would simply like to be able to manage and invest their own wealth? Do you think they should develop some habits before starting?

In order to be able to live from investing only with personal assets, you must have a liquid financial asset of at least 1 million euros, in my opinion, without any debt and preferably a paid home... this, just in order to be comfortable. And you should already have a track record in several annualized double-digit market cycles. Otherwise, the bearish phases of the market can be very tough and then, if having a full fridge depends on it, we can make emotional decisions that are not the most appropriate.

That said, the same habits as for being a professional investor apply. In fact, it would be a way of life so it would actually be your job, that is, you would be a professional investor in a certain way, except when it comes to the relationship with clients. This may even bring some performance benefits. A private investor has quite a few advantages over institutional ones. In fact, except for taxes, I think they are all advantages, the returns should be notably higher.

In the same way, what do you wish someone had told you to avoid going down wrong or longer paths?

I wish I had known that the return on the invested capital, the reinvestment rate, and the competitive advantages that protect these returns are infinitely more important in the long term than the multiple at which a business is quoted at a given moment.

How do you see Acción Global in 10 years? Would you change something?

I believe that an investor must be in constant evolution, and we are completing our stages in 5-year cycles. We have recently started the 2021-2025 Plan, in which we have already made some changes (type of investments, exposure, concentration). Predictably if everything goes as expected, this will be the permanent philosophy. Therefore, I don't see any big changes here.

We are also in the process of internal changes to build the long-term project that I have always wanted – office, work team, etc... If everything goes well, I would like to have a work team of 4-5 people, already with my help in the analysis team, maintaining our base in A Coruña (Galicia, Spain), in the new office we have recently moved into, being very close to our clients, and a medium-sized fund, which allows us to continue investing in the way that we want, in any company regardless of its size. And I would like to think that with more help in the team, I will be able to personally visit many more companies, regardless of the city or country they are based in.

As for the type of shareholder base, I think we will continue along the same lines, with a greater number of clients with similar average tickets, although in 10 years I would like to think that we will also have 4-5 institutional clients.

Javier, thanks for stopping by. It is a real pleasure that you have shared all this with us.

Thank you for the invitation. The pleasure of having the attention of your readers is of course mine.