Letters

Covid-19 and Unusual Economic Scenarios

February 2020

Covid-19 and Unusual Economic Scenarios

In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed.

Warren Buffett – 2010 Letter to Shareholders of Berkshire Hathaway

The ongoing world outbreak of Covid-19 is stretching health care systems, disrupting travel and supply chains, forcing most employees to work from home and leading to quarantines and cancellations of public events. The population is naturally tense with the uncertainty of the future  development of this outbreak and its impact of their health, family, work and life activities.

Financial markets are no fans of uncertainty and have understandably sold off looking for more clarity of the economic and business impact of this on-going outbreak around the world and across industries.

As stewards of your capital, it is our job to protect your wealth and position it to withstand the evolving turbulence. It is also our job to position your investment to benefit from bargains that this current sell-off has opened so you can participate in the recovery that inevitably will succeed the eventual resolution of this crisis.

In this letter we want to let you know how we are pursuing our mission.

First, we start from a position of strength. As detailed in several of our previous letters, our long investments offer superior value propositions to their clients that they can’t find anywhere else. Therefore, to the extent
that money gets tight, they are likely to benefit from an increase in market share. Conversely, our short investments offer inferior value propositions and therefore are vulnerable to market share losses that could accelerate during harder economic times.

Second, we have assessed the potential impact of a global Covid-19 pandemic on each of our investments. That has led us to adjust exposures by adding to shorts that are set to be more impacted (travel sector,
transportation and lodging for example) and exiting long investments that were close to our price targets and/or are more vulnerable to a short-term change in consumer habits (restaurants for example). We were early, nimble and decisive in this exercise.

Third, we are closely following business updates, guidance changes and early signs of changing business dynamics to update and refine our assessment of the potential impact of the current outbreak. We have used
this incoming information to find new short investments and have recently added them to the book.

Fourth, in long investments where we feel there has been no negative impact or where the current outbreak may even prove beneficial in accelerating market share wins, , we have selectively and slowly added to our exposures at very attractive valuations.

Fifth, we have leveraged our primary research, including interviews with management teams, entrepreneurs, and local observers to assess the impact this outbreak is having on different businesses.

Dislocations like this one, given their unpredictability and lack of comparable precedents open market and business discontinuities. This plays to our strengths as fundamentals based active investors. We like our chances to both protect the downside while positioning the portfolio well to take advantage of emerging opportunities this outbreak opens. We will continue to update you in future letters.

All the best,

Pedro Ramos


 

Disclaimer: This website is for general information purposes only and is not intended to be, nor should it be construed as investment advice, nor a solicitation or offer to buy or sell any securities, related financial instruments, or  interests in the Somar Master Fund, LP (the “Fund”) or its feeder funds. The information contained herein is not complete, and does not contain certain material information such as disclosures and risk factors about the Fund or its feeder funds. Opinions expressed are current opinions as of the date of this material only and are subject to change without notice.Hedge funds: (1) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; (2) can be highly illiquid; (3) are not required to provide periodic pricing or valuation information to investors; (4) may involve complex tax structures and delays in distributing important tax information; (5) are not subject to the same regulatory requirements as mutual funds; and (6) often charge high fees.

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