Is this the beginning of the end for Magellan?

Magellan has announced that Hamish Douglass will take a medical leave of absence. With the recent departure of the CEO, relative underperformance and losing their largest mandate, is this the beginning of the end?

In the coming days we will see the market put the strategy on “Fund Watch” / “Under Review” / “We really have no idea”, then sit on their hands while they wait for a meeting. It is highly likely that the combination of factors will result in research houses downgrading the strategy, if not putting on a sell recommendation. In the meantime, every BDM and marketing team worth their salt will go into overdrive and start promoting their competing strategies. 

As an investor or adviser, what should you do?

Unfortunately this process is often too slow to be useful. If there is a meaningful change the big money will be gone before you get the “compliance” tick. At Research IP we want our clients to be aware of the risks, but we take a slightly different approach.

On 10 January 2022 we released a new research report for the Magellan Global Fund. It was released with the following statement:

“Despite the recent relative performance and press coverage, the Magellan Global Fund has retained its “5 IP” rating from Research IP, with a score of 4.40/5. The Fund continues to meet its stated object, that is to deliver 9% p.a. net of fees over the economic cycle.”

We believe that making a decision to invest with a fund manager in one of their funds is a big step for financial advisers, who are obligated to help investors make decisions in their best interest. Not all investors use the services of a financial adviser and investing with a third party can be a bigger leap of faith, especially with many first time investors in the market now. Unfortunately, many simply search on fund performance and fees to make their decision, but are investors looking at the fund manager’s performance objectives or the noise of the market? By focusing on the fund’s stated performance objective it allows us to cut through the market relevant performance noise. This is an important aspect of knowing the fund manager, the fund, and its stated objectives. After all, the fund manager sets the scene and expectations of what people should expect from the way they invest. However, this is not the place to have the debate about active vs passive or performance objectives.

On 7 February 2022, Magellan Financial Group announced Hamish Douglass is taking a medical leave of absence. 

In preparing our research reports we collate data and other information relating to the fund and meet with the investment team, many of whom we have met numerous times over our collective careers. 

It is important to understand the team that manages the Magellan Global Fund is not just Hamish Douglass. Douglass was supported by 12 other portfolio managers with broad or sector-based responsibilities, with a total investment team of 34.

Magellan has put together a strong team and, from our review meetings, the portfolio management team are very well versed in the processes employed in managing the portfolio. They also have a very strong understanding of why the portfolio positioning is the way it is. 

Our score of 4.67/5 for the team was not based on one person. 

After a longer than usual review meeting with Head of Macro and Portfolio Manager, Arvid Streimann, in December 2021, we continue to hold a very high degree of confidence and conviction in the portfolio management team at Magellan. No one person materially changes that conviction; we continue to back that team. This is why meeting with the investment team is very important in any research process. We do not look for “star” portfolio managers and investment teams. We look for cohesive, insightful and strong teams that manage the portfolio to a consistent process.

From our 2022 report, “Research IP considers key person risk in Douglass to be relatively high, having significant responsibility as both the Chairman, Chief Investment Officer (CIO), and Portfolio Manager (PM) for this fund, although there is assistance and oversight from other members of the investment team. Douglass is also a very key component of the Fund’s marketing drive and message”. 

We are not diminishing the importance of Douglass, but it didn’t reside purely in Douglass’ portfolio management role. We believe the Board and dominance of non-executive directors has been a strong corporate governance strength of the collective business. The Board remains largely unchanged, other than the announced search for another non-executive director. There has been a recent CEO change with Brett Cairns’ departure, who was not a part of the investment team, but other aspects of the business managed by the 130 strong team at Magellan should not be materially impacted by Douglass’ medical leave of absence.

Chris Mackay and Nikki Thomas are well regarded investment professionals by Research IP. In smaller firms, it is important to understand any change, but with larger firms changes like this are planned and scripted. It is rare that someone drifts off the message. As stated above, we have a strong conviction in the portfolio management team at Magellan. Both Chris and Nikki are known and there are many more names arguably more important to the fund during this transition period. If anything Chris is more bearish than Hamish, when looking at his portfolio positioning.

A large part of research relates to the psychology of investing, understanding the personalities and how they interact together. Following the journey of Magellan from the early days when it was set up by two investment bankers has been fascinating. The funds have done well and the share price even better, but the intensity of funds management can often come with external costs.

The problem or the risk from here is more one of perception. If the consensus turns negative and more money looks for the exit, this can become challenging for a manager. The loss of a large mandate occurred in Q4 2021, when St James’ Place terminated its relationship, worth $23 billion. A further $1.1 billion was withdrawn by retail investors and $460 million in redemptions from institutional clients. Yes these are all big numbers, close to $25 billion redeemed in December 2021 alone, and it is likely there is more in the pipeline which will be a catalyst for more. Magellan is not going anywhere fast though. As at 31 January 2022, Magellan still managed $93.5 billion.

Some open questions we will continue to ponder:

• Performance – are they straying from their objective?
• Will Hamish return, or is this his path to the exit?
• Why did Nikki go to Alphinity? Why is she leaving Alphinity? Why is she returning to Magellan?
• What price was paid for the move? It is very rare not to serve out a period of gardening leave.
• Chris chose to focus on MFF for a reason, why return at this time?
• Any other team changes?
• Any strategic changes at the Board level?

From our research scoring perspective, ultimately the corporate position and investment governance of the fund have not changed. The process and investment philosophy have not changed. People have changed, but this is mitigated by the size and depth of talent sitting in the team. Portfolio construction and implementation have not changed. Risk management has not changed. Lastly, fees have not changed.

If we truly believe in the Research IP methodology and in our views from a month ago, what could be either a short (2-6 months) or a longer-term (6-12 months) absence should not negatively impact our current position. As should be the case, we will continue to watch Magellan Financial Group for any more announcements. Additional information will be reviewed in the context of all the recent developments and changes that have taken place at Magellan.

We would like to extend our thoughts and best wishes to Hamish in his difficult personal circumstances. In the meantime, we will stay close to this one.

So in conclusion, what should you do?
Well, that depends. Some of you unfortunately may be given no choice, compliance will make the call (driven by a research house that does not know your business). The path ahead for Magellan will not be easy and a few will need to work for their pay (and dividend) cheques, but a lot will depend on the flow of money and someone called Jerome Powell.

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