Letters

Portfolio Management

June 2020

Portfolio Management

The world has changed dramatically over the past few months. From a sharp macro contraction to a sharp recovery; emergence of divergent paths on public health around the world and ongoing geopolitical changes. Detecting and incorporating these divergent paths into our views has been key for Somar’s performance. We believe the way we are organized, with multiple diverse perspectives feeding into a single decision maker, is a source of competitive advantage.

Somar believes strongly in the benefits of its investment team organization. Our Portfolio Manager (PM) provides a single point of decision on investments, sizing and risk-management. The PM is fed a very wide range of data-points and analysis from a team of inside and outside resources. We designed this organization to raise the quality, speed and continuous learning of our thinking and decision-making. This model has delivered us superior results over several years and market conditions.

Our process starts with gathering all the relevant sources of information and analysis relevant for each case. These include forensic accounting, field direct observation, interviews with competitors and entrepreneurs, deep analysis of the contrarian thesis, talent flow evolution, web scraping, scenario analysis, regulatory evolution and landscape, macro-economic scenarios to name just a few. Multiple lenses can be relevant for each individual decision. We have a roadmap of resources, internal and external, to be deployed when each of these skills are needed.

Our organizational decisions rest on several core beliefs:

  • In investing, we optimize for quality rather than quantity of buy or sell decisions;
  • Before trading, we need to fully articulate the rationale of the other side of the trade;
  • The more diverse the lenses applied to a situation, the more we can understand about it and minimize the probability of being wrong;
  • Debate between people holding opposite views of the trade is crucial to uncover hidden assumptions;
  • Understanding the actual circumstances behind an event is key to identifying which assumptions do not apply to the current case1;
  • Direct observation of data showing which assumptions are valid increases conviction on thesis.

Our organization and processes are designed to protect us from common mistakes and pitfalls and set the stage for continuous learning and improvement. This approach allows us to:

  • Optimize trade-off across investments. A single person can compare risk-reward opportunities across geographies and sectors. Organizations with siloed responsibilities (across geographies or sectors) struggle with these trade-offs leading to sub-optimal capital allocation;
  • Incent full alignment. Given the ultimate responsibility lies with the Portfolio Manager (PM) there is no one else to blame for mistakes but the PM. Every other member of the investment team is motivated to bring relevant facts and perspectives to inform the correct team decision;
  • Leverage insights from one investment into other investments (even in different geographies and or sectors). The team can quickly assess what the implications from the work on a particular investment are for other existing investments and act quickly on it;
  • Expand the team to add a new voice that brings a perspective that the current team is not currently incorporating;
  • Avoid groupthink: the team is focused on bringing fresh new thinking and perspective to the group. Every member is constantly asking itself which perspectives are not being analyzed that could be relevant to the outcome of the investment decision;
  • Learn and improve overtime: every member of the team sees the decision making and outcome on every decision, learning from what went right and what was missed.

We believe that our process and organization is a competitive advantage that will continue to allow us to deliver superior returns to our investors. It forces us to continuously improve, which means that Somar today is a much better investment firm than it was when we started. Hopefully it will be better still in the future.

Our focus on performance will also lead us to close the fund to new subscriptions in due time. We will not allow our asset base to be a headwind to the return prospects of our investors.

 

Team

The team has been working at our offices for the last month. The transition to remote work and back to office work has occurred smoothly and gives a lot of confidence in our ability to adapt to additional logistical changes that may be required in the future.

This month we welcomed our intern class of 2020. This year we have 2 interns from different Ivy League schools. Justin Qi and Andrew Lee are both juniors and they are attending Harvard and Cornell, respectively. Both are developing their modelling and research skills with the help of our own Jason Gans. Justin is focused on healthcare and Andrew is focused on gaming. We are extremely impressed with their work, especially given the constraint that they have had to work remotely.

We are honored every day to be stewards of your trust. We take it very seriously and are grateful to work on your behalf to connect your wealth prospects to some of the best business builders in the world today. Should you require any additional information, please reach me at either pedro.ramos@somarcap.com or +1.646.581.6842

 

All the best,
Pedro Ramos

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