03-June-2020: On Monday (June 1), Chris Mackay's LIC, MFF Capital Investments (MFF), reported that they ended May with 46.4% cash, most of that being in US$. MFF advised that its approximate monthly NTA per share as at Friday 29 May 2020 was $2.940 pre-tax ($3.225 as at 30 June 2019), and $2.557 after providing for tax. They also paid a 2.5c per share fully franked interim ordinary dividend on 15 May 2020. Tax instalments of approximately $34.8m (approximately 6.3 cents per share) paid in May also reduced cash and pre-tax NTA. That amount of tax payable gives you some idea of how much selling Chris has been doing. His May report for MFF is worth reading - you can access it by clicking here.
Chris Mackay is the lesser known co-founder of Magellan here in Australia. Reasonably early on in their journey, Chris had concerns that he and Hamish Douglass had somewhat overlapping responsibilities with regard to portfolio management, and that he (Chris) would be happier managing his own smaller fund, and leave the main Magellan funds management to Hamish, who was more charasmatic, outgoing, and generally regarded as the face of Magellan here in Australia (not affiliated with the Magellan Fund in the USA that Peter Lynch managed extremely successfully for more than a decade).
Hamish Douglass, who is widely regarded as always being the smartest man in the room and one of the most successfull fund managers Australia has ever produced, has always described their "split" as being very amicable, and they remain friends. Indeed, Chris still works out of the same office building as Hamish to this day, and Chris is a major shareholder in many of the funds that Hamish manages. Chris however is the only major shareholder in MFF, owning around 88 million MFF shares, or 11.8% of the company. Chris doesn't invest in too much outside of the USA, and he doesn't have the heavy investments in the IT sector that Hamish favours. The main single tech exposure in MFF remains their 1.9% exposure to Microsoft. There is also a tiny 0.1% remnant position in Alphabet (Google). However, MFF's main exposures have been Visa, MasterCard, US Banks, US Healthcare and US Retailers.
MFF's top 12 positions currently represent 99.6% of the fund, so their other positions are really immaterial.
Those top 12 positions as at May 31 were:
- 46.4%, Cash, AUD net cash was 5.0% (taxes, other expenses and dividends are paid in AUD), USD net cash 41.5% and other currency borrowing/cash exposures were below 0.1%
- 18.5%, Visa
- 16.2%, MasterCard
- 9.3%, Home Depot
- 2.5%, CVS Health
- 1.9%, Microsoft
- 1.3%, Lloyds Banking Group
- 1.2%, JP Morgan Chase
- 1.0%, US Bancorp
- 0.6%, Lowe's
- 0.4%, Schroders
- 0.3%, Wells Fargo
- 0.4%, All others (including HCA Healthcare, Morgan Stanley & Alphabet).
- 100% total.
MFF closed at $2.80 yesterday, and is up a little so far today. While they're trading at a discount to their $2.94 before-tax-NTA, I'm a little wary of the big difference between the before and after tax NTA numbers ($2.940 vs. $2.557). When you've got a fund manager liquidating assets at the rate that Chris has been, and paying tax as he goes (including $34.8 million in tax paid in May alone), this may be one of those situations where the after-tax NTA is more applicable to a sensible valuation than the before-tax NTA. Of course, that all depends on whether he keeps selling or not. If most of that variance in due to unrealised capital gains in their major positions like Visa and MasterCard and they don't sell those positions down any further, then the before-tax NTA is fine as a working valuation.
I'm not buying into MFF just yet, but they're now on my watchlist. It's not often you find a succesful fund manager happy to have almost 50% cash in his fund at a time when the market appears to be in recovery mode after a crash. Chris Mackay is obviously quite wary here, and those concerns are pretty valid. At the end of May (3 days ago), the US tech-heavy NASDAQ index was at 9,490, only 3.3% below its ALL-TIME-HIGH of 9,817 which it set on February 19th this year. Many would question whether that sort of optimism is justified considering the headwinds that the world faces today, particularly the USA.
Magellan's other co-founder, Hamish Douglass, however has a longer investment horizon than most fund managers and he's following global megatrends such as the shift to the Cloud and the rise of massive and dominant global IT platforms - including global payment systems, social media, advertising, online retailing and commerce, online entertainment (including streaming services and content creation), logistics and delivery platforms (both physical and digital delivery), and increased Chinese consumer spending in China. Apart from Tencent and Alibaba (which Hamish holds), he is playing those themes mostly via US-listed companies (including US companies with heavy exposure to the Chinese Consumer - such as Starbucks).
Chris Mackay is far more "old-school", preferring traditional US Banks and retailers, although they clearly both agree on Visa, MasterCard & Microsoft.
Interesting...
