Bear77
In response to your #Moats Straw @TycoonTerry - MGF is a fund (a listed investment trust or LIT) and I don't think funds have moats. They have performance stats, returns for their investors to crow about or brush under the carpet, but no moats - as in barriers to entry for competitors - or competitive advantages. Sometimes fund MANAGERS (like MFG who manage MGF) may be considered to have moats - and the moats that MFG used to have were scale, resources, contacts (smart and connected people around the world that Hamish kept on a retainer for up-to-date info, Janet Yellen was one of those - current US Treasury Secretary and former Chairperson of the US Federal Reserve's Board of Governors - she was on MFG's payroll between those two positions) and performance track record. The performance has been poor during the past couple of years, MFG's scale has certainly reduced along with their FUM, their resources I don't know about, but there have certainly been some changes in personnel that we do know about. So MFG's (the manager's) moat(s) has/have certainly shrunk considerably. Or evaporated perhaps.
The rockstar fundie that used to run MFG - Hamish Douglass - has fallen from grace - fallen a LONG way actually; he's no rockstar these days - and - apart from being kept on a retainer by MFG for the odd bit of "advice", Hamish is not involved any more with the day to day operations and decision making at MFG - Hamish is no longer a PM (portfolio manager) or CIO (chief investment officer) at Magellan. So a lot has changed for the manager, a lot more than has changed for MGF (MFG's largest managed fund).
That said, I hold MFG in one of my RL funds and I hold MGF in another one (the one I manage for my two kids). Here's why:
- Despite the changes at MFG, I believe MGF (the fund) is still invested in some of the best companies globally, and that the people at MFG who manage MGF are not dumb, or silly, and the performance will recover from Hamish's past mistakes now that he is no longer making the day-to-day decisions.
- I still regard the team at MFG to be better than the team at Platinum (PTM) and they are the two largest Australian-based global funds managers that we have to choose from.
- I am aware that I do not have the time or the resources to do the DD on global companies in terms of working out what the best ones to invest in are - I have my hands full with the Australian market (the ASX) so I would prefer to get my global exposure via a fund manager that specialises in global sharemarkets. And I don't mind if they've had a bad run of late, as long as they are still making good calls for the future, which I think MFG are, particularly with MGF.
- I am aware that almost EVERY global fund (LIC or LIT) that is ASX-listed trades at a significant discount to their NTA. It's been like that for a few years now. Some trade at bigger discounts to others, but it's rare to find a globally-focussed LIC or LIT (listed investment company or listed investment trust) that trades at NTA/NAV or at a premium to NTA/NAV.
- I am aware that this gap between share price and Net Asset Value (NAV) may continue indefinitely, and it doesn't bother me too much. It means I'm buying $1 worth of global shares at less than $1. It has no effect on performance. Performance is all about growing the NAV (some LICs call it NTA, but it's the same thing) and if the NAV increases, it drags the share price up towards it eventually. I'm not saying the share or unit price will be dragged up to parity; what I'm saying is that even if a fund trades at around a 20% discount to NAV most of the time, if the NAV goes up by +50%, the SP will also rise, perhaps not by the same percentage or by the same dollar amount, but the gap won't keep getting wider and wider. If it becomes wide enough, somebody will takeover the fund for the arbitrage, or more likely the fund manager will take steps to close the gap so that the fund won't be such a takeover target. But getting the SP to parity with the NAV may not be possible if the market insists on a discount to NAV for all global share funds. Performance will make some difference, but it's the nature of global funds that they usually trade at a discount to NAV, or have for the last few years anyway - and that's across the board, not just the ones managed by MFG.
- While MFG's and MGF's respective performance has been pretty dismal of late (like for the past couple of years), a lot of that can be explained by a few large moves (such as Alibaba and Tencent) which went very pear-shaped on Hamish - and that was the main reason I originally preferred Magellan to Platinum - because Platinum were all about Asia, particularly China, and Magellan thought the Chinese market was too risky and there were safer ways to make money in the US and Europe - and then Hamish went and bought lots of Chinese Tech just before the Central Government over there cracked down hard on their tech billionaires and their stocks got smashed. Hamish's timing couldn't have been much worse. And there were other mistakes as well. Deciding to partner with Cricket Australia as the Australian Men's Test Cricket naming rights partner right before the sandpaper scandal occurred was another decision that backfired. Hamish immediately cancelled that deal when the sandpaper (ball tampering) issue blew up, but Magellan had spent millions on the ads and signage and everything else and they didn't get much bang for those bucks. The biggest issue was that whatever Hamish said was law at MFG a couple of years ago - nobody dared argue with him, it was his company - he was the largest shareholder and the CIO. And he'd had the Midas touch for a few years and nothing he did went wrong... And then it did, all at once. And he didn't handle it well by all accounts. Refusing to back out of losing positions was one problem. Doubling down on companies that had clearly gone pear-shaped was a bigger one. But let's not rake over those coals. Mistakes were made. There was some serious underperformance. And Performance Fees that could have been earned by the manager (MFG) have not been, which has reduced their income, and therefore their profits. In terms of MGF however, the largest fund that they manage, less fees being paid by the fund to the manager is actually positive. The big negative is the lack of positive performance as measured by their NAV. The SP (share price) isn't going to head north until the NAV does. So we need some positive performance again, and I think that is coming. It hasn't come yet, but I think it will.
