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A Fund Manager’s thoughts on the Magellan situation

Magellan Financial Group (ASX: MFG) has reported a series of disruptive staff changes at the very top of the organisation with Hamish Douglass (CIO of global equities fund) on medical leave with Chris Mackay taking over as CIO and Nikki Thomas coming back to Magellan to further bolster the image of the team and expertise.  These changes do raise the risks in the investment team’s ability to consistently deliver excess returns in the future.

The main concerns are with Magellan’s International Equities Fund.  Broadly speaking, we remain confident with the composition of the fund in terms of exposure to the generally high quality stocks but it is the post-Douglass residual capability in the investment team to consistently deliver excess returns is what we now have a question mark against.

Some Observations 

On a past one year chart (see below), you can see that the major positions in the global equities fund have had few major downside surprises namely through Tencent holdings, Facebook, Netflix (these being the worst offenders)  but Starbucks and Alibaba were also the drags on performance relative to the ACWI world index.  On the flip side, far fewer major positions have performed better than the benchmark e.g. Microsoft, Google (Alphabet) and Visa delivered better.

Incidentally, Facebook was holding up in performance until just recently but got sold off heavily after an awful fourth-quarter earnings report. But Facebook is now appearing as quite cheap on Fwd P/E of 15x and cheapest amongst the FAANG stocks – I guess the market is questioning Facebook’s ability to deliver 14% revenue growth and is questioning the expenditure going into Metaverse investment which if it works will pay off handsomely but it is a new frontier and rife with risks.  Netflix has similar issues of stagnating growth, competition, and questions around the business model.

So, between Netflix & Facebook (Meta) and Alibaba you have 15% of the portfolio under concentrated squeeze before we go to other positions in the portfolio.  These positions do require a strong character (previously Hamish) to make a call (either to cut or hold) and articulate and convince the market of the position.


On a five year chart (below), you can see the above mentioned big bet positions, while they contributed considerable alpha on their way up they have also now given back the returns as these stocks get competed away for their moats.

Anyway, so now to the relatively flat structure of the investment team at the Magellan Global Equities Fund (apologies for the blurry chart below but you get the gist).  Hamish Douglass led the team and the vertical nature of the chart would suggest to me that ultimately he made the final call on the positions without being challenged by a parallel who would be adjacent at his level in the org chart.

Gerald Stack runs the infrastructure Fund so his input to the global equities portfolio should be discounted as minimal.

Chris Mckay will now head up the Investment Team and while he has been around a long time in investment banking and is also perhaps distracted for time as director of seven group holdings, I would reserve my judgement on how much innate knowledge and appreciation he has of the high growth tech stocks to make a decisive call on their future and weighing that up against the importance of these tech positions in the portfolio right now I think you can quite easily conclude there is a steep learning curve ahead for him.

Appointment of Nikki Thomas, who has joined from Alphinity and has spent a lot of time as an analyst and some time as research head at Magellan in the past, may help but don’t underestimate the organisational cultural challenges this results in to settle back in the team and work as one to deliver performance.  But again portfolio management decisions that now need to be made at such a scale without Hamish in the picture (for now) does raise the stakes for making further errors.

I do think after all the plusses and minuses the fund does have big global brand names, so on the whole, it should deliver close to its 9.5% p.a. aspirational return.  But that raises the question that is it justified paying a premium dollar in fees without the premium in returns?? (they may well lower their fees).

Our team have downgraded the fund to neutral and we are holding a video call tomorrow morning at 11am to discuss the change in recommendation and what may be your other options as a substitute for this fund.

Separately, we are fine with Magellan Global Infrastructure Fund as being recommended.

Max Riaz

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