Hamish Douglass sticks to his guns with Magellan strategy

In a note to Magellan staff on Monday, Hamish Douglass wrote: ‘We must accept that there are elements of our performance in the past 12 months that have underperformed our high expectations.’ Picture: Britta Campion

Shorters of Magellan stock will be patting themselves on the back. Shares in the fund manager fell by a third on Monday.

In fact, these shorters had already started their play in the weeks ahead of the shock and still unexplained departure of CEO Brett Cairns on December 6, and before confirmation (following a surge in media speculation) that chairman and chief investment ­officer Hamish Douglass and his wife Alexandra were separating. They were looking at fund performance. On Monday came the confirmation that Magellan’s largest institutional mandate had been pulled. Macquarie Research believes the loss of the British St James’s Place mandate will hit annual revenue by 12 per cent and net profits by $66.5m, or a drop of 14-15 per cent.

Early this month, Douglass insisted that no institutional investor had questioned the perform­ance over the previous 12 months.

So what is behind SJP pulling the pin? And are these three developments to be seen as a series of unfortunate events, or a sign that the wheels are coming off at Magellan?

The Douglass philosophy that protects clients from market downturns is ill-fitted for a pandemic world where governments and central banks remove downside risk from equity markets through stimulus measures. However, it has done very well in times past, when corrections have wiped out returns of rival fundies.

But how will Magellan fare going forward?

In Magellan’s internal note to staff on Monday, obtained by The Australian, it is clear Douglass is not deviating from Magellan’s investment strategy.

He acknowledges that a prudent approach is likely to underperform current conditions, and includes a mea culpa. “We must accept that there are elements of our performance in the past 12 months that have underperformed our high expectations.”

Magellan missed the November 2020 rally by being too cautious ahead of the vaccine trial results after which many cyclical stocks took off. And Douglass now says he was wrong on China. But he is adamant the global equity strategy will stand the test of time.

The Magellan Global Fund holds about 25 international companies where Douglass sees sustainable competitive advantage, like Starbucks, Netflix and Microsoft. It has a return target of 9 per cent a year net of all fees.

In the staff email, Douglass notes that in the year to November 30, the target had been achieved over every timeframe while at the same time exposing investors to less than 50 per cent of downside market risk: one year (12 per cent), three years (13 per cent), five years (14 per cent), seven years (13 per cent), 10 years (17 per cent).

Magellan CEO Brett Cairns left the company on December 6. Picture: Jane Dempster

The problem for Douglass is that in a market of asset bubbles, investors and the media are comparing performance with the global equity benchmark, the MSCI World, something he admits is natural. “The risks in current markets are very elevated. Time will tell if our prudent approach will continue to serve our clients well,” he notes.

Douglass has recently warned of a 30 per cent risk that Omicron and US inflation could trigger a sell-off. He believes inflation should be transitory: however, if by mid next year Omicron shuts borders, supply chains fail, and consumers continue to spend on goods rather than services, the risk is that inflation is passed on to consumers and central banks raise interest rates.

“And what happens when they start to materially tighten monetary policy is we’re going to have massive asset price volatility. I think I could name 200 stocks that could drop 40 per cent in a day. People are playing with fire,” Douglass told staff in his note. Internally, he describes himself as the designated driver at one hell of a party.

A more problematic scenario for Magellan would be a mild goldilocks economic period that continues for 18 months: Omicron disappears, inflation rolls over and there are a few rate rises. Douglass is sticking with the Charlie Munger view that markets today are the most extreme event he has seen and risk is real.

“Remain rational”, Douglass told investors in July.

Institutional clients will listen to Douglass’s take on risk and the portfolio’s position as they have for many years. But they will also want comfort on the Cairns departure and whether Douglass is distracted over his personal ­situation.

Six weeks ago when Hamish Douglass was in London, St James’s Place gave no public sign it would terminate with Magellan.

SJP has been shifting away from single managers to a multi-fund manager model for its main funds. Unfortunately for Douglass, it could well be the series of events that pushed SJP into action: the Cairns exit and the Douglass marriage speculation and media noise around performance.

Each of Magellan’s institutional clients now account for no more than 3 per cent of annual revenue and each will make its own decision. Much of the retail money with Magellan is through financial planning firms that use the big assets consultants, Zenith, Morningstar and Lonsec, for advice. To date, they have not downgraded Magellan. Douglass will be working hard to make sure it stays that way.