Magellan boss Hamish Douglass has issued a ‘mea culpa’ for a couple of dud calls during the last 12 months while defending the manager’s long-term record.
In an article titled ‘The importance of being rational’, Douglass also highlights “major risks that appear to be hiding in plain sight” including inflation and a bitcoin bubble destined to “end in tears for many people”.
The head of the $100 billion plus Australian global equities manager says “two mistakes stand out” for the group over the previous year – one a single-stock error and the other a strategic timing issue.
Firstly, Douglass says Magellan was hit by an overweight position in Chinese technology firm Alibaba that at one point reached 8 per cent of the manager’s portfolio.
The Chinese government cracked down on Alibaba and founder, Jack Ma, in 2020 just as the firm was due to spin-off its financial services arm, Ant, in a highly anticipated IPO.
After Chinese authorities squashed the Ant IPO, US-listed Alibaba shares fell from almost US$320 to below US$200: it currently trades at about US$214.
“The plan at the time was to gain a holding in Ant before trimming the Alibaba holding to a more moderately sized position,” Douglass says. “In hindsight, this was a mistake and was likely due to overconfidence and confirmation bias.”
“…To avoid making the same error again, we have instituted risk controls that set a maximum position size for Chinese companies and certain other technology companies.”
He says Magellan also missed out on the market switch to cyclical stocks ahead of upbeat COVID-19 vaccine test results last November due to a cautious positioning on the medical outcomes.
“… for various reasons I decided not to invest in these cyclicals and the portfolio entered November last year with limited cyclical exposure,” Douglass says. “In hindsight, this was a mistake. However, we will not chase the market after that horse has bolted.”
Despite the short-term hiccups he says the flagship Magellan global fund has delivered on target over the 133 months of three-yearly rolling returns since the fund’s inception in 2007.
“We are satisfied that our Global Fund has delivered an average three-year return of 14.4% per annum in Australian dollars after fees over these 133 monthly periods, which has outperformed the MSCI World Index by 4.2%,” Douglass says.
More recently, he says Magellan has positioned its global equities portfolio for higher interest rates and rising inflation, in anticipation that inflationary pressures may prove less temporary than consensus forecasts suggest.
“Other risks hiding in plain sight include some worrying asset price bubbles,” Douglass says. “It would be fair to say that we are witnessing one of the most extreme delusions in modern history, measured by the breadth of participation and size. This delusion has some powerful attributes: cult-like behaviour, rebellion against authorities, gambling, break-out technology, a fear of missing out and the madness of crowds.”
Specifically, he says cryptocurrencies relying on ponzi-style dynamics, rather than central bank issuance or hard-asset backing will most likely “end in tears for many people”.
“In our opinion, it is virtually certain that, in time, cryptocurrencies that are not backed by assets or by a central bank will become worthless,” Douglass says.
As at June 30 this year, Magellan reported almost A$114 billion in funds under management split between about $31 billion in retail and $83 billion in institutional money, according to a company update in July.
“For the June quarter, Magellan experienced net outflows of $351 million, which comprised net retail outflows of $260 million and net institutional outflows of $91 million,” the update says.
The manager, which is popular in the NZ financial advisory market, estimates it will collect performance fees of roughly A$30 million for the 12 months to June 30.