Quarterly Letter to Investors 2 nd Quarter of 2016 MAGALLANES VALUE INVESTORS, S.A. SGIIC. Dear Investor,

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1 Quarterly Letter to Investors 2 nd Quarter of 2016 MAGALLANES VALUE INVESTORS, S.A. SGIIC Dear Investor, During the second quarter of the year the European stock market continued with the downward path that started at the beginning of the year. The 23 rd of June of 2016 will go down to history as the day in which the British decided to leave the European Union, commonly known as Brexit. Such decision had a very strong impact in the price of most financial assets and especially in the European stock markets which experienced declines close to -7%. The effect was even worse in countries like Spain, where the Spanish Ibex- 35 Index suffered its worst session in history with a decline of %. Our main goal is to preserve your investment to subsequently be able to increase it in the long run. To protect the capital in a fund which invests in shares entails losing as little as possible when the market goes through difficult situations. Since we began to manage at the end of January 2015, the European stock market has declined around -8%, emphasising the sharp decline close to -20% of the Spanish stock market. In this adverse environment our funds have managed to stay in positive territory, where it is important to positively highlight the fund Magallanes Iberian Equity which accumulates returns superior to +5% since inception (see Annex of Returns). Monetary policy of low interest rates promoted by the main central banks has caused the existence of more than 13 billion dollars in bonds with negative yield globally, more than 10 times the Spanish economy. A situation as the present one is certainly complex, to some extent irrational, making it very difficult to guess its future impacts. Considerably worrying it is if we combine it with the yet high levels of indebtedness of the main developing countries, the credit crisis in China, the upsurge of populism in the world and the possible institutional weakening of Europe after Brexit. In this regard, most of the investment community focuses on predicting the outcome, which could be more or less disastrous, of this singular situation as the present one. They try to position their portfolios as a consequence or give advice to their clients on how to manage their investments in any given eventuality. It is easy to understand the relation cause-effect, but difficult, pretty much impossible, to know when and at what level of intensity will such effect take place. It could happen tomorrow or it could happen in decades, as it is happening in Japan. Magallanes Value Investors, S.A. SGIIC / C.I.F. A / Nº de la CNMV: 239 C/ Lagasca, 88 4º, Madrid 1

2 This current complexity of the world invites to being, more than ever before, modest, rational and tempered. Always with the focus on the search of companies whose appreciation in value over the long term depends on its own fundamentals. Fortunately the success of the investment process at Magallanes it is not based upon the degree of fulfilment of future eventualities but on the ability of buying good businesses at good prices regardless the current market situation. The good performance of the funds at Magallanes is due to three points: good evolution of most of the companies in the portfolio, total absence of banks and cash levels. Cash in the portfolio is of great importance in moments of high uncertainty as it enables us to buy companies that may have been penalized in a sudden and effective way. This was the case the day after Brexit, as a result of holding around 10% cash in the portfolio we were able to purchase some stocks that declined sharply. As you may know, we analyze and closely follow the evolution of the banking sector. We would like to be more positive but the reality is that it continues to be tough. The historical reasons that led us to avoid it remain in place: low interest rates, absence of credit growth and balance sheets with levels of government bonds very superior regarding equity capital base. All these facts confirm the chronic problems of the banking sector, lack of generation of earnings and low levels of equity capital. It could also be noted the unrecognized implicit risk of treating from a regulatory point of view the government bonds in balance sheets as zero risk, something which is difficult to believe. Nonetheless our concern on the banking sector goes beyond the existing situation. In our opinion, the sector, as a traditional business model, is in clear risk of disruption due to the business transformation that new market players are carrying out. Today, largely as a result of technological development and sector liberalization, it is possible amongst other things to make payments with mobile devices, to subscribe investment funds or to take out life insurances, away from the traditional banking circuit. Current oversized structure of most banks leads us towards a more cautious and sceptic vision regarding its future capacity to adapt. Our investment philosophy has as fundamental pillars patience, long term focus and thorough analysis. Current strong volatility and uncertainty is transforming these attributes into anxiety, short term focus and superficiality in most market players. This divergence generates unique opportunities to investors like us. We have taken advantage of the strong volatility in prices to buy and sell some companies in the portfolio. Magallanes Value Investors, S.A. SGIIC / C.I.F. A / Nº de la CNMV: 239 C/ Lagasca, 88 4º, Madrid 2

