VGI Partners Ltd (VGI) Executive Chairman, Rob Luciano

VGI Partners (VGI) Executive Chairman, Rob Luciano speaks with Tom Piotrowski about growth in the e-commerce space, opportunities in the technology sector – in particular 5G – and his views on inflation.

26 May 2021



[MUSIC PLAYING] TOM PIOTROWSKI: Thanks for joining us for the Executive Series. Today I'm speaking with Rob Luciano, who is the Executive Chairman and Portfolio Manager at VGI Partners. Rob, great to talk to you.

ROB LUCIANO: Thanks for having me.

TOM PIOTROWSKI: We've just been talking a moment ago off-air about how important it is to preserve capital. It's a bit of a challenge at this point in the cycle. Market's become a little bit volatile lately.

ROB LUCIANO: Yeah, it's a complex market. You have central bank money printing. It's very positive for asset prices, and it's created a lot of speculative activity and the point on preservation of capital, which is a key tenet of our focus and what we've done now for nearly 14 years gets back to the cornerstone of a Warren Buffett, Charlie Munger principle, which is just know what you're doing. It doesn't mean you're not going to see a share price go down. It doesn't mean that there isn't going to be volatility. There will be volatility. But if you know what you're doing, and you own high quality businesses, and you don't get bluffed out-- it's easier said than done-- you can own great businesses which contribute growing earnings to you as a shareholder and turn into dividends or share buybacks, and you own that business for many years, you can get a high quality outcome.

Now you can get various periods of volatility, but if you have cash and you keep reserves and you're not leveraged, A, you don't get bluffed out, and B, you can add, and that's very powerful. And it gets back to a concept that we've embraced now since we started in 2008, which is we're absolute return investors. We look to generate a return.

And this is what we said to our investors on day one, 2008. We're looking to generate a return of 10% to 15% through the cycle, which is a 3 to 5 year period, although I'm not sure what a cycle is now in a quantitative easing world. And what that means is it doesn't mean a year will be positive. We might be negative. We haven't sort of experienced a period of substantial negative returns, thankfully. But we're looking to generate that return of 10% to 15% by holding cash, by holding high quality securities, and then short-selling securities that we think are mispriced due to a variety of factors.

And then you put that together, and you get a return that is reflective of what we're trying to do in an absolute return strategy. It's not trying to replicate a market. We don't use a market index as a reference point. A lot of fund managers, in fact, most fund managers use an index as a reference point. We're using not losing money as a reference point, and that's not losing money through the cycle.

That's starting with an amount of money and growing and compounding that money. And if you do 10%, you're doubling your money every 7.2 years. And if you do 15%, you're doubling your money just under every 5 years, about 4 and 1/2 years. And that's a perfectly good outcome.

TOM PIOTROWSKI: One of the things that stands out when looking at your investments is that you've really focused on trends that have got a very long runway, or secular trends, as they're referred to. So exposure to information technology, the internet-- That's a big, important part of your thinking, isn't it?

ROB LUCIANO: Well, we focus on trends and secular trends in the portfolio. The internet's been something that I think has been a thematic and a trend now for a long time. And yeah, of course, it's something that we've had some exposures to. We're looking for things a little bit, I wouldn't say niche, but within the internet, we identified e-commerce as a trend that we wanted to have exposure to maybe 8 years ago.

We bought in our global portfolio Amazon in 2013, 2014 for about $250 a share. At the time, it was deemed as a profitless prosperity business. It wasn't showing any profits. But interestingly enough, it was generating lots of cash, but reinvesting that cash back in its business. So it didn't raise any debt, wasn't raising debt, wasn't doing equity raising, so it was an interesting situation in that very high quality business that was continuing to grow, and expand, and build its moat.

And it was something that certainly caught our eye. And lo and behold, it's been a very good performer to our portfolio. It's now about $3,000, $3,200. It's a 14% weight in our global portfolio. It got up to 18% last year, and we've sold some down. So we let positions run and grow over time, but we won't let them become too large a part of the portfolio.

