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Dear Fellow Investors,
For the twelve months ended 31 December 2021 ( CY21 ), VGI Partners Global Investments Limited ( ASX : VG1 ) generated a net return of -2.5 %. VG1 ’ sulfur post-tax Net Tangible Assets ( NTA ) per share stood as at $ 2.34 as at 31 December 2021 1. This is a very disappointing consequence and has been driven by choice core long-run investments performing ailing over the second gear half of calendar 2021. however, we have taken advantage of depress prices in samara portfolio positions to add to our existing holdings and build new positions in businesses we believe will deliver attractive returns to the portfolio in the years ahead. We continue to focus on owning great businesses exposed to a long runway of layman growth that are beautifully priced, based on our judgment of fair value. At writing, on our estimates, our top 10 holdings are trading at 70-75 cents on the dollar with some holdings trade below 50 cents, and we believe our valuations are conservative. Our top 10 Holdings represent approximately 74 % of entire portfolio capital. Our long portfolio is predominately made up of high-quality compounders that operate within favorable industry structures. Alongside these are a series of businesses that are earlier on in their evolution, but where we see great potential in the years ahead. We believe these businesses have a singular opportunity to grow, enhance their moats and frankincense evolve into high-quality growth compounders. This was the case with Amazon when we first gear purchased it in 2014 – it was not viewed as a high-quality colonial with its ongoing heavy investments ( and associated prima facie account losses ), yet looking a few years out we could see a profitable trajectory for its core e-commerce business while many market participants merely saw losses. Interestingly, nowadays we see several situations in the digital business landscape where high- choice businesses are very beautifully priced based on our estimates of future earnings growth. We touch more on this later in the letter. We observed some dramatic market dynamics during 2021, which included an incredible distribution of lineage returns. Certain parts of the market, such as COVID winners and “ unprofitable ” technology 2, experienced meaning evaluation atmospheric pressure. market indices ended the year at their highs ( before selling off in January at writing ) but looking underneath the surface paints a different picture – for example, key US indices ( namely the S & P 500 and Nasdaq ) have largely been held up by mega cap engineering and a handful of early businesses which have witnessed substantial multiple expansion coupled with strong earnings growth. The circus tent five winners in the Nasdaq-100 ( Microsoft, Apple, Alphabet, Nvidia and Tesla ) contributed two-thirds of the overall Nasdaq 2021 render of +27 % and excluding these five the Nasdaq would have rather generated a +9 % return in 2021. furthermore, over a third of the ~3,600 companies in the Nasdaq Composite are down by well over 50 % from their 52-week highs. It is here where we see a number of opportunities rising to the surface. “ unprofitable ” technology had a peculiarly inadequate time period of operation over the second half of 2021 and this has flowed into 2022. Pockets of exuberance that we witnessed earlier last year have washed out with the prospect of rising ostentation and higher interest rates. This has led to a meaning de-rating of growth stocks particularly those securities that lack earnings or absolve cash flow. For model, we saw this having an outsize impingement on new IPOs. The chart below encapsulates this dynamic, showing the divergent performances between large technical school ( the Nasdaq-100 ) and “ unprofitable ” engineering. This has created some attractive opportunities but has besides caused some of our key holdings, like Pinterest and Qualtrics, to perform ailing ; in addition our longer tail of smaller positions was besides caught up in this sell- off, which we discuss in more detail later in the letter. Non-Profitable Tech Stock Index in 2021 vs the Nasdaq-100
note : The Non-Profitable Tech Index is a market value weighted index based on a Goldman Sachs basket of 60 non-profitable US-listed technical school companies. Related to this active has been the increasing market concentration amongst large technical school companies. FANGMAN ( Facebook, Apple, Nvidia, Google, Microsoft, Amazon, Netflix ) now account for 25 % of the S & P500, up from good 15 % three years ago. Most large technical school companies had stellar years, with Alphabet ( Google ) +65 %, Microsoft +52 % and Apple +35 % ( the lone company to disappoint was Amazon, which frustratingly is besides the only one we own ). Some of these FANGMAN performances have been underpinned by corporeal multiple expansion, which seems improbable to sustain itself. In fact, during January 2022, we have already seen some sharp declines in FANGMAN constituents. It is possible we are seeing a “ Nifty Fifty ” scenario emerge as per the 1960s ( where the Top 50 US stocks wholly drove market returns ) with the current case being preferably different given the narrow skew to mega technical school and categorization of other family identify mega caps. We observe we are in a commercialize that is willing to pay stark premiums for stocks that have firm diachronic visibility and perceive predictability