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Date : 02/07/2021

Magellan Global Fund

ASX :

MGF

Market Cap : 3.06 Billion

Dividend Per Share : $0.036

Dividend Yield : 1.99 %

Buy

52 Week Range : $1.56 - $2.04

Share Price : $1.82

A collection of the top global companies, managed by Australia's largest fund manager. A great ETF to "Buy" for the long-term.

Company Analysis

Magellan Global Fund is the largest individual managed fund in Australia by market capitalisation, with $13.6 billion in assets – almost twice the $7.7 billion held in the largest passively managed fund, the Vanguard Australian Shares Index ETF.

The fund recently made its debut on the ASX in November 2020 as part of Magellan’s strategy to cater to retail investors. The Magellan Global Fund seeks to invest in outstanding companies at attractive prices, while exercising a deep understanding of the macroeconomic environment to manage investment risk. MGF is currently trading below its listing price (which was $1.86). Google, Microsoft, Alibaba, Tencent, Facebook are just some of the stellar companies that make up the portfolio of MGF. Given the stature of these companies to generate growth in cash flows and the significantly high MOATs they operate with, it is by no means a stretch to say that the MGF price will remain at current levels.

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Source: Tradingview.com

MGF is also trading lower than its Net Asset Value (NAV) due to the recent underperformance of global equities. The NAV calculation as of the 30th of June 2021 is $1.96. Therefore, this is a very good opportunity to take a position in an extremely diversified managed fund that is run by one of Australia’s best and most successful fund managers.

The Magellan and Hamish Douglass Attraction

“What does the future look like?” is Magellan’s motto, and the company has remained true to its principles since 2006. Magellan has a proven track record and is recognised by the industry as an expert in global investing. The firm primarily focuses on capitalising in high-quality global stocks since its early days and had successfully navigated through themes that appeared to be disruptive but are evident today such as the rise of the emerging consumer, cashless society, the recovery in the U.S. housing market, the dominance of the tech giants, and the arrival of digital consumer platforms. A great company never succeeds without a great team, and that is the case for Magellan. 37 highly qualified and experienced investment professionals are composing the team with the “star-investor” Hamish Douglass leading the way as the co-founder and CIO. Hamish Douglass is known as one of the top fund managers in Australia with his excellent track record of fund performance. His name is a big selling point for Magellan’s fund. Four major strategies define the company’s investment philosophy: (1) global equities, (2) global infrastructure, the newly launched (3) sustainable fund and (4) Australian equities.

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During the first half of FY21, Magellan saw its management and services fees revenue going up by 9% to $311.4 million. Revenue growth from fees can be attributed to the company’s recent capital inflows and the initiative to implement its flagship funds as actively managed exchange-traded funds which accelerates access for investors to the investment strategy through the open market. As of the end of May 2021, Magellan is managing more than $109 billion in global equity and infrastructure funds for its clients.

Directors Putting money where the mouth is

Directors and management owning shares and topping up their holdings is extremely reassuring for retail investors. Last month, Hamish Douglass topped up $3.19 million of own money to Magellan’s managed MFG fund and high conviction fund. This certainly inspires our confidence in the firm. We like the idea that portfolio managers are practising what they preach. Douglass invested $1.72 million in Magellan’s flagship Global Fund and $1.47 million in the high conviction fund (ASX: MHH).

It’s not just Hamish Douglass that is optimistic on the performance of the fund, but the directors as well. Following the turbulent February tech corrections that affected markets, 7 Directors have topped up their holdings to take advantage of the lower prices. While there has been a recovery in the share price, there is still plenty of upside yet to be realised.

Diversification at its Core

MGF, an inexpensive and well-diversified fund managed by Australia’s top fund manager. The Magellan Global Fund is one of the best ways in our opinion to get exposed to the global financial market. What better than having a well-diversified portfolio of blue-chip stocks from around the world, actively managed by one of Australia’s “star-investor” Hamish Douglass.