3 In June we sold the whole position in EMMI AG, owner of brands such as Kaiku and Caffè- Latte. The reason for selling the stock is it reached our target price. We started accumulating shares of EMMI AG at the beginning of 2015 at levels of 300 Swiss francs. Today, year and a half later, these shares trade above 600. It is a company we still like due to the quality of its products, its management team and its pricing power capacity, however its demanding valuation does not justify, in our opinion, to hold the position. We would like to highlight the purchase of Savencia SA, international food company which belongs to the Bongrain family. It is a world leader in the milk transformation, second biggest cheese maker in France and fifth globally. Among its most prestigious brands may we highlight Caprice des Dieux, Milkana or Burgo de Arias. The main reason of the purchase is the combination of a range of premium products with an attractive valuation of the company as a whole, which compared to companies such as Nestlé, Danone or EMMI itself could reach an appreciation of more than twice its current valuation. A more favorable situation of the milk sector, along with certain pricing power capacity could bring about a gradual increase in margins, which would be reflected in the long term in a higher valuation of its shares. In the Iberian fund we bought Meliá Hotels. It is a world leader in the category of holiday resort, with strong presence in the Caribbean, highlighting Mexico, Dominican Republic and Cuba. The business model of Meliá combines a strategy based upon freehold property and management of unique assets which are hard to replicate, hotels in the Caribbean, along with a professional hotel management for third-parties. Investing in companies whose products are desired by its clients is a distinctive aspect of the investment process at Magallanes. We discovered EMMI AG due to its quality of its products free of lactose, Savencia for its wide portfolio of products and good flavor of its fresh cheese and Meliá for the pleasure of spending good holiday time in some of its hotels in the Caribbean. During the course of time we have held more than 120 meetings, travelling across some countries of Europe. Our feeling is positive and hopeful given the existence of a wide universe of singular and well-managed companies in which to invest. Being aware of the importance of staring to save as soon as possible, over the month of June we launched a new initiative by which young people under 25 years will be able to invest in funds of Magallanes taking advantage of a class with cheaper management fee. As significant events in the second quarter may we highlight the attendance in April as guest speakers in the ValueSpain conference, the celebration on the 8 th of June of the first Annual Meeting to Investors in Barcelona and more recently the attendance also as guest speakers in the Value Investing Seminar of Trani, Italy. Magallanes Value Investors, S.A. SGIIC / C.I.F. A / Nº de la CNMV: 239 C/ Lagasca, 88 4º, Madrid 3

4 Thank you on behalf of the whole team of Magallanes for entrusting us with the management of your money. Kind regards, Iván Martín Aránguez, CFA Chief Investment Officer Magallanes Value Investors, S.A. SGIIC / C.I.F. A / Nº de la CNMV: 239 C/ Lagasca, 88 4º, Madrid 4

5 ANNEX 1. STRUCTURE OF THE FUNDS MAGALLANES IBERIAN EQUITY FI The fund closes the quarter with an investment level of 89.6%, made up of 27 Spanish and Portuguese companies. The portfolio holds a clear bias towards the industrial and service sectors, where we could highlight amongst other holdings: Barón de Ley, Prosegur, Inmobiliaria Colonial, Gas Natural and Miquel y Costas. Top ten holdings account for 46.4% of the fund. Spain accounts for 69.5% of the total investment of the fund with Portugal accounting for the remaining 20.2%. The prevailing size of the companies in the portfolio does not exceed 3 billion of market cap, accounting for 70.9% of the fund. An 18.7% of the fund is invested in companies with market cap of over 3 billion. Current investment level of the fund seems to be adequate for us. The number of companies in the portfolio will not significantly change in the medium term. MAGALLANES EUROPEAN EQUITY FI The fund closes the quarter with an investment level of 90.5%, made up of 32 companies. The portfolio has a clear bias towards the industrial manufacturing and consumer sectors; sectors which are represented, for example, through holdings such as Hornbach AG, Pargesa Holding SA, Orkla ASA, Savencia SA and C&C Group Plc. Top ten holdings account for 44.6% of the fund. As a result of the holdings in the portfolio the exposure to France, Germany and Switzerland is greater when compared to other countries, with an aggregated weight of 46.8% for these countries. The prevailing size of the companies in the portfolio does not exceed 5 billion of market cap, accounting for 68.3% of the fund. A 22.2% of the fund is invested in companies with market cap of over 5 billion. Current investment level of the fund seems to be adequate for us. The number of companies in the portfolio will not significantly change in the medium term. Magallanes Value Investors, S.A. SGIIC / C.I.F. A / Nº de la CNMV: 239 C/ Lagasca, 88 4º, Madrid 5

