Caledonia, the prominent Sydney hedge fund that invests on behalf of some of the city’s wealthiest families, says it has reassessed its key holdings as it tries to reassure restive backers to stick with the firm after a long run of disappointing performance led to an exodus of money.
In a confidential memo circulated among clients, Caledonia’s co-chief investment officers Will Vicars and Mike Messara said the firm was “committed to broadening the long book over time” and had already taken new positions in companies such as Live Nation, a New York-listed entertainment marketing and ticketing business, and Transocean, a sprawling Houston-headquartered offshore drilling contractor.
The note comes amid growing disquiet among Caledonia’s backers and the lengthy underperformance of the fund’s core holdings, American real estate platform Zillow and bookmaking giant Flutter Entertainment. The fund also holds a sizeable stake in ASX-listed gaming machine manufacturer Light & Wonder, whose shares have fallen 17 per cent this year.
Caledonia, with long ties to the Packer and Darling families, once managed more than $10 billion and boasted some of the best returns among Australian hedge funds. Funds under management have dwindled to around $3.7 billion, and it recorded a negative 32.7 per cent return in the 12 months to June 30. It lost 8.6 per cent in the three months to September 30.
Frustration over Caledonia’s performance culminated in a tense annual client meeting at the Museum of Contemporary Art in Sydney’s Circular Quay in August, where Messara and Vicars were grilled on their strategy.
“The recent share price performance of three of our largest long positions has been deeply disappointing, and as the largest investors in the fund, we feel it acutely. But how we feel settles nothing,” Vicars and Messara wrote.
“What matters is whether this is a permanent impairment of these businesses, or a temporary dislocation between their price and their worth.
“Over the past several months we have worked hard to answer that question: tearing our analysis back to first principles, re-underwriting assumptions, and actively looking for the evidence that would prove us wrong. Our conclusion is that the fall in market values of the holdings in question has far outstripped any fall in their intrinsic value,” their note reads.
Zillow shares have halved since the start of the year, while Flutter, which owns Sportsbet, has slumped more than 63 per cent.
Vicars and Messara told investors they were more bullish on Light & Wonder and Zillow than previously, saying the market has misjudged the effect of artificial intelligence on the real estate platform in particular.
They added that Caledonia had made a mistake in its forecasts for Flutter, which was “disappointing”, but insisted this did not mean future estimates would be less accurate, without elaborating furtherer.
In response to concerns that Caledonia was making few new investments, Vicars and Messara told clients to expect a portfolio with “more core longs, each at a smaller weighting than over the past five years”.
“We expect to do this primarily by adding new positions over time as compelling opportunities arise, in an orderly and opportunistic way,” they said, pointing to Live Nation, Transocean and Sequel Med Tech, a venture capital-backed medical business specialising in diabetes treatments.
“The aim is always the same – buy businesses we expect to own for many years, at a meaningful discount to intrinsic value to achieve long-term compounding and only sell when our research and analysis clearly identifies better long-term investment opportunities, or the discount to intrinsic value closes, and they no longer represent a superior long-term investment.”
Caledonia is far from the only Australian fund manager to experience investor disquiet and poor performance. GQG Partners disclosed $US2.3 billion ($3.3 billion) in outflows in September, despite stronger performance after pivoting back to the technology sector, which the fund had avoided.
The ASX-listed firm has suffered $US26.2 billion of outflows this year, as total assets under management plunged $US23.7 billion from its peak of $US172.9 billion on the eve of war between Iran and the United States.