Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 439

Part 2: Hamish Douglass on not swinging for the fences

On 14 December 2021, amid a backdrop of intense media coverage of Magellan’s recent performance and the resignation of CEO Brett Cairns, Hamish Douglass presented online to clients of advice group Stanford Brown. He was interviewed by Stanford Brown Director and Private Wealth Adviser, Hamish Harvey. This is Part 2 of an edited transcript. Part 1 is here.

Note also that in this video update released on 22 December, Hamish Douglass addresses the challenges the business has faced in recent weeks, including commenting on his personal circumstances which have received so much attention. He says: 

“People have tried to create an image that my wife and I [are in] some nasty divorce – nothing could be further from the truth. My wife and I remain incredibly close. Actually, we spend a lot of time sharing a house together. We’re spending the whole Christmas holidays together.” He also clarified that neither party will sell Magellan stock and “We’ve never sold a single share in Magellan.”

-----

HH: We talk frequently to clients about the concept of sequencing risk. They need to ensure they have dry powder, money set aside for pension payments and the fixed expenses in life. We don't know what's around the corner.

HD: And don't have a fear of missing out in this environment. For example, everybody has a crazy story about housing at the moment. We thought it was crazy a few years ago but now we have extreme anecdotes about a house that sold for double what it was worth 12 months. It doesn't seem like we're in a normal world.

HH: Some of the numbers we're seeing are phenomenal. What do you expect from quantitative easing and interest rates in 2022?

If inflation is sustained, the result is recession

HD: I think Powell is under enormous political pressure because the Democrats are taking a big hit. I think (the Fed) will go very slowly easing out of QE and with a few rate rises on the table. They're going to try not to disturb asset markets. If we don't get real inflation, we will get out of this without a huge effect on markets. The rate rises are in the market’s expectation, but that's not a tightening. It's a modest change to a very expansionary policy although they are well behind the curve of where they really should be at this stage. The problem will be where inflation is in April, May, June next year.

I had lunch with Glenn Stevens, maybe four months or so ago, we were debating this issue, he put a 25% probability on the inflation scenario. He's probably higher today, but I haven't spoken to him. And I said, ‘What is the answer, if we truly get inflation?” And he just looked at me and he said, ‘Hamish, there's only one answer. It's a global recession.’ He said we will be forced to move monetary policy to stop it, and that will stop economic activity.

So the party comes to an end if we have inflation, and you have people going, ‘I should own commodities and banks in an inflationary environment.’ It shows we've been a long time without inflation because they happen to be the most stupid things in history to own if you're worried about inflation. They perform well in the cyclical recovery story. You can't have your cake and eat it too.

HH: Which leads to the next part, portfolio construction. In an environment of higher inflation and interest rates rising, where would you want to be sitting?

HD: We own businesses that are capital-light with very high returns on capital, the vast majority have pricing power and royalty structures. Something like Yum Brands, it's a royalty company. If there's inflation, prices go up and they collect effectively about a 5% royalty on the revenue line. So their actual profitability is indexed to inflation and that's what you want. Netflix, Starbucks, PepsiCo have pricing power and other businesses are capital-light like Visa and MasterCard. They’re leveraged to reopenings and payments, they're a bit sensitive to the economic scenario but people traveling will happen in maybe 12 to 18 months, or only six months without Omnicom having an effect.

Assets are going to be affected but as a sign of how finely things are balanced, consider DocuSign which is an incredibly good business. It gave out some revenue guidance for the next quarter that was marginally below the street estimates and the stock price plummeted 40% in a single day. It is a risk that it is foreseeable if the world changes its view that Tesla could drop 50% in a few days. We have so many of these large companies that are unanchored in terms of valuations that are almost a popularity contest at the moment. Everybody could rush for a door at the same and hit an air pocket and fall through it. We don't have those air pockets in our portfolio if the market plummets 30%. I don't want to mislead people, inflation is an ugly place to be.

Home ownership and affordability

HH: I have a question here on the housing market in Australia. Home loan rates can still be fixed around 2.3% to 2.5% but rates are creeping up a little bit. Do you have a view on Australian housing?