But that's an example of a very powerful thematic, and a thematic that just continues to evolve and surprise you to the upside, which is what a good business tends to do. Good business surprises you to an upside. A bad business tends to surprise you to a downside. Funny how it works.

And it's interesting you talk about a powerful trend. Well, in something like an e-commerce situation, which is how Amazon started, has then morphed into being the number one player in cloud computing with Amazon Web Services, which was an internal division that they then allowed to grow by having external customers. So they're the biggest player in cloud computing on the planet-- bigger than Microsoft, bigger than Google.

They now have the third biggest digital advertising business on the planet, which you wouldn't have picked, we certainly didn't pick in 2013 or '14 when we first bought it. And now they're one of the biggest gaming platforms in the world because they own Twitch. And it just shows you how these powerful trends can evolve, create these types of spin-off benefits. And I think it's an example of one of the types of thematics we look at.

Other ones that we've been spending time on lately, certainly gaming, which is non-gambling gaming, and the proliferation of gaming, particularly as a consequence of what's transpired over the last 12 months. And other types of pull-forward digitisation. A new area of software that we've been looking at and have an investment position in the global fund is experienced management, which is, we think, is a new niche of software that we think is going to continue to evolve and proliferate, particularly in this pull-forward digital environment. So they're a few examples of the kinds of thematics.

Before we went on air, we talked about 5G. That's an area that we're focusing on substantially in our global fund and our Asian fund. So these are thematics that we think have multiyear runways and create structural growth opportunities. And we're trying to position the portfolio in a concentrated fashion.

So unlike a lot of other managers, we're concentrating capital. Typically, the top 10 positions will roughly be up to nearly 75% of our capital, sometimes more. And so we're concentrating capital in these thematics and sectors that we think have multiyear runways, and therefore can contribute quite-- what we are hoping-- outsized returns to the portfolio at the time. And Amazon is an example.

Another one, the trend that we've been looking at is we talk about digitisation, but we focused many years ago on the digitisation of cash. And that is the transition of cash to a digital form, which now seems perfectly obvious. But we've owned Mastercard now for going on a decade, and that has been one of the primary beneficiaries outside of Visa of the digitisation of cash, moving from its physical form to digital form. It owns one of the two main global networks that facilitates debit/credit payments and increasingly, everything else. When you use Apple Pay, you're effectively using Mastercard.

And so there are lots of thematics you can focus on. We're trying to focus on ones that we think we can execute on, and we can execute on through businesses that A, we can understand, and B, we think we can analyse them as a result and C, we can try and value them. And that gets back to that point of really trying to preserve your capital. Yes, you'll have volatility. But if you can withstand the volatility, you are going to own a business or you're going to own a security which underlies the business that is going to grow and compound your capital over time.

TOM PIOTROWSKI: Rob, one of the things that's really gripped markets in recent times is a concern, if you like, about inflation, which is inevitable given where interest rates are, how much is being spent by governments. How much of a preoccupation is inflation for you?

ROB LUCIANO: Well, we think about it. And we don't spend a huge amount of time on macro forecasting, but we do think about economies and how they function, and obviously, key drivers-- GDP growth, inflation, unemployment, certainly in the key countries we invest in. And inflation's a very powerful driver, particularly for asset prices because it drives the risk-free rate.

What's happened obviously in May, and we've touched on in one of the previous questions, is asset prices being extremely volatile because of preoccupation with inflation. What do we think? Well, we can see some reasons for inflation increasing in the short term.

There are a number of supply-demand imbalances. Whether it be from computer chips to having issues with shipping, there's a variety of capacity constraints. There'll be certain issues with labour, whether that be US restaurants trying to get people to work in their restaurants, or even domestically here, trying to get people to come off certain types of benefits and induce them back to work. That's going to create some type of constraints.

