Apple, Alphabet, eBay, Intel backed by Magellan group

Magellan Financial Group boss Hamish Douglass has strongly backed the current crop of global technology giants.

Magellan Financial Group boss Hamish Douglass. Picture: James Croucher

Magellan Financial Group boss Hamish Douglass has strongly backed the current crop of global technology giants, contrasting the value they have created with the dotcom bust in 2000.

“We could be starting to see the dominance of platform technology businesses,” Mr Douglass told 450 financial advisers at a lunch in Melbourne yesterday.

“These are real businesses with real earnings and real market share.”

Not only that, he said, but they were generating “massive” free cash flow and network effects, and had “realistic” valuation metrics.

In contrast, the tech companies of the dotcom era had no earnings and vastly inflated valuations.

Mr Douglass noted that five tech giants were now among the world’s 10 most valuable corporations, with a few more knocking at the door of the elite.

These companies typically employed people with the “highest IQs on the planet”, because they were making significant calls about the future, and it was important that those calls were the right ones.

He criticised former Microsoft boss Steve Ballmer for “ripping up” about $US30 billion of value by doing “some pretty stupid things”, but the prospect of some really bad outcomes was relatively low given the quality of management.

The $8bn Magellan Global Fund’s top four holdings at the end of last month were: Google holding company Alphabet, Apple, eBay and Intel.

Since its inception in July 2007, the fund has earned an average annual return of 10.9 per cent compared with 4.3 per cent for the MSCI world net total return index.

Last financial year, it only “broke even”, mainly because of the adverse impact of Britain’s shock vote to leave the European Union on Magellan’s holdings of Lloyds Banking Group and British retailer Tesco.

The fund also made the wrong call on an expected tightening of US interest rates, with 10-year US bond yields starting the year at 2.4 per cent and closing it out at 1.5 per cent.

Mr Douglass said yesterday that central banks around the world had distorted the market with quantitative easing, or massive programs of bond-buying.

About $US13 trillion of bonds were now trading on a negative yield.

“We continue to expect the Fed will tighten rates over the next few years,” he said.

“But we’ve moderated our expectations of the likely rise in longer-term bond yields over the next five years.”

In financial services, Mr Douglass said he doubted the ­cryptocurrency bitcoin would ever go mainstream because of regulatory concerns about its anonymity. However, the underlying blockchain technology — the distributed ledger that supports Bitcoin transactions — had potential.

“We’re looking at that pretty closely,” he said.

The fund’s average investment is now worth $US1bn, giving Magellan open-door access to any management team it wanted to visit.

But Mr Douglass said he had to be careful about getting too close to company management because it could influence his objectivity when the time came to consider an exit.

That said, he made a point of getting to know Tesco chief executive Dave Lewis, who was given the job of turning around the ailing retailer in July 2014. About 3 per cent of the Magellan Global Fund is invested in Tesco.

While disruption was a recurring investment theme around the world, Mr Douglass said it was important to assess businesses according to risk categories, with food, for example, unlikely to be significantly disrupted.

The exponential growth and impact of technological change was accelerating, but it was “insanity” to sell today based on a 20 to 30-year view when the pace of disruption was slow.