Magellan Global Fund

Transcription

1 Analysts: Justine Gorman; Jane Wu Products Facts Manager Magellan Asset Fund type Retail Investment Trusts Boutique Yes Management Limited APIR code MGE0001AU Specialisation Value Multimanager No Fund status Open Peer group International Equities - Large Cap Inception date July 1, 2007 Min. investment (A$) MER (% pa) Standard & Poor s View Standard & Poor's rates this fund 4 stars, reflecting our high conviction that risk-adjusted fund returns will consistently exceed relevant investment objectives and returns of peer funds. The is a concentrated global equity fund, in both the number of stocks held and the focused number of sectors the manager looks for investment opportunities. They are a boutique manager offering a global equity product managed from Australia. Its unique feature relative to competitors would be the experience and background of the two founding directors, and their non-executive board members. Their experience advising on issues such as capital structure, corporate transactions and business management, was gained from their previous investment banking tenures. These skills are of great benefit to the analytical process, in understanding the behaviour and rational of corporate boards, and consequently, improving the precision of the valuation. It is therefore no surprise that Magellan has focused on building a team with strong analytical and valuation skills. The manager looks to hold a portfolio of quality global businesses that they believe will outperform their sector peers over the longer term. This long-term investment focus should keep the portfolio turnover low. The portfolio construction framework ensures that the manager sets stocks weights dependant on the stock's expect upside, being a combination of the quality of the business and the discount to intrinsic value that the stock is currently trading at. S&P considers the investment process to be a disciplined and repeatable process for identifying and selecting stocks, and allocating capital to those stocks. A performance fee of 10.1% is payable on the excess performance over dual hurdles, being the return on the MSCI World Acc. Index, and the yield on the 10-year Australian Government bond. S&P considers this performance-fee structure to be in accordance with the investment philosophy of preservation of capital. The manager also applies a highwater mark, which is reset every three years. The manager calculates the performance fee daily, although it is payable biannually. The management cost for the fund is 1.36%, which is at the median for the peer group. The management cost does not incorporate the performance fee of 10.1%. Performance fees in the global-equity large cap universe are generally uncommon. The fund has a bid/offer spread of 0.5%.Type the Product Features here Benchmark Target return (% p.a.) Target tracking error Fund Objectives Index Not Applicable N/A N/A Product Features The aims to provide investors with capital growth over the medium-to-longer term by investing in securities that it expects to achieve superior risk-adjusted returns, and by constructing portfolios with a focus on minimising the risk of capital loss. The fund is a high-conviction portfolio that will hold between 25 and 50 globally listed securities, concentrating on sectors such as financial services and infrastructure. Stocks will also be purchased if they exhibit franchise characteristics. The manager may make opportunistic investments, such as in circumstances in which the manager has identified a merger arbitrage situation, a favourable corporate spin-off or restructure, or a potentially profitable company split-up scenario. These investment could be outside the focus sectors. A limit of 25% of the portfolio is placed on these opportunistic investments, although they typically represent less than 10% of the portfolio. Investment guidelines stipulate that the fund has a minimum exposure to listed overseas equities of 50%, and a maximum exposure of 20% to stocks listed on exchanges from non-oecd countries. The fund will generally be unhedged against movements in foreign-exchange rates against the Australian dollar. Feb. 7, 2008 Page 1/7

2 Investment Style Magellan Asset Management Ltd. (Magellan) is a fundamental bottomup stock picker, which aims to identify companies that have a sustainable competitive advantage over their peers, which should translate into excess returns over the company's cost of capital. It also emphasises selecting companies with a strong capital-management focus. Once it has identified these companies, the manager will endeavour to purchase their securities at a discount to intrinsic value. The nature of the investment approach implies a medium-to-long-term investment time horizon, which Magellan expects to result in an annual portfolio turnover of about 20%. Stock selection is focused on the financial, and infrastructure sectors, and stocks that exhibit franchise characteristics. The fund will invest across the global market-capitalisation spectrum, although the fund guidelines limit investment in companies with a market capitalisation of less than US$500 million to 20% of the portfolio. Passive Value Small Cap Investment Team Active Growth Large Cap Magellan Financial Group Ltd. (MFG) is an Australia-based specialist fund management group, its main operating business being Magellan Asset Management. Chris