Two reasons to invest in Magellan Global Trust, and one reason not to
There's plenty to like about Magellan Global Trust, but potential has a price.
The biggest risk facing a fund manager is not losing you money, it's losing his or her job. And one surefire way to do that is to go out on a limb and then be wrong. ‘Safety in numbers' is the catch-cry of most fund managers, so many tend to have portfolios that mirror the indexes, with the manager just fiddling at the edges. This guarantees they will never outperform, but also means they can't underperform by a large amount (before fees, at least).
Magellan Financial Group (ASX: MFG) has never been one to follow the crowd, though. You don't get $46bn in funds under management without being a little different and its latest incarnation – Magellan Global Trust (ASX: MGG) – is true to form. The portfolio is expected to hold 15–35 international stocks, and ‘Magellan seeks to invest in a focused portfolio of outstanding global companies and seeks to purchase investments when they are trading at a discount to their assessed intrinsic value' – the same strategy as for the Magellan Global Fund.
Concentrated, long-term capital
There are plenty of benefits to investing overseas, not least of which is a more diversified portfolio and access to big names like Alphabet (Google), Berkshire Hathaway, Apple and Facebook.
It's rare, however, for fund managers to concentrate their portfolio in so few ideas and this shows off the Trust's biggest advantage – long-term capital. The fund is structured as a ‘listed investment trust', which is ‘closed-ended'. That is, now that the fund has raised cash – all $1.6bn of it – the money is locked in.
Investors can buy or sell units in the Trust, just as they do with ordinary stocks, but the money changing hands is between themselves and other investors, not being withdrawn from (or contributed to) the fund itself. Now that the initial public offering is over, Magellan can get on with investing and doesn't have to worry about impatient investors pulling their money. This should allow the fund to invest in great long-term ideas, even if they risk short-term underperformance. In a world where everyone seems to be focused on the next quarterly result, that's a huge advantage.
Magellan has always been comfortable focusing on its best ideas and happy to hold cash when those ideas are lacking. In fact, the Global Trust will be allowed to hold up to 50% of its portfolio in cash, compared to 20% for the Magellan Global Fund. The ability for the Global Trust to hold so much cash will – at least in theory – allow it to take advantage of opportunities when they are plentiful and remain extra conservative when markets look dicey.
So should you invest in the fund?
We like concentrated portfolios but that also means you should be prepared for higher volatility. What's more, Magellan hasn't had stellar performance over the past few years, with five-year performance only a few basis points above the benchmark index, though it had a good start to life with 10-year returns of 11.4% compared to 5.5% for the index.
Nonetheless, we like the fund's strategy of making investments in high-quality, undervalued companies, and the closed-end structure means it can take a genuinely long-term view. A couple of percentage points of outperformance over the long term wouldn't be surprising.
High fees
Our only point of contention is the cost. The Trust will charge 1.35% a year and there is a 10% performance fee for any excess return over the benchmark index. There is, however, an absolute return hurdle (the 10-year Government bond yield) and there's a high-water mark clause, meaning it will need to make up for any underperformance in previous years before the performance fee is earned. Still, 1.35% 10% is quite a high fee, particularly in light of the Global Fund not outperforming its benchmark for five years.
An index fund that tracks the index, rather than tries to beat it with stock picks, might charge just a tenth of what Magellan is asking. Alternatively, Platinum Asset Management's (ASX: PTM) International Fund, managed by Kerr Neilson, has a similar strategy to Magellan, and, while it charges a 15% performance fee, it has at least outperformed the benchmark over a 3-, 5-, and 10-year period.
Still, we at least have to tip our hat to Magellan for fairness. The company is footing the bill for the Trust's listing, rather than taking it out of investor funds, and the Trust has a more reasonable performance fee than peers. Whether or not the high management fee is deserved will only be known in hindsight.