$10bn Caledonia takes short stick to commercial property sector

The Will Vicars-run Caledonia believes its current long portfolio is one of its best ever, but is preparing a string of major short bets.

Will Vicars - chief investment office, Caledonia

The $10bn Caledonia Investments has targeted the commercial real estate sector for new short positions after adding a string of new shorts across its portfolio in the consumer discretionary, specialty retail and logistics industries.

The Sydney-based Caledonia, which counts the wealthiest people in the nation among its investors and is run by rich-lister Will Vicars and Michael Messara, believes its current long portfolio is one of the best since it started investing in 1992.

But in its latest newsletter to clients, obtained by The Australian, it said short positions were fundamental to its success over 2020, allowing its funds to add 20 per cent, or $2bn, to their long exposures in the second half of March as a global sharemarket rout took hold.

Caledonia said the soaring sharemarket in the second half of 2020 had lifted some companies far higher than their fundamentals merited, prompting the firm to add 19 new shorts, largely across what it called “familiar sectors” such as consumer discretionary, specialty retail and logistics.

“We have also begun to add new short positions in commercial real estate, a sector that we see under pressure globally, as the work-from-home (WFH) trend gains momentum, and major cities like New York struggle to re-open,’’ the fund manager told clients.

“There is something inherently satisfying about pulling weeds. This is how we have come to think about shorting stocks. It isn’t a chore. It is a necessary activity that over time strengthens the portfolio and hones our skill as investors. We think the next few years may be profitable for Caledonia on the short side.”

After investing in the global gaming sector for two decades, in September Caledonia took a cornerstone shareholding in Scientific Games, which operates in gaming, lottery, social and digital gaming industries in the US and around the world.

Caledonia took a 9.9 per cent stake in Scientific Games after US billionaire Ron Perelman sold his $US960m ($1.25bn) stake in the company, making the investment Caledonia’s largest position at inception since it first invested in US online real estate group Zillow in 2012.

During 2020 Caledonia also added stakes in Warner Music, US telehealth services specialist American Well, British e-commerce firm The Hut and US mortgage group Rocket Companies to its long portfolio.

Four of the new long positions were acquired in IPOs, where Caledonia was one of the lead investors.

The firm said that disruption would also spawn opportunities to take new short positions in these sectors. “We are excited because we are just beginning to explore three new landscapes in telehealth, mortgages and music.

“As these industries undergo the transition from analog to digital business models, outcomes will be binary with winners and losers creating opportunities for Caledonia.

“In recent years, some of our best shorts have come from this kind of in-depth industry analysis. Watch this space,’’ it told clients.

Caledonia’s current exposure to global sharemarkets is 55 per cent, up from a low of 45 per cent in July, primarily because of the new investment in Scientific Games.

It told clients it was comfortable with this market exposure.

Last year Caledonia also reduced its exposure to gaming group Aristocrat Leisure, online food delivery firm Delivery Hero and US real estate group Howard Hughes Corporation.

Caledonia’s Global Fund returned 6 per cent after fees in the December quarter, below the benchmark MSCI World Index return of 12 per cent, but the fund gained 41 per cent after fees for the calendar year, nearly tripling the 14 per cent return for the index.

The firm’s combined strategy performance of its Global Fund and its Global Co-Invest fund was up 31 per cent for the financial year to June 30, after fees.

This was despite its portfolio collapsing from a gain of 25 per cent for the year-to-date to a loss of 16 per cent in just 10 trading days during the March sharemarket rout.

It was one of only six drawdowns where the portfolio has fallen 15 per cent or more in the firm’s history.

“The recovery happened quite quickly this time, but such an outcome is not as unusual as you might think,’’ Caledonia said in its latest newsletter.

“The majority of the drawdowns we have experienced were less than three months in duration. Recovery time was also typically less than six months (except for the financial crisis of 2008-09).

“Often, stocks turn around for reasons that are hard to anticipate. Central banks take action. Consumers adapt their behaviour. Most important, management teams respond. All of this demonstrates why it is so critical not to get bluffed out at the ­bottom.”

Caledonia’s pre-tax profit for 2020 surged to $101m, a fivefold increase from the $20m result recorded in 2019.

The firm’s biggest three investments are in Zillow — alongside local billionaire Gretel Packer — online food delivery giant Grubhub and Canadian online gaming firm Flutter Entertainment, the owner of bookmakers Paddy Power and Betfair.

Last year European food delivery service Just Eat Takeaway agreed to buy Grubhub for $US7.3bn after the US firm spurned a takeover offer from ride-sharing giant Uber.

With the share prices of Zillow and Flutter now reaching new highs, Caledonia told clients it would spin a portion of the shares from each position into its co-investment fund on April 1.

The co-investment fund is a long-only fund where investors can hold large positions in Caledonia’s best ideas for the long term at lower fees.