Magellan warns investors to ‘be selective’ as virus mutation could put world back to ‘square one’

Hamish Douglass says a major mutation could put the world ‘back to square one’ and warns investors to be ‘very selective’.

Hamish Douglass. Picture: Britta Campion / The Australian

Magellan Financial Group chairman Hamish Douglass says a major mutation of the coronavirus could put the world “back to square one” and warned investors to be “very selective” in the months ahead given global markets have already priced in a rebound from the Covid pandemic.

A new variant of the coronavirus, which is said to be much more transmittable, has been driving a rapid surge in infections in Britain over the past week.

While the head of drug maker AstraZeneca insisted at the weekend that his company’s Covid vaccine would work against the new strain, some experts believe it may not be as effective as the rival vaccine developed by Pfizer that is already being distributed in the UK, America and other countries.

There has been a major repricing of risk in global markets over the past month off the back of successful vaccine trials. But Mr Douglass said the UK mutation and the breakout in new cases on Sydney’s northern beaches showed the dangers of complacency.

“The one thing we would say is there is still scientific risk here,” Mr Douglass said in an interview with The Australian.

“This virus could mutate. Depending on how it mutates, it could change the efficacy of the current vaccines.

“There is a major mutation that is happening in the UK and it has changed the spread risk. What we don’t know is how this may change the efficacy of the vaccines.

“Given the scale of the mutation that is much larger than others, this is always a risk for coronaviruses. We could be back at square one again in terms of the risks. We think the markets have appropriately repriced risk over the past month but we need to remain wary.”

Parts of Sydney’s northern beaches will remain in lockdown until January and New Year’s Eve celebrations have been curtailed as new case numbers continue to be recorded in the city.

Mr Douglass said the Sydney situation “demonstrates how quickly things can change”.

“It reminds you it is a deadly virus. It is a warning of how quickly we can become complacent when risks remain. But I have great confidence in our health officials and politicians that they can respond appropriately,’’ he said.

Magellan, which has close to $103bn in assets under management, halved its cash holdings from 18 per cent to 9 per cent during October and early November and made its first investment in global streaming giant Netflix.

Mr Douglass said the $3bn holding, which represents 4 per cent of Magellan’s global equities portfolio, was underpinned by the fund manager’s confidence in the low levels of regulatory risk facing the booming American media group.

He said that in the absence of a major virus mutation, Magellan was optimistic that the pandemic was “largely behind us”, which would lead to a large rebound in economic activity.

“But we have to remember markets have priced most of that in. So you have to be selective and on your toes. There is no bad news being reflected at the moment.

“You don’t want to reach for too much risk in this world. You want to be prudent. When interest rates are zero there will be a reach for yield.”

The rally in November provided the second strongest monthly return for global sharemarkets in half a century and some have questioned whether Magellan had been caught out by the sudden rotation back into value from growth stocks.

Record high reached in February

Of the top performing global stocks that went up over 30 per cent in November, only two were on Magellan’s approved investments list. Magellan shares are also down more than 20 per cent from the record high they reached in February.

But Mr Douglass said Magellan’s global equities strategy was focused on stocks that would compound their earnings over the next three to five years.

“What we are interested in is compound returns. Most value stocks get a one-off pricing adjustment but they don’t deliver over the longer term. I would bet our portfolio over the next three to five years versus, for example, an airline. Quality compounds, deep value doesn’t,’’ he said.

“It is important in this world where you won’t get a free lunch from interest rates, you need to be in the right places — businesses taking market share or creating new markets. One of our largest investments is still Microsoft. And we have smaller positions in Facebook and Alphabet,’’ Mr Douglass said.

Questions were also raised last week about the strategy of Magellan’s Principal Investments arm after it paid a bumper $86.8m for a 10 per cent stake in Mexican takeaway chain Guzman y Gomez, putting an enterprise value on the Australian fast food group of over $850m.

Mr Douglass said Magellan was using its expertise in the quick services restaurants space, which has delivered it strong returns on investments in McDonald’s, Starbucks and Yum Brands, the owner of KFC and Taco Bell.

The Principal Investments arm has also taken a 40 per cent economic stake in the fledgling investment and advisory firm Barrenjoey — to be chaired by former ANZ chairman David Gonski — and made a $20 million-odd investment in financial services group FinClear.

Mr Douglass has rejected speculation the Principal Investments strategy could distract Magellan from its core global equities offering.

Magellan recently launched a series of exchange-traded funds (ETFs) under a new Core brand. They are listed on Chi-X, an alternative sharemarket to the ASX.

The ETFs provide a broader and less active approach than Magellan’s existing funds and charge only a 0.5 per cent per annum fee compared to Magellan’s standard fee of 1.35 per cent.

“One of the bigger breakthroughs we have made over the past year is helping revolutionise the ETF space. We know there is a big client interest in having that type of solution,” Mr Douglass said.

“It is a strategy that is going to take years to evolve.”