of earnings while companies deemed to have lower predictability are being heavily penalised. Beyond mega hood technical school, we are seeing early pockets of “ blue chip ” securities where valuations are head-scratching. For case, in the consumer goods space, companies such as Nestle and PepsiCo are trading at all-time high multiples. These are solid businesses, but they have limited ability to reinvest capital at high rates of tax return and are entering a period of having to rely on price increases to offset inflationary cost pressures in order to maintain their margins. Despite this, these securities are trading at loose cash flow yields comparable to early digital businesses that have durable growth and the ability to reinvest big amounts of capital into their business. More broadly, after the recent investor “ rotation ” out of growth securities, we believe many ordinary, analogue businesses look outright expensive whereas many advantaged tech-enabled businesses and many of tomorrow ’ s future winners look highly attractive. Amazon ’ s parcel price performance has suffered because it has less predictability of earnings in the short term and continues to reinvest heavily. We like the fact that Amazon is continuing to invest aggressively and remains focused on deepening and widening its moat, and consequently we remain highly optimistic about the trajectory for the business. On clear of this, there are concerns that Amazon is facing headwinds in the near term ascribable to the pull-forward in e-commerce during COVID. We are less implicated about this given our focus on the longer-term trajectory of the business and the inevitable profane growth in e- department of commerce and mottle penetration. however, the fact that Amazon ’ s contribution price was flat during 2021 was a key scuff to our portfolio returns ( Mastercard, one of our other winder holdings at 9 %, was besides flatcar ). While disappoint, particularly when many early securities performed so strongly, we accept that this is the nature of running a concentrated portfolio – we plainly can not pick the accurate time nor order of magnitude of person broth returns over a discrete time period. however, we do expect both Amazon and Mastercard to contribute strongly to portfolio returns over the years ahead and we believe the probability of this has increased after recent price military action, particularly given the continued firm fundamental business performance and profane growth drivers. Our approach is bottom-up and focused on identifying high-quality businesses with a hanker growth track and ability to reinvest capital into their occupation at attractive rates of tax return. As we have discussed in former letters, our investment access is bottom-up and focused on identifying high-quality businesses with a long growth runway coupled with the ability to reinvest das kapital into their business at attractive rates of return. This doctrine leads us to businesses that tend to have pricing office ( such as Richemont in super luxury jewelry and watches and SAP in enterprise solutions ) or have pricing models based on a take-rate or ad valorem model ( such as Mastercard in payments and Amazon in e-commerce/advertising ), meaning that the businesses we own are by and large shielded from inflationary pressures. We besides have a large position in the CME Group ( ~8 % weighting ), which we have owned in VGI Partners ’ global strategy since 2008. We believe CME will be a major beneficiary in an inflationary environment due to its monopoly side on deal uranium interest rates futures ( CME volumes should grow substantially in an environment with higher interest rate excitability ) and winder commodities. however, thinking about inflation and the expectation for its trajectory is very authoritative for all investors as it is a cardinal antigenic determinant in valuing a future stream of business cash flows. The question today is, are we presently seeing a ephemeral, supply-induced inflation spike that will normalise beyond COVID before deflationary forces such as engineering and automation resume putting downward press on inflation, or are we in an environment with more persistent ostentation driven by shortages in british labour party, materials and house ? While we do not presume to have an answer, this question has important ramifications for dismiss rates and multiples, which in turn shock the valuations of our holdings and prices we are bequeath to pay for modern holdings. Our approach involves stress testing valuations so that we are comfortable owning a business even if there is a 100bps to 200bps change in rebate rates. As per our former letters, we have been shifting the portfolio away from capped top in lower growth, analogue universe businesses. We are frankincense gradually moving away from businesses with lower, albeit more predictable, growth where in many cases valuations are relatively high gear ( specially in terms of price for growth ), and allocating more of our portfolio towards structural growth ( that is in some or possibly most cases, under-appreciated or even camouflaged ) and where the price for increase is highly attractive. Albeit not a pure digital worldly concern exemplar, the bombastic outperformance of Richemont over other luxury stocks over the last 12 months is a good exemplar – Richemont had hidden measure through its loss-making on-line occupation and under-appreciated growth within jewelry compared to