VT - Welcome to our latest Meet the Manager episode.
My name is Vishal Teckchandani and today I have the pleasure of speaking to Hamish Douglass, and Hamish is going to share with me the art of investing in global equities, a topic I'm really excited to talk to him about.
Hamish, so great to be with you here. How are you?
HD - I'm very well, Vishal. How are you?
VT - I'm good, thanks, Hamish.
Before we talk about the art, please share with our investors, what got you into funds management? What got you fascinated with global equities, and why did you decide to start Magellan?
HD - What a big question to start with. I guess, when I was very young, I really liked mathematics. At the end of the day, you know, I quickly got to understand the power of compound interest. Really, the magic of compound interest, but for it to work, you need time to work on your side. So that's kind of a fundamental underlying pinning of how I think and what Magellan's about.
So how did I really get that connected from a mathematical point of view into investing? Well, when I first arrived at Schroder's in Australia, I sat next to my business partner who set Magellan up, a man called Chris Mackay. Chris is a bit older, but we both joined Schroder's by happenstance, on the same day and sat next to each other. I think, on the second day I was there, he put like 20 years of annual reports of Berkshire Hathaway on my desk. And I just started reading these annual reports of Berkshire Hathaway, and I also asked our librarian at the time, is every time a piece of sell-side research came in about a company.
It was Australian companies, at that stage. Could it be put in my in-tray? So I used to get inches of broker's research put into my in-tray every day, and I wasn't in the investment management business. I was in the investment banking side of it. And I used to go home every night and read these for hours, to soak up the information. And as I got more and more interested in Warren Buffett, I started really thinking about all the influences of Warren Buffett.
So I started reading all the big Graham books, I started reading on Phil Fisher, I really got very interested in Charlie Munger, and really started to think about what parts of the investment philosophy really made sense to me. And what really made sense to me was probably the Phil Fisher sort of Charlie Munger influences. You want to invest in really high-quality businesses.
VT - OK.
HD - And because I believe in the magic of compound interest, and you need time on your side to make it work - now trade, you need time, you really need a very high-quality business that you have confidence in that you can hold for the long term.
You know, Buffett's made a famous quote, and he actually changed from sort of being a Ben Graham deep value investor into a much long-term quality investor, with the influence of Phil Fisher and Charlie Munger. And he said, "It's much better to buy a wonderful business at a fair price, than a fair business at a wonderful price." And I think that really distinguishes between what we're doing. It's all about doing your research to find really high-quality businesses.
So why did we go global, you've asked?
VT - Yeah?
HD - The reality is, it's widened my, there are very, very few wonderful businesses in Australia. Your opportunity scene is very, very narrow if you set that as your test. And we've set investing in very high-quality businesses, wonderful businesses with wide economic moats.
Going global just gives me a lot more opportunity to do that. It's a very rarefied part of the investment universe and going global, I'm maximising my opportunity to find those businesses around the world. The Australian market is so narrow.
VT - Sure.
HD - It's just 2% of the world, and therefore, it's probably only got 2% of the world's wonderful companies.
VT - Yeah, and I think Australian investors are getting it right. They need to look at that 98% of the other opportunities in the world and we're starting to see our investors dabble in a few global names, but perhaps, not with the same level of discipline that you might apply.
You know, you've got thousands of companies that you look at in a given month or year. How do you kind of filter them down into a manageable investment universe?
HD - Well, first of all, we don't look at thousands of companies. I think anyone who's trying to look at thousands of companies I'd describe them as flies in a bottle. They're just flying around, buzzing around, and they're just not get anywhere. You can imagine that fly in a bottle just buzzing around from wall to wall to wall and not actually making any progress at all. So, we're very disciplined in defining what is the type of business we'll invest in, so we've got four global sector teams.
We've got about 30 analysts of Magellan, and they don't cover 15, 20, 30 companies. They may cover 5-10 companies with excruciating amount of detail, and we're really looking for those business leading companies in the world who have demonstrable long-term competitive advantages, and then we're trying to do what I'd describe is inch-wide and mile-deep research. We want to understand everything about that company, everything about its competitors. We want to really think about what the threats to the businesses are, what the regulators could do to the business.
We will employ lawyers around the world, experts around the world because if you want to invest in a fairly concentrated portfolio and you want to hold them for duration to get these compound returns, you need to do a lot of research. So we're not out following thousands of companies. We're following a relatively narrow universe.
I wouldn't call it, let's put in the multiple hundreds of companies that we cover in excruciating detail, and out of that we want to understand their valuations, and out of that we want to buy a concentrated portfolio of around 25 investments in the ones that we really have high conviction around their investment cases and where we find that the valuation's hopefully compelling, sometimes fair, in Buffett's words, but sometimes compelling.
VT - OK, OK, so you've got a lot of resources here. From a retail investor's perspective, if they want to identify a high-quality business, what would be your tips, in terms of how they can do it? Like, what do you look for in a company?
HD - Well, sometimes it's quite obvious. Quite a lot of these are consumer-facing businesses. So the consumer-facing businesses, you can think about how often you use the services, how often are you likely to switch to somebody else's search engine, for instance.
You use Google regularly. If you want to look something up, you use Google, or will you go and use Yahoo or Bing? I think that will start to answer the question about the power of the actual platform that you're using.
So you can think about goods you're using in your daily life. If you're wanting a consumer good like a suit or something, you should go walk into the mall and see how many suits there are to choose from and how many manufacturers, and you may say, well, it doesn't look like there's very high barriers to entry in fashion.
