Magellan chief investment officer, Hamish Douglass, has warned investors seem ‘oblivious’ to the risks of a possible setback to the vaccines, as he puts over half of his portfolio in cash and high-quality equities.
In a market update, Douglass said investors were failing to consider aspects such as escaped mutations and vaccine failures which could set back the market’s recovery, which had been rising since the announcement of several successful vaccine trials.
The ASX 200 had risen 13.7% since the start of November, when three successful trials were announced by major pharmaceutical companies including Pfizer and Moderna.
“The pandemic is an event of huge scientific complexity and many investors seem oblivious to these risks,” Douglass said.
“The biggest risk the world faces right now is that the virus might mutate in a way that reduces the effectiveness of the vaccines developed so far.
“Now is not the time to be oblivious to the pandemic risk, especially given infections we are seeing in Latin America, the UK and the US. Hold onto your chairs if investors suddenly decide that a mutant strain has rendered ineffective the vaccines that drove the November rally.”
According to FE Analytics, the firm’s Magellan Global fund lost 0.02% over the year to 31 December, 2020, compared to returns by the global equity sector of 6.3% over the same period. The fund recently converted into an open-class structure, bringing $13.5 billion to the exchange traded fund (ETF) market.
This was a result of missing out on the short-term rally on the back of the vaccine success at the end of the year when the fund’s performance diverged from that of the benchmark. However, he said he was “not losing any sleep” over this as he focused on long-term performance and had positioned the portfolio to provide protection.
Over half of the portfolio was invested in cash and high-quality equities with the top 10 holdings including Alphabet, Microsoft, Novartis and Starbucks.
“Our portfolio has defensive characteristics that should see it hold up relatively well in adverse markets,” Douglass said.
“We typically have 50% of our portfolio in cash and high-quality defensive equities to provide protection. The defensive half of our portfolio didn’t decline overall but it didn’t surge like cyclical and discretionary stocks.
“Do I lose sleep over missing out on some of this short-term rally? No. We are never going to bet on an oil strike or the equivalent, which is one way to see the vaccine results. After all, some important vaccine trials failed.”
Performance of Magellan Global fund during 2020 versus global equity sector
