Open Square Capital’s Q1 2019 Investor Letter

Open Square Capital is an asset management company headquartered in Orange County, Southern California. It is a young hedge fund, launched only four years ago by Nelson Wu, who is its Managing Director. Mr. Wu’s professional background consists of 20 years of consulting experience and international business. Prior to launching his own fund, he was in charge of the legal entity structure of a Fortune 500 company. He holds a B.A. from the University of California, Berkley and a J.D. from the University of Minnesota Law School. The fund’s investment philosophy is a long-term and thematic oriented, and most importantly – it’s often contrarian, which makes the core of it. “We believe that there’s no safety in the unanimity of opinion; and that thoughtful contrarianism can lead to extraordinary results.” The fund usually runs a concentrated portfolio of a couple of stocks that holds for a few years, practicing the patience of a wise investment.

Apparently, its investment strategy is very sharp, seeing that last year through October, its Open Square fund brought back an eye-popping return of 112.5%. This is an amazing performance, even though in the most difficult quarter for most of the funds, Q4 2018, Open square Fund also suffered a loss of ~40%. The fund recently published its Q1 2019 Investor Letter, a copy of which you can download below. Among other things in the letter, the fund posted first-quarter return of 44.35%, beating the S&P 500 which gained 13.65%.

 

Dear Limited Partners,

We’re running through a charred landscape now. It’s what’s left after things burned to the ground three months ago, when financial markets dislocated from reality and panic set-in. Any talk of recovery is immediately met with skepticism as the lingering smoke deters scarred investors whipsawed by the volatility. Our footfalls echo as it’s nearly empty with nary a flora or fund manager in sight. With capital having fled, producers must now fend for themselves, forced to live within their means as the days of generous lending terms and liberal equity infusions have ended. The few capital allocators remaining have now turned to suffocate producers, barring any notion of production growth and punishing those who try. It’s less capital discipline than capital disciplined.

For OPEC+, the cabal has refocused and recommitted to taming production, the financial pain too difficult to bear. With gritted teeth, they’ve begrudgingly cut production and exports to customers despite politics, higher customer demand, and their own desire to capture Iranian market share relinquished because of US sanctions. Instability in Venezuela and Libya also threatens production and both have no clear end in sight. For the Saudis, economics now Trumps politics, so there’s little reason to shrink the widening supply gap. Let the world figure it out. You’d think it’s all for one and one for all with this group, but as any scary movie teaches us, one person’s production shortfall increases another’s chance of survival. So restrain and maintain because oil tankers that don’t sail today are barrels that don’t arrive tomorrow.

Thus, our mantra for this quarter was . . . just . . . keep . . . running. Progress, however incremental, builds upon itself, and set-backs, great or small, improves the process. Embrace the grind. We ignored those who claim clairvoyance about the Q4 financial crash, of how we could have or should have sold and then rebought with the clarity afforded by hindsight. That’s never been our process nor our strategy. We continue on our run, steady and undeterred, on a marathon road that we firmly believe will lead to an inevitable conclusion. Focus on the road and focus on moving forward because if we do, we will eventually get there. As we’ve done so this quarter, we’re beginning to see thin blades of hope push through blackened soil. Looking further out, we’re seeing greener fields to come.

 

You can download a copy of Open Square Capital’s Q1 2019 Investor Letter here:

Open Square Capital Investor Letter (2019 Q1) (FINAL)