- In terms of MFG, the manager of MGF, I hold them because I think they are still profitable simply based on their ongoing management fees (MFs), without any performance fees (PFs), so when they do manage to outperform the MSCI again - and possibly even some other global funds - and the PFs start rolling in again, we should see a significant positive re-rating of MFG by the market. So, the short version is - they're cheap, they're profitable, they're paying good dividends, and they're not going broke. That said, they're not going back to their previous highs any time soon, if ever. But they are a very, very long way down from those highs now.
I like the number 7, so I'll stop there. In Summary: 1 = MGF positions (I like most of the companies that MGF hold), 2 = I like the current investment team at MFG (who manage MGF) - except for Hamish Douglass (who is almost completely out of the picture now anyway apart from still owning a lot of shares in both MFG and MGF) - and I think the current management team can turn the performance around and perform well in future years, 3 = I prefer to use a LIC/LIT for my global sharemarket exposure, 4 = global LICs/LITs trade at discounts to NAV, so it's par for the course, 5 = funds that trade at discounts to their NAV can offer the opportunity to buy assets (or exposure to companies) at a discount to their market value, and the NAV will be dragged higher if we get some consistent positive outperformance in future years, 6 = I believe I understand what went wrong, and I think I understand why it could go a lot better in the future, and 7 = MFG (the manager of MGF) looks like a good deep value play to me here with low downside risk and quite a bit of potential upside if a few things go right for them in the future.
One extra thing. MFG has been in what many may have seen as a death spiral over the past year or so, which started with a lot of poor performance, than escalated rapidly when they lost a BIG chunk of FUM (funds under management) which began with losing their largest institutional client and then fed on itself; the more FUM they lost, the more people withdrew funds, and that meant they lost even more FUM, and on it went. The FUM appears to be stabilising now - at least the outflows have slowed down to a virtual trickle compared to a few months ago. That to me suggests that the worst could be over, as long as they do NOT continue to underperform from here in terms of the performance of the funds that they manage (such as MGF). So, of course, it could get worse from here, but not too much worse I hope. But that's MFG, the manager of MGF. The Magellan Global Fund (MGF) has also been negatively affected by large FUM outflows because it has meant Magellan were forced sellers at times when they would have preferred not to have had to sell shares. They had to sell shares at times to free up cash for those exiting the fund or redeeming some of their units (reducing their exposure to the fund). Large FUM outflows is never ideal for fund performance, so the slowing of those outflows to a virtual trickle is a positive for MGF (the fund) as well as MFG (the manager of MGF), and if they can maintain FUM from here or keep their FUM around these levels going forwards, that should make it easier for them to turn around their performance (both MGF and MFG), all other things being equal.
Hope that helps.
Bear77
Yeah, I didn't mention the buybacks @Dominator but of course you are 100% right in that buying back shares at a significant discount to their net asset value (NAV) is always positive for unitholders of the fund, as you point out. And for the sake of clarity, I was only talking about MGF - the closed class units - however there is also the same fund (invested in the same companies) available as an open class fund - MGOC - which operates like a traditional open class managed fund where new units are created on demand and units are redeemed and cancelled on request, so they always trade at NAV (or close enough to NAV - some funds have a very small buy/sell spread on redemptions and/or new units but it doesn't make much of a difference). LICs and LITs (like MGF) are closed class, so ordinarily there would be a fixed number of units, so to buy units you have to pay somebody for their units at a price they are willing to accept and when you want to sell units you need to sell at a price someone else is prepared to pay, i.e. the same as shares in any other ASX-traded company. Open class funds are not ASX-traded as a general rule, the new units are issued or existing units redeemed by the manager on request, and that's why they can trade at near enough to NAV at all times. ETFs are an exception as they are open class and ASX-traded, but they use "market makers" to provide liquidity (which is a whole 'nother thing that I won't go into now). MGOC is actually an active ETF, so they are ASX-traded, and like all ETFs, new units are created as required and cancelled as they are redeemed.
With closed end funds (closed class funds), the share count (or unit count) can increase - such as if they do a bonus issue, rights issue, issue options, or do a dividend/distribution reinvestment plan, or takeover another fund, and the shares/units can also decrease, such as if they do a buyback where they buy back their own shares or units and then cancel them, as MGF has done. But ordinarily, with those exceptions and a few others that I've probably overlooked, the unit count (or share count in the case of LICs) of closed-end (closed class) funds do not generally change, and that is what creates the divergence between intrinsic value (NAV or NTA) and the market price of their shares or units (trusts such as LITs have units, companies such as LICs have shares). Supply and Demand. And limited Supply.