HD: I'm no expert in housing but I do believe it's correlated to two things: interest rates and the stockmarket. We've had a 12-year bull stock market and we've had falling interest rates for 30 years and both have been supportive of housing. If it's an inflationary environment, and rates are going up, while people can fix for five years, you own a house for 30 years. So you're not fixed for the duration of the ownership. Ultimately, the house price will reflect affordability through its life.

If interest rates go materially higher and we have a wealth effect with the stockmarket falling, I think it's almost inconceivable that we couldn't get a major change to house prices. It becomes self-reinforcing to a downside scenario. In the GFC, we didn't see a collapse in housing because China and central banks came to the rescue.

Books will be written on all this stuff such as Bitcoin. Charlie Munger said he wishes he would live for another 30 years just to be a spectator to see how this all ends. It’s one of the most extreme and fascinating periods in history. We’re cautious and we're fiduciaries of all our clients’ money, we're not going to swing for the fences. I can take a dent to my ego and all the press coverage and everything that's coming but I would feel really bad if I started using other people's money to make up my ego by swinging for the fences trying to catch up some short-term performance. It's not my damn money. I'm not going to take risks that I think are imprudent, even if it causes my ego to underperform in the short term.

A mass delusion of modern history

HH: What's your thinking on cryptocurrencies and Bitcoin?

HD: It will go down as one of the mass delusions in modern history. At the end of the day, there's nothing there. There's no value of anything sitting there. Yes, we are going to have digital currencies based on the blockchain and there's a fundamental change in the world. We'll have stable coins. We'll have centrally-banked coins.

But infinite value from a thing that is nothing more than thin air! I'm highly skeptical whether Bitcoins are worth $1 or $50,000, there’s no reference point. Of course, we've got mass crowd-buying of a limited supply of something that they can get any price you want. But ultimately, the regulators will probably end up killing it as it undermines monetary policy. There's nothing stopping people just launching look-alikes, and I can't tell you whether it's two years or it's 10 years from now, but I think it's fairly predictable that these things will go to zero. Who will be left holding the can? It's a great study in human psychology. If you think it's a core part of investing and putting a huge amount of money in it, well, people can do it if they want but do it with your eyes open as you may lose all your money as well. I don't win a popularity contest giving that answer. There's a lot of very passionate people who tell you I'm the greatest idiot on the planet and a dinosaur.

Future returns

HH: That's alright, we can handle that. My kids probably say that about me sometimes. Markets have done so well recently, and we aim for CPI plus 4% to 5% over the long term. Do you think we should have lower expectations of returns over the next five to 10 years?

HD: If you look at peak cycle to peak cycle over the long term, returns are around 8% per annum. The world economic machine has delivered about 6% nominal growth plus dividends. So economic growth is on average 2% real, plus 2% inflation is 4% growth. That's what profits have been growing at. There are then additional returns due to either buybacks or gearing to get you to about 6%. Equities have delivered 200 basis points more for 30 years due to falling interest rates and a real leveraging of corporate profitability.

Over time, I think both those games are up. There isn't much left in leveraging up and interest rates are now at zero or 1%. And if I look out beyond the next 18 months, I am struggling to see how economic growth is suddenly going to be about 4% per annum. China will be less of the contributor just because it's becoming a bigger part and a slower and lower number. And rising interest rates are headwind to equity returns.

If people have been used to 8%, in terms of your wealth accumulation, there is a huge difference over an extended period of time between 6% and 8%. It's about double the difference of the amount of money you would have after 20 years. We're aiming at 9% per annum but we've benefited in the last 15 years from falling interest rates and the job’s got harder.

People need a reality check that they don't get delusional as the world's a lot tougher for asset owners as we go back into a low growth, low inflation world. I don't know what's gonna happen in the next two years. I'm talking about that 10- to-15-year sort of expectations moving forward.

 

Hamish Douglass is Co-Founder, Chairman and Chief Investment Officer of Magellan Asset Management, a sponsor of Firstlinks. This article is for general information only and does not consider the circumstances of any investor. This is Part 2 of an edited transcript of a client event hosted by Stanford Brown.

For more articles and papers from Magellan, please click here.

