Magellan best at downside protection

Magellan Global Equity fund has been found to be the best global equity fund that has protected during a downside over multiple time periods thanks to its 0.8 cap on volatility downside risk.

Using FE Analytics data, Money Management found the funds that experienced the sector’s lowest drawdowns over the periods of the Global Financial Crisis (GFC) in 2007, the Eurozone debt crisis in 2010, and the sell-off at the end of 2015 that was prompted by, among other things, worries over China.

Four of the top five funds were major funds – Magellan, Macquarie, and MFS – with a fund size of between 1.9 billion and 9.1 billion.

For Magellan, its drawdown for the GFC stood at -19.32 compared to the sector average at -38.53, -8.95 in 2010 compared to -12.73, and -8.95 in 2014 compared to -9.2. The fund was also the top performer out of the list with a cumulative 10 year return of 191.75 per cent.

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Since the GFC, the Magellan fund has kept its positive returns with a three year to 31 July 2017 return of 13.56 per cent (compared with the sector’s 10.35 per cent), and a five year to 31 July 2017 return of 17.99 per cent (compared to 15.57 per cent).

The firm’s chief executive, Hamish Douglass, said the first objective of the fund was to protect the fund in adverse downmarket environments, and the second objective was an absolute return objective.

“We invest in a relatively concentrated portfolio of 20 to 40 per cent securities, but really in a portfolio with the world’s best businesses and outstanding companies that have very demonstrable long-term competitive advantages and best returns on capital and we’re trying to purchase that sort of high quality portfolio and at a discount to what we think the businesses are worth,” Douglass said.

“The second thing we do in the strategy is that when we deal with the portfolio, we run less drawdown and volatility risk than the market.

“We’ve actually got a cap on volatility downside risk measured over markets over multiple periods of time of 0.8. We’re running effectively less risk at all times in our strategy.”

Douglass noted that the fund also had the flexibility to go up to 20 per cent cash which was unusual for a lot of global equity funds that typically capped out at five per cent.

He said that the portfolio was effectively tailored around their own macroeconomic views as they were very conscious around what they though the risk of markets were, such as markets, equity markets, and geopolitical events.

“And the last thing we do even though we are running a relatively concentrated portfolio is that we put a whole lot of risk controls on the strategy, so that we’re not overly exposed to one particular factor or sector or macroeconomic risk that may be out there in the market,” he said.

“It’s not just one thing, it’s investing in high quality, it’s about valuations, it’s about macroeconomics, but very importantly the strategy runs less volatility risk, drawdown risk, than markets and we cap that risk out at 0.8 of the market’s risk.”

Douglass said the fund by domicile was weighted towards the US but many of those firms were multinational businesses that had the vast majority of their business outside the US, and at present had around one third of the portfolio in technology investments. The fund does not invest in commodity related sectors such as oil and gas production, and mining as they tend to be pro-cyclical sectors on the downside.

While Macquarie Walter Scott Global Equity fund came in fourth in terms of cumulative 10 year returns, it was second on the list when it came to the lowest drawdowns.

Macquarie’s head of its professional series for Australia and New Zealand, Craig Berger, said their performance was a result of the investment team combining fundamental bottom-up research with detailed financial and qualitative analysis to find companies meeting common criteria, including high return on equity, high free cashflow and high earnings growth.

Speaking about third place IFP Global Franchise fund, Berger said: “During the GFC, the defensive and predictive nature of cashflows in franchise businesses meant they were less affected by the liquidity, credit and macroeconomic shocks that the GFC delivered”.

“In IFP’s bottom-up stock selection process seeks to uncover companies with proven long-term track records, strong management teams and a unique competitive advantage,” he said.

“The competitive advantage is typically supported by the possession of a dominant intangible asset such as brand, patent, intellectual property or licence.”