say LVMH, which was viewed as the consensus quality player in the lavishness sector. Over time, we believe that the companies that possess less obvious growth ( and are consequently underappreciated by the commercialize ) but have inherently high-quality business models and diligence structures, will outperform nowadays ’ s consensus quality/growth stocks. We are excited by the current opportunity set in global listed markets specially digital businesses in the submarine US $ 50 billion commercialize capitalization region – a zone which, as discussed above, has come under considerable valuation coerce over the past 3 to 6 months. This suggests that M & A action is likely to gain momentum given the war chests that many corporates and secret equity funds are holding ( at writing, the offer by Microsoft for Activision reiterates this view ). today, we see many companies we greatly admire that are deemed “ loss-making ” and being sharply marked down. many of these companies choose to be loss-making in the short circuit to medium term strictly because these companies are not optimising their tax income algorithm ( they are biding their clock as they build their business flywheel ) and they are simultaneously aggressively over-investing in their commercial enterprise via function costs, namely research & development and sales & commercialize. The ongoing sell-off in digital/technology companies, specially “ loss-making ” companies, is creating substantial opportunities for those who are truly long-run investors and are able to withstand short- terminus monetary value volatility or, as some say, a capacity for investing pain ( that is, being able to withstand a malcolm stock halve over a 12-month menstruation and not get bluffed out, due to the conviction in your analysis ). A capacity for investing trouble is required to then experience the atonement of seeing, much when there is conviction in the analysis, the like security recover quickly and move to new highs. As far back as 2014, when we foremost bought Amazon, we have been asked : why do you invest in loss-making companies ? Amazon was a “ loss-making ” company for many years. The world was that it did not make losses ascribable to a flaw business model – preferably its management just chose the long game and therefore constantly reinvested in the customer experience and the business itself. This investment came through the profit and loss statement via foregoing certain revenues ( for case via a low initial Amazon Prime fee ) or growing operate costs via high rates of research and development. similarly, today we see many companies we greatly admire that are deemed “ loss-making ” and being sharply marked down. many of these companies choose to be loss-making in the brusque to medium term strictly because their management teams ( normally led by founders with large equity ownership ) are not optimising their gross algorithm ( they are biding their clock time as they build their business flywheel ) and they are simultaneously aggressively over-investing in their business via operate on costs, namely research & development and sales & marketing. If these note items were treated the same way as an analogue business treats its investing in physical improvements to say a factory or manufacture equipment – it would be via capex and thus capitalised on the balance sheet merely to be depreciated in the years ahead – and “ accounting profits ” would ensue. The overall point being that camouflaged quality can come in many forms and we are searching for those attributes and trying to assess the long-run absolve cash flow generation such a business can produce. today we own a handful of smaller size investments in our portfolio that are at earlier stages of their growth phase but we think will develop into highly durable business franchises with favorable industry structures and unit economics. Some of these businesses are already generating release cash flow while others do not. These positions were a drag to operation in the second half of 2021, as they are broadly in the engineering space – however we remain confident in the long-run prospects of the businesses and are consequently will to tolerate volatility near-term and believe they will deliver meaningful returns to the portfolio in the years ahead. In most cases we have taken advantage of share price weakness to make extra purchases. We believe many of these holdings will prove to be the future compounders for the portfolio and be worth multiples of their current evaluation. We will continue to allocate a assign of the portfolio to smaller weightings in businesses that we believe can be future multi- class winners. As aforementioned, for the twelve months ended 31 December 2021 ( CY21 ), VG1 generated a web restitution of -2.5 %. VG1 ’ south post-tax Net Tangible Assets ( NTA ) per partake stood at $ 2.34 as at 31 December 2021. For reference, the MSCI World Total Return Index ( AUD ) of +28.8 % over the same period. Since origin in September 2017, VG1 has generated a net revert of +26.4 % after all fees. This represents a compound annual net return to investors of +5.7 % over this period with a net equity exposure of 59 % ( compared to 100 % invested for the exponent ). As we have highlighted in anterior letters, we took a cautious approach when getting invested in the initial years of the portfolio, which was a damaging drag on performance.
Below we provide an update on some of our key holdings.