6 ANNEX 2. RETURNS BY FUND AND CLASS as of 30/06/16 MAGALLANES IBERIAN EQUITY, FI Magallanes Iberian Equity, FI "M" 110,7001-5,20% -2,42% 2,76% -0,63% 7,35% 29/01/ ,6% Iberian benchmark -10,03% -7,01% -21,00% -12,78% -17,77% Magallanes Iberian Equity, FI "P" 111,4788-5,13% -2,27% 3,31% -0,35% 5,95% 26/02/ ,6% Iberian benchmark -10,03% -7,01% -21,00% -12,78% -22,60% Magallanes Iberian Equity, FI "E" 112,6916-5,11% -2,13% 4,04% -0,03% 12,69% 09/01/ ,6% Iberian benchmark -10,03% -7,01% -21,00% -12,78% -10,54% Returns net of fees. Iberian benchmark: 80% Ibex35 Net TR + 20% PSI20 Net TR. MAGALLANES VALUE INVESTORS UCITS IBERIAN EQUITY LUXEMBOURG Magallanes Iberian Equity LUX "R" 100,4870-5,67% -3,29% - 0,49% 0,49% 31/12/ ,9% Iberian benchmark -10,03% -7,01% - -12,78% -12,78% Magallanes Iberian Equity LUX "I" 100,7703-5,63% -3,15% - 0,77% 0,77% 31/12/ ,9% Iberian benchmark -10,03% -7,01% - -12,78% -12,78% Returns net of fees. Iberian benchmark: 80% Ibex35 Net TR + 20% PSI20 Net TR. MAGALLANES EUROPEAN EQUITY, FI Magallanes European Equity, FI "M" 99,4369-4,46% -1,32% -3,17% -3,52% -0,17% 27/01/ ,5% European benchmark -5,00% -1,27% -10,96% -7,23% -6,84% Magallanes European Equity, FI "P" 100,1670-4,42% -1,20% -2,69% -3,28% 0,81% 29/01/ ,5% European benchmark -5,00% -1,27% -10,96% -7,23% -6,83% Magallanes European Equity, FI "E" 101,2450-4,35% -1,01% -1,95% -2,92% 1,24% 09/01/ ,5% European benchmark -5,00% -1,27% -10,96% -7,23% 1,83% Returns net of fees. European benchmark: MSCI Europe Net TR. MAGALLANES VALUE INVESTORS UCITS EUROPEAN EQUITY LUXEMBOURG Magallanes European Equity LUX "R" 96,6628-4,37% -1,49% - 2,83% 2,83% 29/01/ ,8% European benchmark -5,00% -1,27% - -7,23% -1,08% Magallanes European Equity LUX "I" 96,8907-4,33% -1,36% - 10,88% 10,88% 12/02/ ,8% European benchmark -5,00% -1,27% - 8,22% 8,22% Magallanes European Equity LUX "P" 97,0084-4,30% -1,28% - -2,99% -2,99% 31/12/ ,8% European benchmark -5,00% -1,27% - -7,23% -7,23% Returns net of fees. European benchmark: MSCI Europe Net TR. Magallanes Value Investors, S.A. SGIIC / C.I.F. A / Nº de la CNMV: 239 C/ Lagasca, 88 4º, Madrid 6