Sententia Capital Management is not your average value focused hedge fund. The fund was founded by Michael Zapata, a former Navy Seal Team 6 Officer and has attracted funding from some of the best-known names in the value space. Mario Gabelli, Jean-Marie Eveillard from First Eagle, Bill Miller from Legg Mason and Michael Van Biema have all invested alongside Zapata, giving Sententia an almost unrivaled vote of confidence. There are a few other funds that have backing from such an illustrious roster of names.
- 2016 Hedge Fund Letters
According to the Latticework blog, Mario Gabelli decided to invest alongside Zapata because “Mike was highly successful in his former profession. He has the intangibles of great investors and he is proving to be a great investor in the tradition of Graham and Dodd.”
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Sententia’s limited performance is already a testament to Zapata’s skill. According to the fund’s fourth-quarter and full-year 2016 letter to investors, a copy of which has been reviewed by ValueWalk, Sententia ended the year up 24.9%, beating the S&P 500 by 12.9% for the year as a whole. During the fourth quarter, the fund returned 1.19%.
The letter ends with a thanks to those investors, stating:
We are thankful to have five partners invested alongside Sententia Capital. Mr. Mario Gabelli served as the anchor for the investment and we have a spectrum of legends, with Jean-Marie Eveillard from First Eagle and Bill Miller from Legg Mason, to an expert value practitioner and former professor, to a value investing staple, Michael Van Biema. We are grateful for their partnership as it provides a runway to continue to prove the Sententia process and continue to create and grow generational wealth for our investors.
Sententia had some great performers within the year with a few key holdings yielding 40% each and one outstanding performer returning 130%. Net exposure was approximately 80% with a 12% average cash holding.
The letter goes on to detail Sententia’s investment process which Zapata describes as walking a fine line between “risk mitigation and outperformance” copying “what we did best in the special operations community”. This is described as perpetual beta, a phrase taken from Michael Maubossin’s Superforecasting summary:
“Combine a growth mindset and grit, and you have an outstanding formula for personal development and improvement. Tetlock and Gardner call the combination “perpetual beta.” A product in beta is nearly complete but has room for improvement.”
When it comes to ideas the largest performer for the fund last year was Perpetual Holdings, up 120%. When initially attracted to the position, Zapata noted the market was undervaluing several hidden assets. Perpetual owned including $150 million in Tourmaline shares and $11 million in other assets. A number of transactions over the year have helped strengthen the group’s balance sheet and production profile. As well as the hidden assets Sententia believes intrinsic value could be close to $5 per share.
Unfortunately, Sententia Capital missed out on some massive gains with its Navistar position when the fund tried to time the market by selling out after a quick run before Volkswagen purchased 16% of the company for $250 million. Profits were taken after only a 25% gain. In the following week, the stock surged 60% and since gains have grown to 150%.
“We simply got caught up in trying to time the market instead of holding steady to our fundamental analyses,” Zapata writes in his year-end letter. “Risk assessment is a good thing, but I let the emotions of the market impact the rationality of the fundamentals. At a minimum, we could have pared our position instead of selling with the hopes of getting a better price” he continues.
The hedge fund is bullish on Loral Space, with hope that the company will IPO Telesat.
The hedge fund notes:
With a market cap of $800m and a potential dividend of $250m in the coming months, we anticipate the potential for a nice return.
Other new holdings of the fund include Navigator Holdings and Herc Rentals.
To end the full-year letter, Zapata airs some thoughts on the current state of the market. He believes that from a top-down perspective, it is time to be cautious and with “the volatility of the current administration” the risk is to the downside in the short term due to “headline risk.” However, he appears to be cautiously optimistic about what the future holds. The longer term “fundamentals of lower regulations and reduced taxes” could be beneficial but the concern is “headline risk will lead to potential air pockets” creating volatility and short term. With this being the case, Sententia remains fundamentally invest for the long term but is holding cash back for near term opportunities.
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