Each month, we look at the economic and investment world from a different view point…
May 2014: Hamish Douglass from Magellan Asset Management
When The Tide Turns
Australian fund manager Magellan Asset Management enjoyed strong returns from the equity rally of 2013, but chief executive Hamish Douglass says that his focus is now on the retreat of the US from ultra-loose monetary policy and what this holds for global financial markets. Douglass, who is manager of the St. James’s Place International Equity fund, believes investors are witnessing a new phase of transition as the global economy moves towards more normal conditions. Douglass talks to St. James’s Place’s chief investment officer Chris Ralph about his investment approach and ideas in this new environment.
Chris Ralph: What are the decisions you feel you got right last year?
Hamish Douglass: Well, 2013 was an interesting year. Equity markets went up very strongly – and a rising tide tends to lift all boats. We certainly benefited from markets going up. But I think there was more that went on for us than simply a rise in markets. We run a strategy that is inherently lower-risk and, in strong markets of this type, we would expect our strategy to lag the market. But it actually outperformed the market in 2013 because we did a few things that worked out well for us.
First of all, at the beginning of 2013, we decided to put in some investments that had a bit more risk attached to them, although we invested in very high-quality businesses. We took some money out of consumer defensive names – big multinational companies like Colgate and Coca-Cola – and we rotated that money into stock that would give us a bit more participation in the economic upside. We invested into some large-cap technology companies, such as Microsoft, eBay, Oracle and others, which worked out very well in 2013 in terms of investment performance.
In May last year, we also started to become concerned about the US Federal Reserve’s efforts to reverse some of the effects of quantitative easing (QE). The ‘tapering’ of QE slowed down the purchases of US Treasuries. We became concerned about emerging market currency risk and sold some of the investments that were more exposed in the earlier part of 2013. In hindsight, this has turned out to be a fairly wise decision.
But most of the investment performance came from investments we have had for a very long period of time. We don’t change our ‘hand’ very often, and we have had great investment performance from businesses like Visa, MasterCard and Google – as well as the home improvement retailer Lowe’s, benefiting from an improvement in the housing market. These were in the top five performers, and we’ve held these for a number of years.
Chris Ralph: The portfolio holds around 75% in US equities at the current time, which is significantly overweight relative to the market benchmarks. Will that disparity between US equities and Asia continue into the medium term?
Hamish Douglass: Yes, we do have around 75% of the portfolio invested in US-listed companies, but many of these are very large multinational businesses with earnings that are spread all around the world. We regard a large part of our portfolio as without a national home. They’re multinational businesses like Nestlé or Coca-Cola. Actually, Nestlé has more of its earnings based in the US than Coca-Cola does, which is ironic given that most people would think of Coca-Cola as a quintessential American company, and Nestlé as a quintessential Swiss company. But they’re both large multinational businesses.
If we look to where our earnings are coming from, about 50% are from the US. We are deliberately overweight to the US – probably by 15% at the moment – and we have been for a while, for two fundamental reasons. We believe the US is further ahead in terms of its recovery and the economic cycle, and we have held this view for quite some time. Secondly, our
US holdings also give us an overweight position in the US dollar, which, in a world that is still not without risk, provides us some protection as the world’s reserve currency. We believe the US dollar will be a fundamentally strong currency in a disaster scenario.
Chris Ralph: What are the major challenges that equities face over the next few years?
Hamish Douglass: If you look over the last seven years, we have had three major challenges. The first, from 2006 to 2008, started with the sub-prime crisis that led to the collapse of Lehman Brothers and the virtual collapse of the banking system. You then had a period in 2009 when the world looked like it was going to fall apart; and the focus was on what actions the regulators needed to take to control the situation. And then you had the European sovereign debt crisis in 2011 and 2012. We are now in another such period, this time one in which the central banks have utilised extraordinary monetary policies of printing money; in particular, in the US. And the big risk and challenge for investors is what’s going to happen when the US Federal Reserve actually stops buying US government bonds and, heaven forbid, starts selling this extraordinarily large portfolio. What impact will it have on bond markets and equity markets? It’s a very difficult question, because there is no precedent in history to indicate exactly what is going to happen. I think that is the challenge for all investors.
Chris Ralph: Are you confident that equities over the medium to longer term will deliver a better return than cash on deposit?
Hamish Douglass: We remain confident that, irrespective of what happens over the next five or so years, we can aim to deliver 10% per annum returns on investments. It’s not a guarantee, of course, but I would say equities have entered a very different cycle to the one they have been in for the last 25 years. Over the next five years, some say equities are going to deliver long-term returns around 8%. I think we’re in a cycle where that 8% in aggregate is going to be challenged. But, if you are picking individual stocks, you are focused and you have the right portfolio, you could do significantly better. However, I do think people should be cautious about what general markets can deliver over the next five years.
Points and Views
- Magellan outperformed rather than lagged the market in 2013, despite its lower-risk strategy.
- In 2013, some money was rotated out of the portfolio’s large defensive stocks, such as Colgate and Coca-Cola, into some large-cap technology stocks, such as Microsoft, eBay and Oracle.
- The US Federal Reserve’s tapering of quantitative easing raised concern over emerging market currency risk, prompting the sale of investments that were more exposed in 2013.
- Around 75% of the portfolio is invested in US-listed companies, but many of these are very large multinational businesses with
- An overweight position to the US dollar offers some portfolio protection, says Douglass, as the “US dollar will be a fundamentally strong currency in a disaster scenario”.
The opinions expressed are those of Hamish Douglass and are subject to market or economic changes. This article is not a recommendation, or intended to be relied upon as a forecast, research or advice.
The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.
Alexander Associates Group (AAG) is a holistic Wealth Management group and provider of a wide range of complementary services. The wealth management advice, for both individuals and corporates, is provided by AAG Wealth Management, a Principal Partner Practice of St. James’s Place Wealth Management. Other services offered by AAG fall outside of wealth management advice and are separate and distinct to the services offered by St. James’s Place. They are not covered by the St. James’s Place guarantee*, which is solely reserved for wealth management advice provided by representatives of AAG Wealth Management.
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