Financial Keys - A member firm of Genesys Wealth Advisers


Investment in Focus: Magellan Global Fund

by Matthew Congiusta

The world is a different place to that of the last bull market (2003-2007) and the way we look at investing in the global investment universe should be re-examined. Financial Keys has identified a fund manager with the characteristics that make it truly a manager of our time. The Magellan Global Fund (MGF) is designed to take advantage of the changing landscape of global markets.

Fund Overview

Magellan Global Fund offers investors an opportunity to invest in a specialised and focused global equity fund. Objectives:

To achieve superior risk adjusted investment returns over the medium to long-term.

To minimise the risk of permanent capital loss. We aim to find outstanding companies at attractive prices. We consider outstanding companies to be those that have sustainable competitive advantages which translate into returns on capital materially in excess of their cost of capital for a sustained period of time. An outstanding company will usually have some (or ideally) all of the following characteristics:

A wide economic moat. An economic moat refers to the protection around an economic franchise which enables a company to earn returns materially in excess of the cost of capital for a sustained period of time. A company’s economic moat will usually be a function of some form of sustainable competitive advantage.

A moderate to high potential to continue to re-invest capital into the business at high incremental returns. This is a very important metric which is often overlooked by investment analysts.

Low business risks. We assess business risk taking into account factors such as cyclicality, operating leverage, financial leverage, competitive strength, regulatory and political environment and profitability. We carefully assess business risk to determine the certainty of cash flow and earnings projections which are central to making an assessment of intrinsic value.

Low agency risks. Agency risk refers to the risk surrounding the deployment of the free cash flow generated by a business. We anticipate that the Magellan Global Fund will comprise 20-40 individual investments, with the portfolio weighted towards our highest conviction investment ideas.

MGF is a unique and high performance global equity fund, with innovative insights and processes. The stellar performance over the last 12 months sees a manager at perhaps the peak of its powers. For investors wondering how to capture the equity risk premium, this fund provides a powerful answer.

The MGF returns have been solid since inception in 2007 with an annual total return of 4.12% pa. This return includes the terrible years of 2008-2009 and 2011-2012. The value of the approach and style of the manager stands out when the last 12 month’s return is considered – MGF has returned 18.25% over the last 12 months compared to the negative 0.76% return of its benchmark, the International MSCI Index – this is a positive outperformance of 19.01%.

There are profound reasons for the potential outperformance exhibited by MGF. MGF is overtly benchmark unaware. This means they do not seek to track or outperform market indices (in this case the MSCI allocates country weightings in direct proportion to the share of global stock market capitalisation).

The problem for active managers who are “benchmark aware” is that they are forced to largely track their reference index, owning stocks and country exposure without regard to relative value. In falling markets, benchmark aware funds sell stocks (hoping to do better than would be incurred by holding stocks whose value may continue to fall). The MGF approach is to identify global themes, look for those sectors which are capable of generating above market growth rates, and then look to buy the best companies in those sectors.

Magellan’s favourite global themes are:

  • Emerging market consumption growth via investments in multinational consumer franchises (Danone, Kraft, Nestlé, McDonalds and Procter & Gamble);

  • A move to a cashless society. There continues to be a strong secular shift from spending via cash and cheque to cashless forms of payments such as credit cards, debit cards, electronic funds transfer and mobile payments ie. PayPal (via eBay), American Express, Visa and Mastercard;

  • Internet/e-commerce (eBay and Google).

  • The eventual recovery in US housing (Lowe’s and Home Depot, Wells Fargo and US Bancorp). MGF looks for an “earnings moat” i.e. strategic assets that protect earnings, like monopolies or unique dominance, like eBay and Google, Coca Cola and Nestle. Please refer to the “Top 10” stock holdings table.

Financial KeysWhile Europe and the US work their way through the deleveraging process, the one essential denominator that MGF is looking for from these (predominately North American giants) is a dedicated China / South East Asia strategy – NOT including Japan or Western Asia. These companies will generally have leading revenues, leading earnings and are beating expectations.

For example, L’Oreal (France) had sales growth for the first half of 2012 of 10.5%, and that growth was bolstered especially by the Asia Pacific region, where sales surged 21.9%. Yum Brands (US - they own KFC) also had an increase in sales of 8% worldwide, driven largely by a 27% increase from China. Kimberly Clark’s (US - Huggies, Snugglers, Wondersoft, Kleenex, Viva, Poise) was led by personal care, with sales (excluding acquisitions) up 7%, particularly in diapers outside the U.S. and Western Europe. The company saw a 40% volume increase in China!

The point being that a large percentage of sales are being generated AWAY from home base (the US and Europe). There has also been much written about a China slow down and what this might do to the overall strategy being pursued above.

If we stick to some points on China;First, domestic consumption is extremely strong

  • Investments made by industry is continuing to grow, albeit at a slower pace

  • The Chinese government dominates many industries and is continuing to invest massive amounts in the economy

  • There is a noticeable slowing in exports, but it would appear that consumer and government spending has covered this gap

  • Investment monies are still flowing into China from overseas as Beijing has made this process a lot easier as she opens up her boundaries to western investment

  • China will NOT be completely immune to western economies’ slowing, however more and more it should be a case of exports weakening and the domestic economy continuing to grow. For example, the U.S today only takes 12% of China’s exports. Additionally, a larger percentage of Chinese exports are now going to their Asian neighbours i.e. Malaysia, Indonesia, India, and other emerging markets, which continue to be very strong

  • China may well face wage inflation – the flip side being many more people with more money to spend – the companies listed in the table will be the recipients of this spend as the Chinese improve their overall standard of living – food, accommodation, asset ownership, personal hygiene to name only a few

  • A housing boom ready to fall – approximately 70% of house purchases in China are funded with cash

  • Housing oversupply – maybe, but rural migration to China’s eastern seaboard is unprecedented and is counted in the many millions.

The MGF is placing a big bet on the ‘China story’. Their overall strategy and the companies they are purchasing is global, BUT a high percentage of sales and profits are being generated from these emerging economies, which includes China as one dominant player.


August 2, 2012
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