The postpone below shows our lead 10 holdings as at 31 December 2021. consistent with our concentrated approach, the crown 10 holdings account for 74 % of our total capital.
|Top 10 Long Investments as at 31 December 2021||% of Portfolio|
|Amazon.com Inc .||16 %|
|Cie Financière Richemont SA||9 %|
|Mastercard Inc .||9 %|
|CME Group Inc .||8 %|
|SAP SE||7 %|
|Olympus Corporation||7 %|
|Pinterest Inc .||6 %|
|Qualtrics International Inc .||5 %|
|Française des Jeux||4 %|
source : VGI Partners analysis. Pinterest (NYSE: PINS) ~6% weighting
Pinterest is a holding we have discussed in detail previously but, given it was the largest portfolio detractor in 2021, we believe it warrants a detail update. We continue to believe Pinterest is a singular ocular search engine with its ~450 million monthly active users ( MAUs ), and is a highly distinguish platform, uniquely combining search with the network effects of a social media chopine. Most users visit the platform with a specific determination and typically use the platform for inspiration. Compared to other sociable networks, purchase intent is high, with approximately 55 % of Pinterest users on the platform there to find or purchase products or services. The high purchase intent of the drug user has made Pinterest an increasingly attractive locate for brands to advertise – it is arguably the lone chopine where advertisements do not damage the user experience and in fact improve it ( arguably aboard Google ). It besides happens to be a relatively safe distance to advertise on-line, with minimal to no abusive or controversial message present on the platform. This has resulted in significant improvement in monetization, with revenues growing by over 5 times since 2016 and by about 50 % in both 2020 and 2021. Notwithstanding this, the lineage has performed ill over the last 12 months due to user increase coming to a stop. As users were locked down at home during COVID outbreaks, Pinterest benefited from rapid growth in engagement, for exemplify users stuck at home looking for divine guidance on a home renovation. On the early slope of lockdowns, some of Pinterest ’ s more fooling users have returned to normal routines and reduced their usage of the platform. We believe the market is excessively focused on a small, and what appears to be impermanent, slowdown in Pinterest ’ s exploiter emergence. ultimately, we believe Pinterest is different to other social media platforms like Facebook, Instagram, Snapchat and TikTok, all of which thrive on daily users efficaciously addicted to each platform. Pinterest on the other hand is, for the most part, not a accustomed chopine, consequently some of the casual users that were introduced to Pinterest during the stopping point 12 months have stopped using the platform ( and most of these have been web-based personal computer users, which are a lot less valuable to advertisers than fluid users ). More importantly, we are encouraged that millions of new users tested the chopine as we think in the future, when these consumers are looking for their future leverage or project, they are more probably to return to Pinterest. Key Pinterest Metrics
Over fourth dimension, Pinterest besides has a unique opportunity to tap promote into a acquit e-commerce opportunity. Pinterest has rolled out a native checkout button and a Shopify partnership to allow users to make purchases directly on the Pinterest app. Pinterest is besides in the process of rolling out features to improve the have for merchants, for example they now have an application interface to allow merchants to amply upload their catalogues to Pinterest. This inaugural is at early stages, but we are excited about the likely. At write we are highly storm that Pinterest has fallen to US $ 30 ( an enterprise value of US $ 18bn ), particularly when there has been guess of multiple coup d’etat approaches over US $ 70 ( an enterprise value of US $ 50bn ) by both Microsoft and PayPal precisely in the last 12 months. Pinterest is not a loss-making or cash-burning clientele ( a common misconception ) – quite it is generating significant release cash hang as its margins have scaled very quickly over the last 12 months, and the standard is now trading on a FY23 free cash flow yield of about 4 % on our estimates, coupled with strong emergence prospects. We remain affirmative about the future of the clientele, its earnings might and frankincense, the share monetary value top. We have taken advantage of the recent volatility to add to our position. While it has been a hearty round-trip, which is frustrating, we are around our cost base on the investment and see material top. Pinterest Free Cash Flow to Firm (FCFF) (US$m)
note : FCFF is tax-adjusted and does not add back stock-based compensation. Qualtrics (NASDAQ: XM) ~5% weighting
Our analysis shows Qualtrics is the world leader in experience management ( EM ) software. EM software is a class that has been turbocharged by the pandemic as corporations and governments are striving to better understand their customers and employees in decree to improve satisfaction, retentiveness and in flex maximise the dollar return on each customer. Customer know was previously assessed via surveys and other forms of analogue feedback. today Qualtrics allows its clients to assess their customers ’ feedback and improve the know with more advanced tools ( e.g. net Promoter Scores ) and in veridical time via multiple data feeds which include call center conversations, emails, on-line chatbots, social media feeds and so on. A good model of a Qualtrics customer is JetBlue Airlines, a major american low-cost airline. JetBlue use the platform to analyse customer feedback