Buffett Fan Douglass Best in Australia on Magellan GlobalIain McDonald and Narayanan Somasundaram
When Hamish Douglass’s first child was born in 1999, he wrote to Berkshire Hathaway Inc. Chairman Warren Buffett to tell him that he had bought shares of the company to give to his son when he turned 21.
“I became fascinated with this whole school of thought about Buffett and investing,” said Douglass, who with Chris Mackay went on to start Magellan Financial Group Ltd., a Sydney-based fund manager whose assets have tripled to A$15 billion ($14 billion) in the past 12 months.
Like Buffett, Douglass eschews the trappings of success -- he drives a low-end Nissan truck -- and has focused instead on delivering returns with bets on Microsoft Corp. and Yum! Brands Inc. The company’s flagship Magellan Global Fund beat all 109 global equity funds available in Australia with more than $100 million in assets over the past three years through June, according to data compiled by Bloomberg. Assets rose to A$3.6 billion from A$1.3 billion a year earlier, the biggest gain among peers, according to data from Morningstar Inc.
The fund’s success has helped drive a fivefold increase in shares of Magellan Financial Group in the past year on the Australian stock exchange. The stock is the best performer in the benchmark S&P/ASX 200 Index this year. It closed 1.6 percent lower at A$11.41 in Sydney.
The firm brought in A$6.2 billion of domestic and offshore institutional money in the 12 months through June. Magellan’s appeal is a view on global companies from the other side of the world compared with fund managers in New York and London, according to Sydney-based Nicholas McGarrigle, an analyst at Ord Minnett Ltd., which has a buy recommendation on the stock.
“They have a fresh perspective on global markets,” he said. “They’re continuing to win money at a pretty rapid pace.”
The global fund invests in companies with an average market value of at least $100 billion. In the year to June 30, it held 25 stocks with an average market capitalization of $119 billion, according to the fund’s annual investor report released July 11. The top 10 holdings made up 51 percent of the fund.
Recent investments include allocating about 4 percent of the global fund to Microsoft in January at a price of $27 to $28 a share. The stock touched a high of $36.43 on July 16 and was the best performer among the 30 members of the Dow Jones Industrial Average in the second quarter.
“We had a view that you were going to see a convergence between tablets and laptops, and with that convergence they would start to pick up market share through Windows 8,” Douglass said in the interview at the firm’s seventh-floor offices in Sydney’s center.
Microsoft was the global fund’s largest single holding at 6.6 percent on June 30 and one of the top three contributors to its 39.7 percent return in the previous 12 months, according to the investor report. The top two contributors on an absolute basis were Google Inc., which made up 6.2 percent of the fund, and Lowe’s Cos. with 5.3 percent.
The biggest detractor was Oracle Corp., according to the report. Magellan in the second quarter took a large position in the software maker, which Douglass said is better placed to weather the development of cloud computing than many expect.
The fund also has positions in Lowe’s, U.S. Bancorp and Wells Fargo & Co. on expectations of a recovery in U.S. housing starts. The S&P/Case-Shiller index of house values in 20 U.S. cities climbed 12.2 percent in May from a year earlier, the biggest 12-month gain since March 2006, a report showed this week.
Magellan also manages a global infrastructure fund and on July 1 started a long-only fund that will invest in eight to 12 stocks globally with the ability to hold as much as 50 percent in cash.
“The macro-cycle calls we’re making -- most people would say you don’t need a lot of IQ for them,” Douglass said. “What you need to have is a time period that is different, you need to be there before the market.”
In 2007, Magellan invested about 6 percent of the global fund in Yum on the expectation that the U.S. company’s China business would grow rapidly. In North America at the time, investors were focused on the poor performance of Yum’s KFC outlets, Douglass said.
“Because we probably have a greater proximity and probably spend more time in China than a fund manager based in New York, we were incredibly focused on China,” Douglass said. “Whatever happened in KFC in North America was going to become completely irrelevant.”
Multinational consumer companies exposed to emerging markets, such as Yum, McDonald’s Corp., Nestle SA and Coca-Cola Co., remain the largest single investment strategy in the Magellan Global Fund, he said. Their focus on emerging markets allows their revenue to increase faster than global economic growth, he said.
At the end of June, that investment strategy made up 21 percent of the global fund, down from 48 percent two years earlier, as these stocks became fully valued, Douglass said.
Douglass, 44, and Mackay, 50, met in 1989 at Schroders Australia Ltd., where Douglass landed a job after graduating with a Bachelor of Commerce from the University of New South Wales in Sydney. Both were investment banking advisers.