Mackay, the group's chief investment officer and deputy chairman, and Hamish Douglass, chairman, cofounded Magellan in June Before this, Mr. Douglass was the joint head of global banking at Deutsche Bank Australasia, while Mr. Mackay was chairman and CEO of UBS Australasia. Both have had extensive experience with merger and acquisition transactions, including some of the largest Australian corporate names. Their experience dealing with companies at board level on issues such as capital structure and business management and assessment is an invaluable resource for the investment team. Their experience has also proven beneficial in gaining Magellan access to the boards of high-profile corporations overseas. Mr. Douglass is also the appointed portfolio manager for the fund. The investment team is broken into three groups: financial services, infrastructure and the franchise team. These are the sectors that Magellan believes fall within its area of competence, and therefore will aim to add value for investors. Dom Giuliano heads the financialservices sector, and comes to the group with six years' investment experience as a sell-side research analyst and a further six years in the actuarial field. Mr. Giuliano has two analysts covering the financials sector, with five and three years' investment experience. Jacqueline Fernley is the sector head for the consumer sector, bringing 14 years' market experience, most recently from Suncorp Investment Management, and prior to this worked as a sell-side analyst with Credit Suisse. Ms. Fernley has four analysts covering the franchise companies. The analysts bring a range of experience from both sell- and buy-side research firms and merger and acquisition transactions. Gerald Stack heads the infrastructure team, and brings 12 years' experience in financial services, most recently managing infrastructure funds for Capital Partners. Mr. Stack has two analysts covering infrastructure securities, Dennis eager with 20 years infrastructure experience, and Alex Hone, with 10 years funds management experience. Michael Leonard is based in New York, where he has responsibility for researching investment ideas for the team, and will also undertake any trading required on the U.S. exchanges. The investment committee, which consists of voting members, Mr. Douglass, Mr. Mackay, Matthew Webb, the three sector heads and nonvoting members, oversee the investment process. The non-voting members are all other investment staff and three independent directors. Mr. Webb is responsible for ensuring the stock is compliant with all client mandates before Magellan can invest. The three independent directors are Brett Cairns, co-head of the capital-markets group at Babcock & Brown, Paul Lewis, senior partner with PA Consulting, and Naomi Milgrom, executive Chair and CEO of the Sussan Group. Investment professionals are remunerated by way of base salary and annual bonus, as well as by participation in the share-purchase plan. Bonuses are based on the performance of the fund against the benchmark, the performance of the individual against internal objectives, the net revenue of the fund the individual has input into, and Magellan's overall profitability. Under the share-purchase plan, staff can acquire shares in MFG at the prevailing market price, financed in part by the individual and the remainder through an interest-free loan from MFG. New Small Unstable Investment Process Experienced Large Stable Magellan seeks to identify outstanding global companies having attractive business characteristics, which can be purchased at a discount to their intrinsic value. These stocks may be prices below intrinsic value because the stock or the sector is out of favour with the market. When market price is significantly below the estimation of the intrinsic value, the difference can be described as a "margin of safety". S&P considers this approach to investment sensible, because this difference allows an investment to be made with reduced downside risk. Determining a company's true worth (its intrinsic value) is subjective, because it entails predicting a company's expected earnings. The margin of safety provides a cushion against errors in the analyst's calculation. Magellan considers companies to have attractive business characteristics if they have a sustainable competitive advantage, enabling them to achieve returns in excess of their cost of capital. Companies with high barriers to entry within the industry they operate in, or with low risk of substitute products entering the market and eroding the high margins the company is earning can accomplish this. Companies that are less affected by the pricing power of suppliers and the ability of buyers to go elsewhere are also favoured. Magellan refers to companies faring well when assessed against these factors as having a wide "economic moat". Companies with wide economic moats that can continue to reinvest capital into the business and achieve returns on capital above the cost of providing it are highly desirable to the manager. The manager also assesses the potential detractors of company performance. Business risk has the potential to reduce the predictabilty of a company's future cash flows, and therefore dampens the manager's conviction that the company can create value. The manager considers risks such as operating and financial leverage, the impact of government