@edgescape I probably came across as very anti-Hamish in that post of mine. The truth is that I personally think he earned his rockstar status in those early years. He was almost always the smartest person in the room. Any room really... He was very, very, good, and he had a knack of being able to explain reasonably complex ideas or concepts to ordinary people (like me) in language we could understand.
The problem I guess is that he may have ended up believing his own hype, that he was always right, and rarely made mistakes. Because that was certainly the case up until a couple of years ago when he started making some serious mistakes. Because he had so many smart people on the payroll in so many different places globally (some just on retainers for the odd bit of advice when required, others working for him full time), he figured he was across most things, and when he wasn't he felt he could get up to speed with what was really going on (anywhere / anything) in a reasonably short time by using the resources and network that he had created. It's easy to imagine how you could become a tad overconfident in that situation.
So I was a bit of a Hamish Douglass fanboy back in the day, went to his roadshows, loved his work, however he had a pretty public meltdown, with his marriage, and his senior staff at Magellan, and then stepped away for a period during which the guy who co-founded Magellan Financial Group (MFG) with Hamish back in the day (Chris Mackay) stepped back in to oversee MFG and assure us that it was "business as usual" in terms of their funds management and their funds. Hamish then retired from the MFG board in March last year and basically had nothing to do with the company for a time. They then announced that they had decided to put him on a nice retainer so they could pick his brains every now and then about this, that, or the other. Seemed like an overly generous golden handshake, but hey, he basically built the company up to become Australia's largest global funds manager, so I'm thinking they should probably be looking after him, despite his millions of dollars worth of shares that he owns and could sell (and he has sold some). But I'm not going to make light of his health issues, particularly mental health. Nobody knows what he went through but I imagine with so much going wrong for him all at the same time in both his professional and personal lives, it would not have been an easy time at all.
But that is all to say that I agree with you @edgescape that Hamish has certainly said and wrote many things that are worth hearing, reading and quoting. Like I said, he seemed to me to always be the smartest guy in the room, and particularly when he was in the same room with Andrew Clifford from Platinum (PTM). Kerr Neilson, the founder of Platinum Asset Management, would probably have been up there, very smart guy, and a self-proclaimed contrarian investor, but I lost faith in Platinum when Kerr stepped away and left the investment decisions to others there. And I didn't like their Asian focus at the expense of so many other opportunities elsewhere. I didn't mind it in their Asian fund (PAI) but not in their main global funds. But I digress.
@Mujo Right you are, there has been a push over recent years to either wind-up underperforming funds or those trading at large discounts to NAV, or else convert them into a different structure such as an open-end fund where the units trade at NAV at all times. So that's certainly possible with MGF. And they already have MGOC, so that's a no-brainer I suppose. But I agree with you that MFG would prefer not to go down that path if they can avoid it.
I guess the bottom line is that if you hold MGF units, you are likely to either see (a) the discount narrow over time, or (b) the fund be taken over or converted into an open-class fund (such as be absorbed into MGOC).
That's the upside, plus potential NAV increases due to positive fund performance.
The downside is that the NAV goes lower or does nothing, i.e. that they continue to underperform.
My own thoughts are that Magellan are really growth investors that are invested in global megatrends such as AI, cloud computing, disruptive and/or market-leading platform tech, digital transformation/digitalisation/IOT, the escalating health imperative (aging population and what that means, drugs, diagnostic services, etc.), plus fast-growing global retail chains, etc. Electronic and physical (card) payment platforms (Visa, Mastercard) and electronic clearing houses for stock exchanges fall into two of those categories (market-leading platform tech and digitisation). Growth investing is going to have good years and bad years, but likely many more good years than bad years over time. They've had a couple of bad years, but methinks the cycle may be changing again, or will soon. Good growth companies, and they have to be good for this to be true, will usually perform well over decent period of time, despite some significant drawdowns along the journey. Many of the companies that Magellan have invested in have had some big drawdowns during the past couple of years, but that doesn't mean they should dump them and look for something else to invest in. Investing often involves playing the long game, and I'm confident that the majority of the companies that Magellan have chosen to invest in at this point (which are mostly the ones they were invested in 5 years ago, give or take a few changes, and a few new additions) will play out well for them over the next 5 and 10 years.
Further Reading: Magellan: The rise and fall of Hamish Douglass (afr.com) [Feb 7, 2022]
Magellan co-founder Chris Mackay (left) and Hamish Douglass (centre) at the fund’s launch in November 2006. James Packer, an early backer is on the right.
Photo credit: Tamara Voninski, AFR.
Hair one day, gone the next...
One very smart cookie, no question.
