A closer look at the Magellan Global Fund offer

Investors in the Magellan Global Fund have recently been made an offer to participate in a capital raising that closes on February 23.

The capital raising offers current unitholders in both the Magellan Global Fund (closed class, ASX: MGF) and Magellan Global Fund (open class, ASX: MGOC or MGE0001AU) the opportunity to purchase additional Magellan Global Fund (closed class, MGF) units.

The Magellan Global Fund invests in a portfolio of 20 to 40 global investments, with a value of $15.5 billion invested across MGF and MGOC. The open class fund has a 10-year performance record (to the end of December 2020) of 15.56 per cent per annum.

To understand the offer, it is important to understand that the Magellan Global Fund restructured in December last year to offer investors a choice of a closed class investment (MGF) and an open class investment (MGOC).

The open class fund has significantly more assets, and the investment most Magellan Global Fund investors will be familiar with. To make things a little more complex, some options will be issued with the capital raising (expected to have the ASX code MGFO), so investors need to have their head around MGF’s, MGOC’s and MGFO’s.

To do this, it is best to start by looking at the difference between a closed class investment and an open class investment.

Open class and closed class investments

A closed class investment is what we would consider a traditional listed investment company – the company has a set number of units outstanding, and the number of units does not change on a day to day basis. Buyers and sellers trade these units on the ASX. For Magellan, their closed class fund has the ASX code MGF. This is the fund that Magellan investors have been offered extra units in.

The open class investment is similar to the traditional structure of a managed fund, with the number of units on offer each day changing as investors buy and sell. Units don’t have to be sold on the ASX, often applications and withdrawals are made directly with the fund manager. For Magellan, their open class investment has the ASX code MGOC.

In reality, the biggest difference between a closed class and open class fund will be how they trade around the underlying value of the investments, the net tangible assets of the fund (NTA).

Because an open class investment will be changing the number of units on offer as people buy or sell more, the value of the fund should be equal to the value of the underlying assets of the fund, the NTA.

Interestingly, Magellan have something that I have not seen before on an investment companies website, and something that seems like a valuable piece of information for investors – a ‘real time’ update of the assets of the fund.

As I write, their open class fund (ASX: MGOC) is trading on the ASX at $2.52, exactly equal to the net tangible assets of $2.52 (Magellan refers to this as the intraday indicative net asset value).

The close class fund (MGF) is trading at a value of $1.73, with a current NTA of $1.81. This provides a great example of the way an open class fund trades in line with the value of the assets, while a close class fund may not.

What is the offer?

The partnership offer by Magellan is for an investment in the closed class units – these trade on the ASX and, as we just looked at, have the potential to trade at a premium or discount to the underlying value of the portfolio.

Investors can subscribe for $1 of closed class units for every $4 of investments held. As well as the initial investment, investors will receive a bonus 7.5 per cent of additional units, and an MGF option (MGFO).

In this case, the options are intended to be traded on the ASX and give the option holder the right, but not the obligation, to buy additional closed class units at a 7.5 per cent discount to the net tangible asset of the fund at the time they are used. The term of the options is three years.

So should investors participate in the offer?

Given that the investment is made to Magellan investors, they are likely to have an underlying view on whether they want to invest more money in the fund – and given the long term performance of the fund, it is likely to be a relatively positive view.

The new investment is in the close class units (MGF). Investors not used to a listed investment company would have to accept that the value of their investment might trade at a premium or discount to the underlying assets of the fund (the NTA), and the only way to buy or sell the shares is through the ASX.

With the Magellan Global Fund being an international share fund, investors should be comfortable with increased exposure to international shares if they participate in the offer – although with many investors underweight international shares this may not be a huge concern. It will also be important to consider cash holdings at the moment – making sure any investment leaves enough cash in the portfolio.

The management fee for the fund of 1.35 per cent per annum (with the possibility of an additional performance fee) is certainly not the highest fee for an international fund, but should be considered.

The 7.5 per cent bonus units are an attractive feature of the offer. That said, the number of MGF units you receive is based on the NTA of the MGF units, not the unit price. At the moment, the NTA is slightly higher (4.4 per cent) than the unit price, so some of the 7.5 per cent ‘bonus’ could be considered lost by having to pay more for the units than the current trading price.

The MGFO options are an additional bonus, that provides flexibility for shareholders in how these options are used. It is unlikely they will ever have a huge amount of value, as they only entitle the holder to buy extra units at a 7.5 per cent discount to the current NTA of the units – however this is still an additional source of value in the offer.

While the offer is for an extra $1 investment for every $4 held, keep in mind that your decisions are not just ‘yes’ or ‘no’, you might choose to apply for a reduced number of MGF units. Keep in mind that the MGF units trade on the ASX, so if you don’t already have MGF units, a small holding of $1,000 or less might not be worth the extra hassle.

Conclusion

While there are a lot of moving parts around this investment offer – options, a 7.5 per cent bonus and the complexity of open and closed class units – the reality is that for an investor looking to increase their exposure to the Magellan Global Fund, it is likely to be a sound way to achieve this.