and in turn better sew price for flights and besides improve the in-flight experience, in order to expand Net Promoter Scores ( NPS ) and increase customer retentiveness through this real-time feedback. For example, by combining escape frequency and pricing studies, JetBlue found that 82 % of their passengers didn ’ t care about rid bags and rather favored cheaper ticket prices. JetBlue responded by rolling out different rate structures and price options for passengers, which were well received. By taking a abstruse dive into passengers ’ feedback in Philadelphia, JetBlue was able to trace dissatisfaction to the lack of airport shops and amenities open early in the dawn, where JetBlue responded cursorily by merely passing out water system, juice, and coffee bean at the gate to boost customer atonement. big corporations are accelerating their custom of Qualtrics software with 85 % of the Fortune 100 using the platform. The incremental spend with Qualtrics by existing customers is impressive and continues to grow in excess of 20 %. This is underpinned by expanding use along with the adoption of extra modules which allow clients to gain greater depth and breadth of data from the Qualtrics platform. In accession, new customers add to the emergence of existing customers resulting in what we believe will be gross growth of over 30 % p.a. over the coming years. Qualtrics Revenue (US$m)
The economics of an enterprise software business like Qualtrics are highly attractive and result in gross profit margins of about 80 %. Qualtrics expenses all R & D and other costs associated with building its platform and capability set – as discussed previously in this letter, if Qualtrics was a manufacture occupation many of these clientele increase costs would be capitalised ( expanding its fabrication facilities, acquiring newly plant, estate & buildings, etc ) allowing costs to be lower and produce optically pleasing accumulation prima facie “ profits ”. We believe Qualtrics is on a fast track to substantially grow earnings and spare cash flow as it reaches a tipping point in its price structure – in our view free cash hang should quickly accelerate in the years ahead ( as seen in the graph below ) and we believe the share price will constantly follow. Qualtrics Free Cash Flow to Firm (FCFF) (US$m)
note : FCFF is tax-adjusted and does not add back stock-based compensation. Our Qualtrics holding was a detractor to performance during 2021. We have added to our holding recently, including this calendar month, as the stock has sold off further. We deem the commercial enterprise extremely beautifully priced on an absolute footing given the emergence profile in complimentary cash flow. In our view, the bazaar value for Qualtrics is materially above the stream share price. Richemont (SWX: CFR) ~9% weighting
Richemont was the largest positivist subscriber to operation in 2021, delivering a sum stockholder reappearance of 75 %, and is frankincense immediately our moment largest position. The commercial enterprise has continued to execute very good, particularly in its effect ace luxury jewelry segment. Revenues have recovered to well above pre- COVID levels and the lack of travel has not been a drag on luxury spend – in fact a bunch of the spend has been repatriated domestically ( e.g. chinese consumers buying Cartier jewelry in China rather than when they travel to New York, London or Paris ). On circus tent of this, operating margins in jewelry reached 38 % in the most recent half, the highest level ever achieved. management did comment these results were exceeding and hinted at the fact that they should not be extrapolated, but it is unclutter that Richemont has significant untapped runway for margin improvement. Richemont Jewellery Segment Revenue and EBIT Margin
evening Richemont ’ s smaller watches division ( which includes brands such as Panerai, IWC, Vacheron Constantin, Jaeger-LeCoultre, A. Lange & Sohne ) has started to turn around after years of underperformance, as Richemont has cleaned up inventory in the wholesale channel, reduced dismiss and is now dealing with fewer distribution partners. Management should be applauded that there is now a waitlist for many of Richemont ’ randomness watch brands – an incredible transformation for brands that used to be prone to discount and weak sales. Another late and important development was the announcement that Richemont is considering strategic options for Yoox Net-a-Porter ( YNAP ), its under-performing on-line division. Richemont are looking at a scope of structures, which may involve a cope with Farfetch ( a leading luxury e-commerce platform ) ; the purpose appears to be broadening the ownership of YNAP to get diligence buy-in and situation it as the lead luxury e-commerce platform. We are excited by this, as we have long argued that the market was failing to ascribe any rate to Richemont ’ s e-commerce operations ( and actually capitalising the losses from this division ). While the marketplace has started to appreciate some of Richemont ’ s hidden measure that we have outlined in prior letters, we continue to see top and a golden risk/reward. Richemont is one of those commercial enterprise that ideally we would never sell given its price power, retentive growth runway, top optionality and aligned, long-run focused family ownership ( and is a business that we expect to continue to prosper even in an inflationary environment ). Should valuation start to materially exceed our appraisal of bazaar value, we will act promptly to reduce the size of our holding but we still see ample board to surprise to the top and we are encouraged by the approaching catalysts to unlock respect.
