Magellan prepares for tougher times

Funds management firm Magellan Financial Group (MFG) has announced the launch of two retail funds, Magellan Global Fund and Magellan Infrastructure Fund, specifically developed to be able to endure a domestic share market downturn.

The Magellan Global Fund is a high conviction, benchmark unaware global equities fund with a portfolio of around 25-50 companies. Some of the current holdings include eBay, American Express, Abercrombie & Fitch and Wells Fargo. The Infrastructure Fund is a global infrastructure securities fund with current investments in toll roads, ports and utilities.

Chief investment officer of MFG Chris Mackay expressed concerns that the current market boom was drawing to an end, so MFG designed funds that were structured in order to provide stable cash flow generation irrespective of economic conditions.

“Australian investors have a false sense of security at the moment. The two factors driving the unprecedented growth of our financial markets (both stock market and the dollar) is excess liquidly and growth of China,” Mackay said.

“However, the excess global liquidity has driven down risk premiums to an unsustainably low level. And secondly, a bubble has emerged in China. Thus we believe sensible global diversification is an effective insurance policy for Australian investors in order to minimise the risk of permanent capital loss.”

According to Mackay, the MFG’s funds were designed based on this assumption, with most of the investments not being major beneficiaries of the excess liquidity or Chinese boom.

“We are seeking outstanding companies at attractive prices. Large cap multi-national companies like eBay and Nutrisystem offer safe havens from an economic downturn in Australian equities markets. In many cases, these companies have actually been de-rated since the liquidity boom providing opportunities of mis-pricing,” he said.

Similarly, Mackay pointed out that although infrastructure is a relatively immature asset class, it offers long-term stable cash flow generation. “Infrastructure assets are subject to very limited competition and is generating high cash flows, with earnings rated at 19 per cent compound over the last six years,” he said.

Investor and manager interests will also be tightly aligned, with MFG already investing $20 million of its capital into the funds. The manager is also subject to a unique performance fee structure, with a double performance hurdle.

MFG’s investment team based in Sydney and New York will conduct stock research and selection.