Robert Luciano’s VGI Capital Partners feels pinch in tough year for shorts

It’s been a tough year for funds that were short or underinvested as global markets lurched from bear to bull on the back of unprecedented stimulus.

VGI Capital Partners co-founder and executive chairman Robert Luciano: ‘If we don’t have a good idea, we’ll sit in cash.’ Picture: Hollie Adams

One of Australia’s leading global long-short funds has warned against excessive exposures to overpriced shares simply for the sake of being fully invested and avoiding low-yielding cash.

It’s been a tough year for funds that were short or underinvested as global markets lurched from bear to bull on the back of unprecedented fiscal and monetary stimulus since March.

But VGI Capital Partners co-founder and executive chairman Robert Luciano has recently preferred to have a high level of cash and reinvest in better opportunities than be too heavily exposed to stocks like Amazon, which have led a 53 per cent bounce in the MSCI World index since March.

As of October 16, his VGI Partners Global Investments (VG1) had a long exposure of 83 per cent, albeit with a relatively low short exposure of 8 per cent, and a conservative cash weight of 25 per cent as its mandate allows. All of that exposure has been in Australian dollars for some months.

At the end of September, its top 10 holdings, representing 65 per cent of the portfolio, were high-flyers like Amazon, which has flourished amid COVID-19 to be up 74 per cent year to date.

Yet VG1 trimmed its Amazon holding from 20 per cent to 15 per cent of the portfolio “not because we don’t like it, but because we don’t want the whole portfolio to be driven by only one or two ­securities”, Mr Luciano said in an investor update.

 

Markets operator CME Group shrank to 6 per cent of the portfolio as its shares dived this year on concerns about headwinds that the CME interest rate complex faced, but Mr Luciano was happy with the quality of the business, its role as a hedge against inflation and its operating leverage to interest rate volatility.

Some longer holdings were cut as their upside was limited and the money shifted to new stakes — including Pinterest, Olympus and Otis Worldwide — and additions to existing positions.

But after cutting all of its short positions in May and June, VGI Partners Asian Investments (VG8) had just 62 per cent of the fund in equities as of October 16, with zero shorts and 38 per cent cash. “We would rather have a high cash balance than execute on shorts that we feel would grind us,” Mr Luciano said.

The fund manager’s focus in terms of its short selling has typically been on accounting-skewed shorts, industry structure unwinds and fad-type situations.

“We’ve found it increasingly difficult in the current MMT (modern monetary theory) environment and liquidity-fuelled environment to execute on those,” he said.

“We have a number of situations we’re watching closely, but the reality is if we had kept some of those specific shorts on we would have just continued to taken a loss on them, and that’s not what we’re prepared to do.”

But while shifting out of shorts, the Asian fund hadn’t significantly boosted its long exposure, although it had crept up slightly with the rebound this month.

“Another key point here is, if we didn’t sell any securities over the last three months we would be roughly 75-80 per cent invested,” Mr Luciano said.

“One of the key differences between us and the vast majority of other managers (is) we’re an absolute return manager, we’re long-short and we can sit in cash. We’re not afraid to sit in cash and we’re not afraid to sell securities that are overpriced. We don’t have to be invested. That’s not how we think.

“Where we have made some changes in the last number of months is we’ve sold the serious positions, we’ve reinvested some of that capital, but the reality is if we didn’t sell anything we would be far more invested, and we don’t think that would be an accomplishment.

“Sure we would be more invested, but we don’t think that would be a good outcome for investors, to hold overpriced securities or situations that we think are overpriced, or share price moves that are being underpinned purely by liquidity and momentum.”

The VGI Partners Master Fund — with $2.9bn of funds under management — has made a compound annual return of 13.1 per cent net of fees since inception in 2009, in the middle of its target return of 10-15 per cent through the cycle, versus 10.8 per cent for the MSCI World Total Return Index in Australian dollars.

It has done that with a net exposure of roughly 70 per cent since inception and a gross exposure of just over 100 per cent — a low level of risk for a long-short fund and a return that exceeds a return from a broad market index.

It has a good record of capital preservation, having returned an average of 2.2 per cent in “up-market” months versus 2.9 per cent for the index, and -0.8 per cent in “down-market” months versus -2.4 per cent for index.

But like any fund it has had its ups and downs and the past year was particularly tough with a negative return of 7.2 per cent versus a 4.6 per cent gain for the index in the year to June.

“We’re in the middle of the range at the moment despite this year being our most difficult year since 2008, in fact 2008 was a better year for us,” Mr Luciano said.

“We tend to lag in up months and outperform in down months because we’re focused on capital preservation. If we don’t have a good idea, we’ll sit in cash.”