Concentrated Caledonia cleans up

The $10bn Caledonia Investments claims its concentrated approach is well-suited to the post-COVID-19 investing world.

Caledonia boss Will Vicars. Picture Hollie Adams

The $10bn Caledonia Investments claims its concentrated investment approach and a co-investment model allowing it to hold “maximum exposure to the best ideas for the long term” will be well suited to the post-COVID-19 investing world, after its flagship funds returned more than 30 per cent in the current financial year.

The deeply private Sydney fund manager, run by Rich Lister Will Vicars and Mike Messara, now has $7.5bn in its flagship active fund. With large positions in its co-investment vehicles, its total funds under management are now almost $10bn.

“While recent developments will create headwinds for many companies, and possibly broader market indices, we believe this is the ideal market environment for a concentrated stock-picking approach like the one Caledonia has honed since 1992.

“For more than a decade, we have been intensely focused on the transition to online marketplaces.

“This trend is taking place around the world in almost every industry. It is not a coincidence that all three of our core longs are benefiting from the accelerated shift to digital occurring today,’’ Caledonia said in its latest confidential client update, obtained by The Australian.

Caledonia’s three big investments are in US online real estate group Zillow — alongside local billionaire Gretel Packer — online food delivery giant Grubhub and Canadian online gaming firm Flutter Entertainment, which last year merged with The Stars Group and is best known as the owner of bookmakers Paddy Power and Betfair.

Revenue from poker play has doubled during the lockdown, with casinos shut around the world, and the client update spent many pages explaining why the fund manager had gone “all-in” on Flutter.

Since March 21, Grubhub’s stock price on the Nasdaq has also soared over 75 per cent, primarily based on the news of a potential merger with Uber.

“This crisis is the largest and most serious event humanity has faced since World War II. We struggle to believe that the global economic recovery will be a straight line, as some predict.

“Stockmarket indices have rebounded smartly from the lows of March, but may prove to be overly optimistic as investors start to understand that not all companies and industries will participate in the recovery equally,’’ Caledonia said in the client note.

“We are rock-solid on the outlook for our three core longs in this environment.

“Zillow, Grubhub and Flutter are exceptionally well-positioned with strong balance sheets, attractive valuations, and great long-term growth prospects.  “They are also at the vanguard of the trend towards online marketplaces — a trend we expect to play out for the next decade.”

The latest set of numbers sent to clients shows the firm’s flagship Global Fund was up 9.8 per cent in May, continuing the rebound from its 14 per cent slump in March.

For the financial year to date, the fund is up 39.3 per cent after fees.

Caledonia’s combined strategy performance of its Global Fund and its Global Co-Invest fund was up 17.3 per cent in May and is up 31.3 per cent for the financial year, after fees.

The combined strategy fell 22 per cent in March.

In 2015 Caledonia spun out part of its investments in Zillow, Grubhub and Stars into its “co-invest fund”.

Then in 2018 it put more of those three investments into the co-invest fund and capped positions in its main fund at 25 per cent.

The co-invest fund delivered a 20.2 per cent return in May and is up 28.6 per cent after fees this financial year.

“We did not know the (COVID-19) crisis was coming when we set up our co-investment structure. We were simply trying to solve for a concentrated investment approach that would allow our clients to hold maximum exposure to our best ideas for the long term,’’ Caledonia said in the client note.

“As it turns out, we believe this structure is ideally suited to the new investing landscape because it allows us to build up big long positions in companies we believe will dominate for years.”