 

8 Comments
Lisa R
January 12, 2022

I bought MFG at 36 and it’s at 21. But… it’s a small % of my portfolio. Ups and downs happen every year to companies, but if we invest for the longer term, quite often we see share prices return up again! It’s interesting to note that as the news cycle is shortened, market reactions too become rapid. I am not selling my MFG, because the first rule of investing is never sell at a loss. Not always achievable, but still a great objective to keep in mind.

Paul
December 27, 2021

Very hard to disagree with his arguments above . Well thought out piece .

Eddie
December 26, 2021

Hamish comes across as Mr Cool and his body image reflects that. He is inferring that he will not be distracted but other high profile people in similar circumstances have said that only to succumb to the sort of repetitive public exposure Hamish is under and some of his is personal. I concur with Ian's comment on December 23 that Magellan's fall from grace has similarities to that of PTM and especially when you take the origin of it's down inflection well before our current pandemic. I am looking to see significant changes in Magellan's equity investments through 2022.

Chris Milner
December 23, 2021

I think Magellan's performance speaks for itself - the global fund has achieved 16.5% pa over the last 10 years. So I don't have a concern about the return falling to 12% over the last year, Magellan is conservatively positioned - they are managing the downside, which is what investors would want and expect. As for MFG's share price - what a buying opportunity currently ~$21 and Morningstar have fair value at $38 - and that's after taking account of losing the St James Place mandate.

Harry
December 26, 2021

18B outflow to St James Place is not going to be easy to replace, particularly with the inflows headed to the index funds.

Ian
December 23, 2021

It will be interesting to see the re-rating of the Magellan funds by Morningstar after the collapse of the Magellan share price. Can you have a Narrow Moat rating with a substantial key man risk? Can you have a Medium Uncertainty rating with a substantial key man risk? Is there any similarity between the share price fall of the Platinum (PTM) share price and MFG..

Alex
December 23, 2021

How about we now leave Hamish to get on with his life and his wife and stop distracting him from investing and needing to explain himself each day. As he says “There’s a time when people should really stay out of people’s personal lives,” about "some of the stuff in the newspapers”.

James
December 24, 2021

Correct Alex...patience is a virtue, something people are going to have to learn, myself included.

 

Leave a Comment:

     
banner

Most viewed in recent weeks

10 little-known pension traps prove the value of advice

Most people entering retirement do not see a financial adviser, mainly due to cost. It's a major problem because there are small mistakes a retiree can make which are expensive and avoidable if a few tips were known.

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Hamish Douglass on why the movie hasn’t ended yet

The focus is on Magellan for its investment performance and departure of the CEO, but Douglass says the pandemic, inflation, rising rates and Middle East tensions have not played out. Vindication is always long term.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Latest Updates

Investment strategies

Three ways index investing masks extra risk

There are thousands of different indexes, and they are not all diversified and broadly-based. Watch for concentration risk in sectors and companies, and know the underlying assets in case liquidity is needed.

Investment strategies

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.

Shares

2022 outlook: buy a raincoat but don't put it on yet

In the 11th year of a bull market, near the end of the cycle, some type of correction is likely. Underneath is solid, healthy and underpinned by strong earnings growth, but there's less room for mistakes.

Gold

Time to give up on gold?

In 2021, the gold price failed to sustain its strong rise since 2018, although it recovered after early losses. But where does gold sit in a world of inflation, rising rates and a competitor like Bitcoin?

Investment strategies

Global leaders reveal surprises of 2021, challenges for 2022

In a sentence or two, global experts across many fields are asked to summarise the biggest surprise of 2021, and enduring challenges into 2022. It's a short and sweet view of the changes we are all facing.

Shares

What were the big stockmarket listings in record 2021?

In 2021, sharemarket gains supported record levels of capital raisings and IPOs in Australia. The range of deals listed here shows the maturity of the local market in providing equity capital.

Economy

Let 'er rip: how high can debt-to-GDP ratios soar?

Governments and investors have been complacent about the build up of debt, but at some level, a ceiling exists. Are we near yet? Trouble is brewing, especially in the eurozone and emerging countries.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.