Mastercard (NYSE: MA) ~9% weighting
Mastercard has been a effect component of the VGI Partners ball-shaped strategy since 2009. Mastercard is a global payments processor and in an effective duopoly with Visa. The industry benefits from a solid secular tendency toward electronic payments over cash and cheques and the COVID pandemic has accelerated this shift. Mastercard ’ s share price increased +1 % in calendar 2021 despite more than 25 % earnings growth. This was due to Mastercard ’ s market multiple de-rating due to short-run concerns about cross-border volumes and long-run concerns about disintermediation from fintechs such as PayPal and Square ( see the graph below showing Mastercard ’ s EV/EBITDA multiple during 2021 de-rating from > 30x to ~26x ). Mastercard EV/EBITDA (Next 12 Months Forward)
Whilst the full convalescence in cross-border travel has been delayed by the onset of Delta and Omicron, we believe there is significant pent-up requirement for travel and that cross-border transaction volumes can exceed 2019 levels by 2023. exchange fees have long been a point of competition between the requital processors and merchants so the news that Amazon UK would no long accept Visa credit cards rekindled fears that there would be a race to the bottom in merchant discount rates. Amazon and Visa have since come to a resolving power and we think it is highly unlikely that early merchants will take a similar footprint. however, we are closely monitoring the situation for far developments. back to Mastercard, we believe that fears of fintech disintermediation are misguided. In fact, fintechs accelerate the profane tendency toward electronic payments and normally spouse with the ball-shaped payments processors to gain merchant acceptance. Mastercard leads the market in partnering with fintechs winning over 250 fresh partnership deals with an over 70 % win-rate in the US and UK markets in 2021. And for all the fears surrounding Buy now Pay Later ( BNPL ), BNPL is a benefit to the networks as the huge majority of BNPL transactions are funded with credit or debit cards. We conclude that Mastercard ’ randomness fundamentals are potent with cross-border set to rebound, underappreciated tailwinds from fintech partnerships, and rapid emergence in new services such as cybersecurity and datum analytics. We besides consider Mastercard as an attractive hedge against inflation – a higher cost of goods purchased will benefit the company ’ s bottomland line as it charges an ad valorem tip and has significant pricing might.
IAC (NASDAQ: IAC) ~3% weighting
IAC is an investment we have held since November 2020. We were attracted to the commercial enterprise because of its excellent management team and impeccable track record. Led by Barry Diller, one of the best das kapital allocators in recent times, IAC is an investment holding company that is likely unfamiliar to many. Despite this, the businesses that have grown out of IAC, and that have then been spun off to IAC shareholders over the years are likely to ring a bell. These include Expedia, TripAdvisor, Live Nation ( once Ticketmaster ) and Match Group, which operates in the dating vertical with long-familiar properties such as Tinder. jointly, IAC has spun-out to its shareholders about $ 100bn worth of value over 25 years.