regulation, and the economic cyclicality of the company's goods and services. The investment process begins with the manager defining the fund's investable universe, being all listed global securities that fall within the financial services and infrastructure sectors, or stocks that exhibit franchise characteristics. These securities will need to have a market capitalisation of more than US$500 million. This exercise results in a list of about 4,000 stocks, or 60% of the MSCI World Index. It then applies a fundamental screen to the list of stocks, sorting companies based on metrics such as return on capital invested, operating margins, and free cash flow. Companies that score highly on these measures generally have the characteristics of a wide economic moat. The manager will take into account other factors such as the company's OECD domicile and the overall attractiveness of the industry. Although Magellan focuses on stocks within the sectors in which it feels it has the Page 2/7 Feb. 7, 2008

3 most competence, stocks are not strictly limited to the GICS sectors. For example, the franchise team may cover an internet stock such as ebay, because the business displays characteristics similar to those of a typical consumer stock. The manager will then conduct a detailed assessment on companies that have scored in the top quartile (about 1,000 stocks) in the initial screens. It uses a stock-scoring matrix to verify the fundamental screen, with a low, medium, or high score given against four criteria: economic moat, reinvestment potential, business risk, and agency risk. Magellan will prioritise its research effort, and cover stocks that fall within the most compelling industries first. Using a three-stage discounted cash-flow model, a sector analyst will then determine the stock's intrinsic value. The analyst will need to make a judgement on the duration of each stage of the cash-flow model, which coincides with the estimated duration of the company's economic moat. The duration and growth rates selected for the model will have a significant impact on the final valuation. S&P considers this an area where manager skill can add value for investors. The analysts will discuss their findings with the relevant sector head and portfolio manager, and suitable stocks will be put forward to the investment committee. The investment committee will hear the investment case, review the model assumptions and parameters and significant qualitative opinions. The stock will be classified as "investment grade" if the committee considers it an outstanding company. Even if it considers a stock investment grade, Magellan may not purchase it immediately. The portfolio manager will determine the timing of the purchase, taking into consideration the prevailing market price. The scoring matrix drives portfolio construction, providing the manager with a systematic and robust process for relative stock assessment and ultimate portfolio weighting. Stocks scoring the highest will therefore have the highest weighting. The lower-ranking stocks will require a larger "margin of safety" to compensate for their lower relative ranking. The manager has defined a portfolio-construction framework to ensure that this methodology filters through. The highest-quality stocks will be labelled tier 1 investments, having a portfolio position of between 5% and 10%. The manager expects that between five and 10 stocks will be classified as tier 1. It will typically hold tier 2 investments at positions of between 2% and 5%, representing between 10 and 20 stocks. Finally, tier 3 investments are those not as attractive as tier 1 or 2 stocks but warranting inclusion in the portfolio often to provide diversification benefits. The manager expects to have between 10 and 20 tier 3 stock holdings. Each year, the analyst will update the cash-flow valuation, and reassess the stock's investment case. This examination includes a review of the company against key performance indicators. Magellan will sell a stock if the value of the stock materially exceeds its assessment of intrinsic value;, the business franchise has weakened; the management's behaviour is not aligned with shareholders' interests; or Magellan has misjudged the business economics in some way. Shares may also appreciate, and become an excessive portion of the portfolio. At this point, Magellan will trim down the stock position or sell it altogether. The portfolio is currently not fully invested, having a cash holding of about 40% of contributed capital. Magellan has indicated that cash reserves will be used when it feels that it has found suitable investment opportunities, and that an opportune time presents itself to purchase the securities at a discount. The portfolio manager may use derivative instruments in restricted circumstances. S&P can report that the manager currently does not hold any derivative positions in the portfolio. Currency Management Magellan will monitor the level of currency exposure at total portfolio level, to ensure no single currency dominates. Although it typically will not hedge the portfolio, the manager may hedge exposure if it expects currency return to dominate total stock return in a negative way. Performance Because the fund was launched in June 2007, S&P considers the performance track record too short to draw any meaningful conclusions about the manager's capabilities. Type Performance - Fund