Additionally, access to the fund is relatively inexpensive for an actively managed with management fees set at 1.35% annually. The fund also has a 10% annual performance fees, which means that if the fund performs better than the comparative index, in this case, the MSCI World and the yield of the 10-year Australian Government bonds; the excess return will be charged along with the high watermark.

Nevertheless, the fund historically has performed pretty well. Magellan global fund was not born yesterday, it has a decade of successful track record. Recently, Magellan decided to dedicate a separate entity just for some of its flagship funds. MGF made its debut on the ASX in November last year. If you want to access global equities without the hassle, MGF is all that you need. The fund is well-exposed over various key growth geographic locations such as the U.S., China, and Western Europe.

Source: Magellan

The right moment to get in while blue-chip stocks are still affordable

We are seeing solid recoveries across the developed economies powered by vaccinations and substantial monetary and fiscal support. The momentum is the strongest in the U.S. where nearly half of the portfolio is allocated in that region. The Biden administration is making historic investments in America’s economy financed by higher taxes. As the USA recovers there are concerns about inflation. The federal reserve (Fed) wants the job market to fully recover before acting to avoid the economy from overheating. This is why we expect the Fed to start tapering asset purchases starting next year with the first interest rates hike by mid-2023.

The next in line in the recovery is the European Union economic reopening. Vaccinations promise strong growth in the coming months with the European central bank remaining supportive. In China, monetary and fiscal policies have normalised, and the economy will likely continue to expand in the months ahead. On the other hand, the recovery of the emerging market will continue to lag as long as the region has less access to vaccines and the longer it takes to vaccinate the world, the bigger the chance to see new vaccine-resistant variants, hence, the biggest risk to global recovery remains the pandemic.

Why is it the right time to consider the MGF Global Fund? Because the strong rebound and growth dynamics should continue translating into support for market momentum in the months ahead. We also think that investors need to watch geopolitical dynamics with the U.S. engaging with the world again. We see trade tension easing with the European Union as well. All in all, we think that equities still remain fairly valued and that it may be the time to consider getting exposure on the global market through the MGF Global Fund.

Magellan Global Fund: Ready to take off

The Magellan Fund is poised for growth on multiple fronts. It is the flagship fund of Magellan, and it also contributes to a third of the group’s overall revenue. We also have noticed the FUMs growing at a rapid pace since it has been introduced recently on the ASX under the symbol MGF. This was done by Magellan to increase their exposure to the fast growing retail investor segment in Australia.

Since then, net assets increased by 40% to $15.6 billion. We are confident with the fund strategy in the long term. The portfolio exhibits an excellent track record and is managed by one of the top Australian fund managers. Furthermore, over the last decade, the fund had historically returned 15.9% every year on average, outperforming the MSCI World Index by about 3% annually.

The Magellan global fund is quite well-balanced in terms of risk-adjusted returns in our opinion. The portfolio has a concentrated allocation of up to 40 companies with nearly half of it in technology stocks. We believe it is a judicious strategic choice because it allows the fund to capitalise on the high-growth stocks among the tech sector whilst benefiting from the solid foundation of value investing.

Analysing the portfolio multiples, we can assume that the fund is fairly positioned vis-à-vis the valuation of the global market. In our analysis, we are using the MSCI World Index as the benchmark as the fund is geographically well-diversified. The Magellan Global Fund has a weighted average P/E ratio of 39 times compared to the benchmark P/E of 27 times which is pretty decent despite a large chunk of it attributed to the high-growth sector. The EV/EBITDA of 21 times suggests that the fund has ample room to appreciate further.

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MGF top holdings are top performers

We do not need to present Microsoft, Google, Facebook, Starbucks, etc to Aussie investors. These are the top names among the world’s most capitalised companies that have significantly high MOATs and competitive advantages over their peers. These stocks are top performers which account for almost a third of the total portfolio allocation. They have displayed exceptional growth potential consistently with their “need” to have products, and this property will ensure they will perform well even during an inflationary environment.