IAC has a unique investment philosophy. Unlike early conglomerates or holding companies, IAC prefers to contribution ways with its businesses once these businesses are able to self-sustain. IAC strives to constantly reinvent itself. consequently, IAC is very shareholder-friendly and thinks of itself as an anti-conglomerate, where the businesses are regularly spun-out to its shareholders rather than held within one big corporate social organization ( imagine Expedia, TripAdvisor and Match were all housed under the same entity ). Barry Diller has besides introduced a system where talent is identified early, and management is empowered to make mistakes and quiz quickly. IAC has been and remains a endowment factory and the more we have learnt and studied IAC, the more we have come to appreciate that this unique philosophy and acculturation is its key moat. When we first bought IAC, we were basically not paying anything for its possession in Vimeo, a Software- as-a-Service ( SAAS ) provider of video solutions. Given the holding ship’s company structure, the assets within IAC are frequently missed or overlooked by investors until closer to being spun-out, which finally draws attention to the broader investing community. This was the case with Vimeo, which started to grow quickly as the tailwinds from COVID lockdowns led to a abrupt resurrect in demand for video recording solutions. Vimeo was subsequently spun out to IAC shareholders in May 2021. thus far, Vimeo ’ s performance has disappointed due to the combination of a emergence slowdown and the broader technical school sell-off. however, we think Vimeo could be in the early days of a multi-year growth opportunity and therefore we have retained the minor hold that we received as region of the IAC spin-out. Despite helplessness in SaaS securities and the sell-off in Vimeo, we have hush made money on our IAC investment. historically, a key area of success for IAC has been capitalising on the shift from offline to digital. They were early in identifying this swerve, as seen by IAC ’ second success in categories such as travel ( with Expedia/TripAdvisor ) and dating ( with Match Group ). IAC is now attempting to do the same in the base services category with Angi Homeservices, which is one of the main assets owned by IAC today. Angi is the leading digital marketplace in the US for all types of home renovation and compensate jobs. IAC is investing heavily behind this business ( which includes the original Angie ’ second List property ) to transition away from being a classifieds lead-generation marketplace, towards a transactional, fixed-price marketplace. Under this model, consumers can immediately koran online a home haunt job at a know price, thereby providing convenience ( clamant book ) and price foil to a process that differently involved exchanging multiple quotes with tradies, haggling on price and painfully coordinating calendars. Angi is having some success with this transformation but it is still early on days. In the near term, it is facing a particularly hard environment given taut supply conditions, meaning tradies are amply booked for many months in progress. We view this as a irregular bottleneck and that over prison term, the newly suggestion will prove superior such that tradies will shift to where the eyeballs are ( in this casing, Angi ). The market is not attributing Angi a gamey probability of achiever in their ability to flip the gross model and become the dominant player in the category. They are already the largest player by far with over 220,000 tradies using the platform. This is besides a class that is even at the very early stages of moving to online. Therefore, Angi seems best placed to dominate the class and with IAC ’ s stewardship and merely a US $ 4bn market capitalization, we believe that Angi has the potential to be deserving many multiples of its current prize if it successfully executes on its scheme. Beyond Angi, IAC has a portfolio of early attractive businesses. One is Dotdash, which owns on-line properties across a range of verticals such as food, health, investing and entertainment. They recently announced the acquisition of a like occupation ( Meredith ) that is highly complementary at an attractive price and we are excited by the likely of this combination. IAC besides owns Care.com, the leading market in the US for finding and booking care-takers. This is another classic IAC class where it can roll out its distinctive playbook and turn the business into a last franchise ( Care.com was acquired for equitable US $ 500m in February 2020 after a period of mismanagement ). In August 2020, IAC besides invested in MGM Resorts precisely as COVID lockdown concerns were starting to ease. IAC are particularly attracted by the sports betting class and have expressed extra interest in the class, although they have remained disciplined and have so far to allocate further capital given what has been a relatively bubbling environment in the sports betting vertical. IAC besides own a 25 % -30 % post in Turo, which is much referred to as the “ Airbnb of cars ”. Turo is a marketplace that facilitates car-sharing and where individuals with idle vehicles can place their car on Turo so that drivers can use these vehicles at short notice ( effectively as an on-demand option to car rentals ). Turo has equitable recently announced that they will IPO in the US, so we look forward to IAC crystallising far value from their investment portfolio. Beyond these assets, IAC has a tail of earlier-stage investments that are today not being attributed any respect by the market and that provide top optionality should they become larger businesses over time. Since we purchased IAC in November 2020, IAC has generated a return of 41 % and 14 % when including the Vimeo by-product. We are excited by the long-run opportunity of IAC itself vitamin a well as many of the underlie assets that it owns.
Below we outline some other holocene portfolio changes. We have taken advantage of recent excitability amongst technical school securities and added to existing core positions, particularly Pinterest and Qualtrics. We besides reinitiated a belittled hold in Spotify, a clientele we have owned previously. We besides exited some core holdings during the year. We sold our OTIS position, which has been a potent performer but decided to exit based on evaluation coupled with a deteriorating lookout for construction in China. China represents about 20 % of OTIS gross but an even higher proportion of future increase ; in holocene months we have started to see some of these concerns play out with multiple signs pointing to a prolong slowdown in China property structure. Another divestment over the period was Pernod Ricard which we sold in 3Q21 – this was again driven chiefly by the exalted valuation and what we believed to be more attractive opportunities elsewhere. Pernod is a business we will continue to track closely as we do like how it is positioned and how management runs the business. An extra position that we have exited is Reckitt Benckiser. Overall Reckitt has been a disappointing investment for us and thankfully we sold down part of our holding near its all-time highs in 2020. More recently we sold down our remaining holding – we re-assessed the business moat as shrinking given an built-in deterioration in the diligence structure for consumer goods companies, and a winder rationality why we have chosen to focus our investment efforts away from these kinds of businesses going forward.