Performance here Performance Measures Average portfolio turnover (%) 20 Typical number of stocks in portfolio Source: Magellan Asset Management Limited. Top 10 Holdings (at Oct. 31, 2007) (%) Cash & Cash Equivalents Yum Brands; Inc ebay; Inc American Express Company 6.99 Wal-Mart Stores; Inc Tesco 3.99 Abercrombie & Fitch Company A 3.89 Nestle 3.4 Bank of America Corporation 3.16 Wells Fargo Company 3.12 Source: Magellan Asset Management Limited. Regional Exposure Versus Fund Benchmark (at Sept. 30, 2007) Source: Magellan Asset Management Limited. Risk Management Magellan views investment risk as the risk of permanent capital loss. This loss can be minimised by ensuring a high quality of stock research before purchase, and during the investment's holding term. The fund is benchmark unaware, so the manager does not use traditional riskmanagement tools, such as BARRA. To ensure portfolio diversification, the manager has set mandate guidelines to control risk. These parameters are a minimum/maximum stock holding of 10%/50%, a minimum overseas allocation of 50%, a borrowing limit of 20% of the gross assets held in the portfolio, a maximum of 20% in stocks with a market capitalisation of less than US$500 million, a maximum of 20% invested into non-oecd countries, a maximum stock position of 10% of the portfolio, and a limit 10% of the invested capital of any company. Feb. 7, 2008 Page 3/7

4 Management Group Profile Magellan Financial Group Ltd. (MFG) was listed on the ASX in November Magellan Asset Management (Magellan) was incorporated in July 2006, and is a wholly owned subsidiary of MFG. Operating revenue is entirely generated from the asset-management business. The market capitalisation of the group currently stands at about A$200 million. Significant public shareholders in the group are Mr. Mackay and Mr. Douglass, 17.6%, Cavalane Holdings Ltd. (the Packer family), 16.8%, and staff and directors, 10.3%. Magellan will also act as responsible entity for the funds managed by the Magellan group. Market Share The was launched in June 2007, and at Sept. 30, 2007, had assets under management of A$16.5 million. Analyst(s): Justine Gorman; Jane Wu. Release authorised by: Mark Hoven. Page 4/7 Feb. 7, 2008

5 S&P Fund Rating Reference Information International Equities - Large Cap (at Feb. 7, 2008) Reference Material Sector Reports Reader's Roadmap Glossary Guide to S&P Qualitative Fund Ratings Fund Rating Team Biographies Feb. 7, 2008 Page 5/7

6 Fund Rating Peer Groups by Sector Australian Equities International Equities International Fixed Interest Alternative Assets Large Cap Diversified Diversified Equities Diversified Fixed Interest Commodities Large Cap Income Emerging Markets Diversified Fixed Interest Income Multi-Sector Large Cap Indexed Emerging Markets Asia ex Japan Fixed Interest Private Equity Listed Large Cap Industrials Emerging Markets China Fixed Interest High Yield Private Equity Unlisted Long Short Emerging Markets India Fixed Interest Income Infrastructure Listed Small Cap Large Cap Diversified Mortgages Infrastructure Unlisted Specialist Large Cap Income Mortgages High Yield Alternative Strategies Australian Fixed Interest Large Cap Indexed Mortgages High Yield Hybrid Single Strategy Funds Multimanager Cash Large Cap Industrials Mortgages Conventional Single Strategy Funds Single Manager Cash Enhanced Long Short Mortgages Hybrid Multi-Strategy Funds Multimanager Fixed Interest Long Short Specialist International Property Multi-Strategy Funds Single Manager Fixed Interest Income Long Short Regional Direct Commercial Multi-sector Mortgages Regional Japan Direct Development Capital Guaranteed Mortgages High Yield Regional UK/Europe Direct Diversified Direct 20 Mortgages Conventional Regional US Direct Industrial 40 Mortgages High Yield Hybrid Regional Asia Direct Residential 60 Mortgages Hybrid Small Cap Direct Retail 80 Australian Property Specialist Healthcare Direct Rural 100 Direct Commercial Specialist Information Technology Direct Specialised Equity Direct Development Specialist Resources Diversified Property Other Direct Diversified Direct Listed Direct Industrial Direct Residential Direct Retail Direct Rural Direct Specialised Diversified Fixed Interest Listed Fund Rating Philosophy A star rating is a forward looking qualitative assessment of a manager s ability to consistently generate superior risk-adjusted fund returns, net of fees, relative to relevant investment objectives and peers. Fund Rating Process In assigning a star rating Standard & Poor's evaluates: the size, skill and stability of the manager's investment team; the clarity, implementation and risk management of its investment process; the fund's objectives, fee structure and portfolio characteristics; and business management. Fund Rating Definitions Standard & Poor s has very high conviction that the manager will consistently generate risk-adjusted fund returns in excess of relevant investment objectives and relative to peers. Standard & Poor s has high conviction that the manager will consistently generate risk-adjusted fund returns in excess of relevant investment objectives and relative to peers. Standard & Poor s has conviction that the manager can generate risk-adjusted fund returns in line with relevant investment objectives and relative to peers. Standard & Poor s has conviction that the manager will not generate risk-adjusted fund returns in line with relevant investment objectives and relative to peers. Standard & Poor s has high conviction that the manager will not generate risk-adjusted fund returns in line with relevant investment objectives and relative to peers. Issues potentially affecting the management of the fund have emerged, and the fund rating is temporarily suspended, pending clarification. A manager with significant issues that have the potential to adversely impact performance. Existing investors should consider obtaining advice regarding switching or redemption. Fund Rating Subscript Where the investment process, fund manager or analytical team has changed significantly, or where the fund has a relatively short history, but a relevant and demonstrable track record can be shown on similar funds. Page 6/7 Feb. 7, 2008