Why is your suit any more complicated than my suit? Why is your material - this manufacturer couldn't sort of replicate that? So, I would look and say, it doesn't appear that there are barriers to entry in that business. There's not advantages of scale. Does is matter being a low- cost producer? So you can start asking yourself these questions around goods that are in your life.
I think some of the business-to-business businesses are harder because they may be further away from a retail consumer's viewpoint of what they're experiencing in their life.
It will be the classic sort of Peter Lynch. Look around the things you're consuming and what you're using, and then ask those questions and how difficult it would be for a competitor to set up a similar business.
VT - OK, so think about the things and the technologies you're using, Google and Apple and Microsoft. Lots of people are using Windows, and that's what a lot of these names underpin your portfolios at Magellan, right?
HD - Yeah, and Warren Buffet's often given the example of Coca Cola. We've invested in Coke in the past, we don't own it at the moment, but Warren has said is "Look, if you gave me $100 billion and said, you need to set up a new cola business in the world and build all the manufacturing plants and then get all the distribution points and all the refrigeration points and vending machines, and everything else, to compete with Coca Cola and instead, if someone just gave you $100 billion to do that, Buffett said, "I would give the money back, cause I wouldn't know how to do it.
It would be so hard to replicate that business, even with an almost unlimited amount of money." Which shows you the economic mode. Is Coke's business suddenly going to disappear in the next 20 or 30 years? Very unlikely. There could be health or wellness trends around the growth of their products, but their distribution and manufacturing system is incredibly difficult to replicate.
VT - OK, OK, so sometimes you might identify investment opportunities, and you will identify investment opportunities. How do you kind of gauge whether this is a good time to invest?
What are say, some of the fundamental factors you look for? Cash flow, earnings growth, dividend growth? Are there some key metrics that you look at before making that decision to go, "Yup, we're buying this company."
HD - Yeah, we do a lot of due diligence and we run a lot of different cases in understanding what could happen if the economy turned down or interest rates went up. Some businesses are actually quite susceptible to those movements and others are not very susceptible.
So we want to understand and then think about the economic environment we're in, but often, the best investments we make after doing the work, they stand out. You know, we're looking at hundreds of things and we may be making every six months, one or two investment decisions.
VT - Right, OK.
HD - You know, we don't make lots of investment decisions. I think that's one of the tricks for even for a retail investor. Reduce the number of decisions you make and make sure you really think about it, and they become obvious. And if they're not obvious to you, well, we just don't do anything.
You know, we do things that are obvious at the time. And there's not an exact formula. It's not like this price earnings model has to be 12 or 15 or 17. It depends on the growth and the prospects and how we feel about the competitive advantages the business has. We'll invest in businesses that require a lot of capital if they have very high returns on capital.
We invest in businesses that almost require no capital. We go both ends of the spectrum.
VT - OK, OK. And lastly, a lot of our investors we find, they'll make an investment decision in global equities based on also where the currency's at. So you'll have points in time when the Australian dollar's strong, sometimes it's weak. How do you look at the currency conundrum?
HD - Well, first of all, I think I'm mathematical.
VT - Sure.
HD - As I said, I think long-term. So let's say you can achieve 10% per annum returns. If you looked over a decade, if you got 10% per annum compound returns, you'd be making a return of 160%. If the currency went from 75 cents to the US dollar to 85 cents to the US dollar over that period, it would take off around 13% of the investment return of 160%. So what I'd say with currencies is they don't compound. They're a one-off adjustment, where earnings and stock returns compound over time, and people miss that.
They think, "Oh my God, the currency can move," but measured over a reasonable period of time, currencies do not have an enormous impact.
VT - Because they wash out?
HD - They pretty much wash out during those periods where the natural ranges of these currencies are. And the other thing I'd say is if in a portfolio sense, if you've got a portion of your portfolio unhedged to the US dollar, for instance, and we get our major stock market correction, the unhedged currency tends to give you more protection.
It's a diversification in your portfolio, because the Australian dollar tends to fall during major economic events in the world and when it falls, your value of your offshore assets or your global assets go up, because of the falling Australian dollar. So it acts as a diversification and hedge in your portfolio.
There are points in time, there are points in time when the Australian dollar falls very precipitously, and it could be that if the currency stabilised at 65 cents to the US dollar, it could make some sense to hedge part of your portfolio. Us and other managers, global equity managers, often offer a fully hedged version of their strategy, so if people want to think about adding a little bit of excess returns to their portfolio when the currency falls below sort of historical normals and now, the currency is sort of average 75 cents to the US dollar, but if it's materially below 75 cents to the US dollar, they should speak to their advisor about should we switch part of our investment, our offshore investment into a fully hedged version of the product, but they have to think about the tax consequences of doing that at the time, if they're having to realise investments and realise tax. But over the very long term and it fluctuates a bit, it's the compound investment returns that really matter to people, and whether the currency is 65 cents or 85 cents isn't that material in the scheme.
Maybe the variation around the median is maybe 12% or 13% compared to maybe looking at even at 10% per annum, which you think is a realistic target to aim for if you've got good investments in your portfolio for the long-term. That's 160%.
VT - Sure. OK. Alright Hamish, thank you so much for your time. I really appreciate all these invaluable insights you've shared with our investors.
HD - My pleasure.
VT - No worries. I hope you found this video informative.
Now, please remember what we talked about in today's investment advice if you're thinking about investing in global equities, looking at Magellan's strategies, it's really important that you do your research, and please consider seeking financial advice.
My name is Vishal Teckchandani and I'll see you next time. END OF INTERVIEW