Our short portfolio was the single largest detractor during 2021, with a entire drag of ~4 %. It has not been a golden environment for our type of fundamental short sell, which is normally based on accounting red flags or identifying structurally challenged industries, particularly in an environment with ongoing multiple expansion across many sectors and businesses. As we highlighted in our prior investor letter, we temporarily shifted the short portfolio to include more market and portfolio insurance given the rise in meme stocks and sporadic short squeezes. We did thus in rate to provide downside protection to the portfolio in an environment where guess was rising and our dash of unmarried malcolm stock short-circuit was not working. however, these positions have turned out to be the biggest haul to our abruptly portfolio. We did increasingly resume single-stock shorting throughout the year in addition to using baskets to avoid the risk of shortstop squeezes. Logitech, the manufacturer of office and bet on equipment, was an example of a successful short for us during 2021. The commercial enterprise was a large benefactive role of stay-at-home orders which drove a demand spike for family office and video recording communication equipment as most employees shifted to working remotely. This not alone drove a pull-forward of growth, but margins besides experienced a increase due to the miss of promotions. The market started to extrapolate these dynamics as a permanent wave change in Logitech ’ randomness economics, whereas we took the opposite opinion which has proved close to reality given a string of disappointing results. In a exchangeable vein, we presently have a abruptly basket consisting of businesses that have been big beneficiaries of the abnormal increase in durable goods consumption ( e.g. recreational vehicles, baron tools, white goods ), which in our opinion, have experienced an unsustainable need boost in terms of both increase and margins. We are besides starting to see helplessness issue in US retail data, which we are watching closely as this will not only impact durable goods categories but besides adjacent markets like caparison. US Durable Goods Personal Consumption Expenditure (US$bn, Seasonally Adjusted Annual Rate)
note : course has been extrapolated from 2015 to 2019 actual data. recently in the year we besides had some successes as we continued to adapt our short process. Something that worked well for us was a hand-pick short basket focused on US unprofitable technical school companies that were trading on crying valuations, which contributed positively to returns in 2021 and has continued to do so at the prison term of write. When we founded VGI in 2008 we decided to operate an active short-circuit portfolio as we believed it would provide us with a partial hedge to our core long portfolio, while besides generating positive absolute returns. We have demonstrated our short deal capabilities over time, generating positive returns in our short portfolio in the years leading up to the COVID outbreak, despite the marketplace increasing well over this period. As we look forward nowadays, we continue to see hearty value in having an active short-circuit portfolio. We believe a short portfolio is additive to our analytic abilities and in change by reversal enhances our long-run endow capabilities and returns, in summation to being a valuable risk management tool, which is particularly utilitarian in the current market environment. Given the growing doubt regarding ostentation and rising adhesiveness yields it may turn out that short sell becomes a larger character of our activities and acts as a core driver of portfolio returns in the future.
The Fund remains in full hedged to australian Dollars ( AUD ). We may move back to an unhedged or partially hedged side – as we take an active position on the currency – but alone when we believe there is a unclutter mispricing based on our fundamental analysis.
We take alignment of interest between ourselves and our investors badly. We jointly have a meaningful investment in VG1 and continue to add to our investments. As a result, VG1 investors should be confident that our investment team ’ sulfur energy and campaign is focused on a remarkable consequence – to maximise returns over the long term while preserving capital for our corporate portfolio in what is a highly challenging investment environment. At VGI Partners we are entirely focused on managing our portfolio. Our commitment is to preserve and grow your capital over the farseeing term, careless of the market environment, by owning a portfolio of high- choice businesses which have been purchased with a margin of base hit coupled with a series of businesses that have under-appreciated or even camouflaged choice characteristics. We can not eliminate short-run volatility from our returns ; however we are more convinced than always that our serve and investment philosophy positions our portfolio to produce attractive returns over the long term and through the motorbike. We remain optimistic about our existing portfolio and will continue to take advantage of opportunities that present themselves. We are identical grateful that we have long-run oriented investors who entrust us with their capital.
once again, we thank you for your investment with VGI Partners. Yours faithfully, VGI Partners