Mackay dumped a pile of Berkshire annual reports on Douglass’s desk in his first week. “Chris was very interested in Buffett and investing and I was a bright-eyed university graduate who wanted to learn,” Douglass said.
Mackay attends most Berkshire annual meetings, including the most recent one in May, while Douglass has been to at least five -- the last one three years ago, he said.
The two rose through the ranks of investment banking in Australia. Mackay became chairman of UBS AG’S local unit and Douglass was named co-head of global banking for Australia and New Zealand at Deutsche Bank AG at the age of 35. In 2006, they formed Magellan Financial Group, securing the backing of billionaire James Packer. The company started trading on the stock exchange the same year.
Both Douglass and Mackay had private share portfolios during their investment-banking careers. “We had a natural affinity where Chris and I really liked investing and had a common thought process,” said Douglass, who at Deutsche Bank advised BHP Billiton Ltd., the world’s biggest miner, on its A$9.2 billion purchase of WMC Resources Ltd. in 2005.
“We were going to be in control of our own destiny and whatever happened we were going to be accountable,” he said.
Packer still owns 9 percent through his investment company Cavalane Holdings Pty, according to data compiled by Bloomberg. Douglass and Mackay each have about a 12 percent stake in Magellan, Douglass said.
Magellan Global Fund is not affiliated with the Fidelity Magellan Fund, which is run by Fidelity Investments of Boston.
Magellan Global Fund outperformed its benchmark, the MSCI World Net Total Return Index in Australian dollar terms, by an average 10 percentage points each year since its inception in July 2007.
In 2011, Magellan struck an agreement with Chicago-based Frontier Partners to distribute its global funds. It also hired Zarina Kalapesi from Orbis Investment Advisory Ltd. to head its institutional client business with a focus on the U.K.
The marketing drive resulted in St. James’s Place Unit Trust Group Ltd., the U.K.’s biggest dealer group, putting 2 billion pounds ($3 billion) with Magellan, according to a regulatory filing Feb. 22. Magellan’s clients also include U.S. state-based pension plans, a Fortune 50 U.S. West Coast company, family offices and endowments, and a large state-based pension manager in Australia, said Douglass, who declined to name them because of confidentiality agreements.
Three out of the four Australian-based equity analysts that cover Magellan Financial Group have buy recommendations on the stock, according to data compiled by Bloomberg.
“There is more upside in it given the momentum that they’re building with institutional investors offshore and the run-rate of retail inflows domestically,” said Ord Minnett’s McGarrigle.
It hasn’t all been plain sailing. The global credit crunch around the time of Lehman Brothers Holdings Inc.’s collapse in 2008 was the fund manager’s most difficult period, Douglass said. In the 12 months to June 2009, funds under management rose by only A$57 million to A$393 million and Magellan Financial Group recorded a statutory net loss of A$12.4 million, according to company filings.
“We had few funds under management at that stage, had built quite a large staff and we didn’t know how long this thing was going to last,” he said.
The global fund returned 7.1 percent in the 12 months to 2009, outperforming the MSCI World Index by 23.4 percentage points, according to a report on Magellan’s website. The fund lost 17.2 percent in the previous year, less than a 21 percent drop in the benchmark index.
“As Buffett says, you don’t know who is swimming naked until the tide goes out,” said Douglass. “It enabled us to have a substantially differentiated investment performance during that period.”
Magellan needs to consider offering more strategies as it grows, said Russell Gill, a Sydney-based analyst at JPMorgan Chase & Co.
“The investment market thematic has run in their favor over the last couple of years given the weighting toward higher-quality, blue-chip names,” Gill said. “They need to broaden the number of investment strategies given the global equities strategy is very concentrated.”
Douglas is married with four children and his family lives on a farm one-and-a-half hours drive from Sydney. “I try not to have a lot of trappings of money around our kids and our life. I do this because I love what I’m doing.”
“I like really cheap cars and old ones -- I mean old ones, not collectors’ ones,” he said. “I have an old Nissan Navara truck, which I have never washed.”
Buffett, the third-richest man in the world with a net worth of $59 billion according to the Bloomberg Billionaires Index, a daily ranking of the wealthiest people, has earned an annual salary of $100,000 for the more than 25 years. He has pledged most of his wealth to charity.
Buffett’s track record of generating shareholder returns through stock picks and acquisitions has made him a cult figure for investors. Book value has climbed more than 5,800-fold per share since he took control of Berkshire in the 1960s.
Like 82-year-old Buffett, “nothing would give me a greater privilege than that I would still be working at age 80 at Magellan,” Douglass said. “But I’m in a public company, it could be the board kicks me out well before that happens.”