  1. Microsoft: +21% year-to-date
  2. Alphabet (Google): +39% year-to-date
  3. Facebook: +27% year-to-date
  4. Starbucks: 4.5% year-to-date

Microsoft continues to climb, and we do not see any sign yet of peaking. The community of investors has strong confidence in the long-term growth which pushed the share up by more than 400% in the last five years. We think that it is acceptable as we see the company expand into business segments that will drive the future of technology such as machine learning and cloud computing on top of its core software segment. Microsoft is a $2.04 trillion company – larger than the GDP of Australia.

Alphabet is one of the stocks that we can say is safe to hold forever. Alphabet is Google’s parent company dominating the tech sector. Google is leading the world’s information while Android is the most popular mobile operating system. Apart from generating lucrative revenue from digital advertisement, Alphabet is also heavily investing in many techs of the future such as driverless cars and life sciences. Investing in Alphabet is the greatest way in our view to get exposed to multiple secular growth trends across the tech sector.

Facebook is incredibly hosting over 30% of the world’s population on its social media platform and still continues steadily to add hundreds of millions of new users every year. Additionally, Facebook is also very good at converting users into revenue. Facebook’s revenue per active user has grown over 60% in the last four years. The company’s ample liquidity plays an important role in Facebook growth as the company is heavily taking over its competition such as WhatsApp and Instagram.

Starbucks is up more than 90% since March last year. The famous coffee shop chain had an incredible rally since March 2020 despite the COVID-19 and lockdowns that negatively affected brick and mortar businesses. Despite revenue not at the rendezvous, shares are still on the way up as investors are confident about Starbucks’ future. The coffee shop chain is planning to open 22 thousand new stores which can be translated to revenue growth over the next decade.

The cherry on top

The MGF Global Fund provides easy access to global equities and big names. It is also an actively managed fund which means that you do not need to do anything as it is managed by a team of professionals. Sounds great, isn’t it? But that is not all. The fund also provides a lucrative semi-annual distribution with a dividend yield of 1.99%. Of course, it is worth noting here that the dividend is reliant on the underlying companies in the fund. However, when the fund is made up of the top 40 companies in the world, the chances of these firms trimming down dividends is fairly slim.

The dividend yield of 1.99% is also calculated based on just the one payment that MGF has paid out since its listing on the ASX. Annually, MGF intends to have a 4% dividend yield and offers retail investors an option to reinvest the dividends at a 7.5% discount to the NAV.

Now, why should you invest in MGF that has a significantly high management fee compared to most ETFs out there that offer exposure to international markets? Well, here are five reasons:

  • Magellan and Douglass have an incredible track record of beating the benchmark. By beating the benchmark, it means that MGF would have outperformed the index that a similar ETF would track.
  • Magellan carefully handpicks the 40 companies that go into this managed fund and weights them based on macroeconomic tailwinds, as opposed to an inexpensive ETF that offers to track the performance of an entire index without any curation.
  • As we mentioned earlier, MGF is trading at a price lower than its NAV – signifying that it is undervalued and given the quality of the companies and their growth profiles in the short-medium and long-term, all bets are on with the price catching up to the NAV.
  • Our analysis of the weighted P/E and EV/EBITDA of the managed fund shows that there is plenty of room for growth here.
  • Thus, as a retail investor, you can passively invest in MGF, and rest assured that it is being actively managed by the largest fund manager Down Under.

Recommendation

The Magellan Global Fund has all it takes to rapidly grow along with the expected global economic recovery. We are seeing a solid rebound across the developed nations thanks to vaccinations and substantial monetary and fiscal support. The strong rebound and growth dynamics should continue translating into support for market momentum in the upcoming months. All in all, we think that global equities still remain fairly valued and that it may be the time to consider investing in the global market through the MGF Global Fund. The MGF Fund is currently trading lower than its NAV and is also a fairly good dividend provider with a 1.99% dividend yield. We all know how important a team is to succeed. Magellan has a great team of highly experienced investment professionals with at its head one of Australia’s top fund managers, Hamish Douglass. With a favourable macro outlook, a top-notch historical performance of the fund, and our 5 reasons to invest in MGF, we recommend long-term investors to “Buy”.

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