7 Disclaimer: A Standard & Poor's Information Services (Australia) Pty Ltd (ABN ) (Standard & Poor's) rating and other opinions are and must be construed solely as statements of opinion and not statements of fact or recommendations to purchase, sell or hold any financial product(s). Conclusions, ratings and opinions are reasonably held at the time of completion but subject to change without notice. Standard & Poor's assumes no obligation to update any information following publication. No warranty, express or implied, is given or made by Standard & Poor's as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any Standard & Poor's rating, opinion or other information and Standard & Poor's will not be liable to any party in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of any party relying on any such rating, opinion or other information (except in so far as statutory liability cannot be excluded). Warning: Past performance is not a reliable indicator of future performance. Any express or implied Standard & Poor's rating or advice is limited to "General Advice" and based solely on consideration of the investment merits of the financial product(s) alone. The information has not been prepared for use by retail investors and has been prepared without taking account of any particular person's financial or investment objectives, financial situation or needs. Before acting on any advice, any person using the advice should consider its appropriateness having regard to their own or their clients' objectives, financial situation and needs. You should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision or recommendation about whether to acquire the product. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any adviser and any such adviser must accordingly make their own assessment taking into account an individual's particular circumstances. Disclosure: Analyst Disclosure: Analyst(s) remuneration is not linked to the rating outcome. The Analyst(s) may hold the financial product(s) referred to in a Standard & Poor's rating or other research report but Standard & Poor's considers such holdings not to be sufficiently material to compromise the rating or opinion. Analyst(s) holdings may change at any time. The Analyst(s) certify that the views expressed in a Standard & Poor's rating or other research report reflect their personal, professional opinion about the financial product(s). Standard & Poor's Disclosure: In the event of any person subscribing to any rated financial product(s), such subscriptions may result in a Standard & Poor's client receiving a commission, fee or other benefit or advantage. Details of any such benefits can be obtained from your financial adviser. Standard & Poor's itself does not receive any commission. Prior to the assignment of any rating, the fund manager or another Standard & Poor's client agreed to pay Standard & Poor's a fee for the appraisal and rating service rendered. Standard & Poor's assigns ratings using comprehensive and objective criteria. Standard & Poor's fee is not linked to the rating outcome. Costs incurred during the rating process, including travel and accommodation expenses, may be paid for by the fund manager or another Standard & Poor's client to enable onsite reviews. Standard & Poor's does not hold or have a material interest in any rated financial product(s). Standard & Poor's associates may hold rated financial product(s) but detail of these holdings are not known to the Analyst(s). Standard & Poor's from time-to-time provides fund managers and other clients with investment data, research software, consulting and other financial planning services. Standard & Poor's is a wholly owned member of The McGraw-Hill Companies, Inc, a New York Corporation. The analytic services and products provided by Standard & Poor's and its associates are the result of separate activities in order to preserve the independence and objectivity of each analytic process. Each analytic product or service is based on information received by the analytic group responsible for such product or service. Standard & Poor's and its associates have established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. Standard & Poor's holds an Australian Financial Services Licence Number Please refer to Standard & Poor's Financial Services Guide for more information at "S&P" and "Standard & Poor's" are trademarks of The McGraw-Hill Companies, Inc. Copyright 2007 Standard & Poor's Information Services (Australia) Pty Limited. Certain funds data contained herein may be proprietary to Morningstar, Inc. Feb. 7, 2008 Page 7/7