But I think the thing that, if you pull yourself back and have a think about it, is this pull forward in technological, I wouldn't say advancement, but technological usage, this acceleration. People in an older cohort starting to use a commerce more, whether that be people my mum's age who are now embracing e-commerce more. These kinds of technological pull-forwards by the whole population, you could argue have quite deflationary factors in them.

And so I wouldn't say that we're alarmist about inflation. There is some inflation coming through. It's inevitable. The question mark is the quantum. And the question mark is how deflationary is this digitisation effect, which I don't think is necessarily constructive for labour.

There's three factors of production-- land, labour, and capital. I think the bargaining power of labour, if you take a multi-year view, is decreasing due to the acceleration of software digitisation. And it's highly disruptive for labour and the unit cost of labour. And I think that that injects a very powerful long-term deflationary force. It obviously facilitates huge productivity. But productivity benefits don't necessarily translate into a positive outcome for unit cost of labour.

So without getting too technical, I'm less concerned about this explosion in inflation, but I'll adjust my view when I see additional facts. So at this stage, we're watching it very closely. But I think the thing that your investors should spend some time watching closely is what central banks do with their settings. And if central banks start to worry about inflation, well, that's going to have quite a substantial impact on markets and inject a lot of volatility in asset prices.

TOM PIOTROWSKI: One of the things that stands out about VGI Partners is the way that you've aligned yourself to the people that invest in your funds. One example is that you don't let any of your employees invest anywhere else. They have to invest in house, Rob. That's making sure they've got skin in the game.

ROB LUCIANO: Yeah. Well, it's been a purposeful strategy really since we started in 2008, to create this alignment of interest between the manager and the investors. And that's investors in our private funds and investors in our listed investment companies, of which we have two-- VG1 and VG8. And the reason for that is getting back to that core mentality that Buffett always talks about, which is eat your own cooking.

And myself and the team at VGI all have a substantial proportion of their net worth invested in our funds, including listed investment companies. For some younger members of our investment team, it's all their net worth. They have 100% of their net worth invested. If they receive additional compensation in a period, they pay the tax on that. And I've seen a number of them invest all of it back into the funds.

And that is something that is not just for myself, but for the other investors in VGI and hopefully, investors in our listed investment companies. They should gain some comfort from that. That alignment's very powerful. It's very different. Not many managers do it. A lot of other managers allow personal accounts, and you do not want your fund manager owning securities that are different to what you own in the fund that they manage for you.

You want to be involved in a-- If you're going to choose a fund manager, choose a fund manager where there's a real alignment of interest, where what they do with their own money, they're doing exactly for you. Not a little bit the same, but exactly the same. And there's not many who do that. And we think it's very-- It's a term called an automatic stabiliser. We think it's a great automatic stabiliser to facilitate this very powerful alignment of interest between the manager and the investor. And it's something that we'll continue in the years ahead.

TOM PIOTROWSKI: Rob, it's been a real pleasure chatting with you today, and I look forward to many more conversations in the future. Thanks for your time.

ROB LUCIANO: Thank you very much.

TOM PIOTROWSKI: And thanks very much for joining us for the Executive Series.

Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non-guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank") and both entities are incorporated in Australia with limited liability.
This information is directed and available to and for the benefit of Australian residents only and is not a recommendation or forecast.

This information has been prepared without taking account of the objectives, needs, financial and taxation situation of any particular individual. For this reason, any individual should, before acting on the information on this site, consider the appropriateness of the information, having regards to their own objectives, needs, financial and taxation situation, and, if necessary, seek appropriate independent financial, foreign exchange and taxation advice. CommSec, and its related bodies corporate, do not accept any liability for any loss or damage arising out of the use of all or any part of this information. We believe that this information is correct as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. 



This site is directed and available to and for the benefit of Australian residents only. © Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and both entities are incorporated in Australia with limited liability.

By clicking on the "Download the CommSec App" buttons above, you will be directed to or These sites are not affiliated with CommSec and may offer a different Privacy Policy and level of security.