Letters

Discontinuities

February 2022

Discontinuities

Vladimir Lenin is credited as saying: “There are decades where nothing happens; and there are weeks where decades happen.” This seems description of the recent weeks. The war in Ukraine came as a surprise to many and re-focused the priorities of western politicians and businesses. Energy security became a top priority. Supply resilience and redundancy have become paramount (as opposed to cost and just-in-time inventory) following disruptions from the pandemic, supply-chain constraints, and geopolitical threats. Across the board, CEOs are calling for onshoring and/or near shoring of manufacturing. Perhaps the most visible example is semi-conductors: most of their production is currently in Taiwan and Korea, and their recent shortage has closed factories across the US and Western Europe.

These changes are putting upward pressure on inflation and interest rates. They are also changing the medium-term prospects for different economies around the world. The situation is fluid, but Somar is prepared to adapt and thrive in the new environment.

Somar has always avoided high geo-political and macro-economic risky markets for its investments. We don’t claim to have better insight into macro-economic and geopolitical trends than the average investor and believe our core competency lies in identifying emerging superior customer offers designed and led by highly talented entrepreneurs and teams. Therefore, since our inception, we decided to focus on investing in North America and (mostly western) Europe. The qualities we look for in a market to consider investing are:

  • Strong Rule of Law – courts defend the rules-based system and promptly enforce contracts; low corruption; healthy open debate of pros and cons of policies and public choices.
  • Capitalist, market based economic system.
  • Open and liquid capital markets both domestically and internationally.
  • Stable, sensible and predictable regulatory environment.
    Somar also has the tools to adapt and thrive in any changing environment:
  • Liquidity: our portfolio is highly liquid. Since our inception I can’t recall a time where it would take more than 2 days to orderly liquidate substantially all our portfolio.
  • Ability to use both long and short investments to take advantage of opportunities as they present themselves in the market. We also have the flexibility to adjust our net and gross exposures to changing circumstances.
  • Large, accumulated know-how of hundreds of companies and dozens of clusters that give us perspective of differentiated impact of changing environment as well as multiple pulse checks into how the economy and consumer are reacting to ongoing news.

At the onset of the war, we acted immediately to better position the portfolio to the new reality.

  • Ensured each of our long investments had non-material exposure to the most affected geographies.
  • Shorted companies with exposure to the affected geographies.
  • Re-assessed each of our long and short investment thesis for potential impact from the new events. To the extent the thesis was impacted we eliminated the position. To the extent the thesis was re-enforced, we increased our position size.
  • Got in touch with management of our top positions to get their assessment of any changes to their prospects and strategies.

Given our above-mentioned market focus and the secular, customer-friendly, source of our long investments’ competitive advantage, almost all our long investment thesis was left intact. New opportunities presented themselves in our short book and we acted on them. We have also built and kept some dry powder to take advantage of additional opportunities that future market disruptions may present to us.

As the above Lenin quote says, the speed of change accelerates in these moments. We believe this is good news for Somar as our long investments offer more for less cost to their customers. Therefore, we are excited with the potential ahead. While the short-term situation remains fluid, we are managing risk well and have seen good risk protection throughout the recent volatile days. We believe our long positions will perform well as soon as a more constructive investment environment returns to global capital markets.

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We hope you get in touch with us during the year. Volatile markets can lead to questions, and we will give you our perspective on what we see in the companies we follow closely. Volatile times are the most attractive to invest in but don’t feel like it while you are going through it. Please reach out at either pedro.ramos at somarcap.com.

I look forward to hearing from you,

Pedro Ramos

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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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