Cashed up Magellan keeps its powder dry

Global shares may be in a roaring bull market but Australia’s best-known fund manager is hugging cash.

Magellan chair Hamish Douglass: ‘The outlooks for the economy and equity markets remain uncertain.’ Picture: Hollie Adams

Global shares may be in a roaring bull market but Australia’s best-known fund manager is hugging cash.

In annual fund reviews on Monday, the Hamish Douglass-chaired Magellan Financial Group revealed 15 per cent of the flagship $US8.1bn ($11.7bn) Magellan Global Equities Fund was invested in cash as of June 30 amid a “cautious economic outlook and the risks confronting equities”.

The fund’s cash level was way above the 8 per cent it held a year earlier. Interestingly, the Global Equities Fund had the same cash level on April 1st this year.

Douglass told a briefing for financial advisers at the time that the cash level had been raised from 6 per cent in response to the COVID crisis because the focus was on “downside protection”.

“When we have a handle on the likely shape of the downturn and the stability of the system we will look to deploy cash, but we do not want to catch falling swords in the current environment,” he said.

 

He warned that to expect a fast rebound like that following the global financial crisis “could be a misjudgment of this situation”. The MSCI World index has surged 27 per cent since then.

Magellan’s conservatism in the face of a rapid rebound in share prices on the back of fiscal and monetary policy stimulus and a reopening of the global economy after early success in containing the virus seems to have cost its funds some performance.

In the three months to June 30, the Global Equities Fund returned just 1.9 per cent after fees versus 6.1 per cent for its benchmark MSCI World index in Australian dollars, whereas it outperformed by 4.5 per cent over six months and has also beaten the index by 3.6 per cent over 10 years.

The Magellan High Conviction Trust had 22 per cent in cash as of June 30 compared to 9 per cent at inception eight months ago. Even the more defensive Magellan Infrastructure fund held 10 per cent in cash as at the end of June versus less than 5 per cent cash as at December 31.

But the co-founder of Magellan — who has seen funds under management rise to an enviable $100bn since 2007 — is sticking to his guns despite missing some of the upside of late.

He’s not alone. The VIX index of volatility in S&P 500 futures has remained well above normal since the coronavirus pandemic went global in February, even with unprecedented policy support.

“The outlooks for the economy and equity markets remain uncertain,” Douglass said. “Key will be the pace of economic reopening and policymaker responses.”

Overall he continues to see four main scenarios.

Thankfully, the worst case scenario of a depression, characterised by very slow reopening of the global economy and a “policy error” hurting employment and output, “appears relatively unlikely”.

But a V-shaped recovery — involving a quick and successful reopening supported by policymakers, with most furloughed workers returning to their pre-pandemic hours — also “appears relatively unlikely”.

More likely are “a U-shaped recovery from a recession or a prolonged and deep recession”.

“It is still challenging to definitively predict if the current downturn will be more or less severe than the recession of 2008-2009,” he said.

Notwithstanding his cautious outlook, Douglass argued that the shares of the 21 high-quality companies held by the Global Fund would generate a satisfactory return over the medium to long term.

“We have positioned our portfolio cautiously by holding a substantial amount of cash and by investing in businesses that should be largely resilient, or even beneficiaries, in the current environment,” he said.

“Over the long term, we believe that investing in a portfolio of high-quality defensive and growth businesses bought at reasonable prices will generate attractive returns and prove resilient in times of economic uncertainty.”

The idea is that the defensive part of the portfolio will give a high degree of capital preservation with attractive returns through the cycle, while the growth stocks will benefit from innovation and market share gains making them less reliant on the underlying economic strength.

But Magellan is clearly still keeping plenty of cash in reserve for a pullback.