Global Equities

Global Portfolio Update – 18 March 2020

Hamish Douglass provides an update on how he is protecting the capital of investors in MFG Asset Management’s Global portfolio from the impacts of covid-19.

Global Portfolio Update – 18 March 2020

As you are aware, the covid-19 virus is a fast-moving and fluid situation. The most likely outcome of the efforts to contain this health emergency is a near total shutdown of the world’s economy over the next two to six months. This is likely to lead to a near total collapse in demand for many (but not all) businesses over this period. For some, this could prove fatal, particularly for small businesses and for businesses that have high financial leverage or high fixed costs. Only governments can prevent these businesses from failing. The potential financial and social consequences are very concerning. 

The shape of the economic recovery will depend upon the scale, timeliness and effectiveness of actions taken by governments and central banks to help businesses to survive and keep people employed over the next two to six months.

The outcomes range from a V- or U-shaped recovery, a prolonged and deep recession and, at the pessimistic end of the scale, to a depression. We are unable to assess the most likely outcome at this stage as we don’t have visibility on the scale and effectiveness of the possible fiscal and monetary responses that governments and central banks might enact. These responses are being formulated as events unfold. The good news is that governments around the world have realised the potential severity of this situation and have the best minds working around the clock to formulate responses.

The likely size of the fiscal response required to head off the worst outcomes is unprecedented and potentially could be up to 20% to 30% of GDP. Unfortunately, there will be some countries (particularly some emerging markets) that might be unable to respond with sufficient force. Fortunately, major countries such as Australia, Canada, China, France, Germany, Japan, the UK, and the US are in strong positions to respond to this crisis. We hope that politicians and central banks will act in time and with sufficient force to prevent a devastating economic collapse. We are assessing their efforts as they announce them.

Over the past week, we have taken steps to increase the defensiveness of the Global Equity portfolio and have increased cash in the strategy from approximately 6% to approximately 15%. All cash is held in US dollars.

We believe the Global Equity portfolio is well positioned to weather this situation.

Our portfolio has numerous advantages. These include:

  • Cash at approximately 15% (held in US dollars).
  • Meaningful investments in businesses that are likely to prove resilient in this environment such as the three US utilities (Eversource Energy, Xcel Energy and WEC Energy), the US-based telecom-infrastructure company Crown Castle International, three consumer staples (Nestlé, RB and PepsiCo) and the Swiss-based pharmaceutical company Novartis International.
  • Most of our major technology investments are likely to be resilient in this environment (including Microsoft, SAP of Germany, and China’s Alibaba and Tencent).
  • Our technology investments with more cyclical exposure (Alphabet, Apple and Facebook) are very well positioned to weather any downturn due to their financial strength and are likely to participate strongly in any recovery. Visa and Mastercard are similarly positioned.
  • Our luxury holdings (LVMH of France and Estée Lauder of the US) own some of the world’s strongest brands, have solid balance sheets and benefit from sourcing about one third of sales from Chinese consumers. We think China is one of the best-placed economies to recover from this situation, which will also benefit Alibaba and Tencent.
  • Our three restaurant companies (McDonalds, Starbucks and Yum! Brands) face a challenging demand situation over the next two to six months as the world shuts down. Post this slump in demand, however, these businesses should recover strongly and prove defensive in the face of an economic downturn. Needless to say, we are monitoring these investments closely given the unusual nature of this situation, which will severely impact their businesses over the next two to six months. We remain of the view that these are some of the best businesses in the world and they are likely to rebound when the virus passes. We note that each of them has a strong drive-through business that is likely to remain open.
  • Our portfolio holds few or no investments across industries that are the most vulnerable to this crisis. The portfolio does not hold any banks, energy companies, airlines, travel-related companies or property trusts. The portfolio has no direct exposure to emerging markets, other than China. Our indirect exposure to other emerging countries is modest.

This is a complex, fast-moving and unprecedented situation and we will continue to manage the portfolio to protect the capital of investors. We believe the portfolio is well positioned to do this.

We will keep you informed as the situation evolves.

Stay safe and best wishes,

Hamish Douglass

Important Information: This material is being furnished to you to provide summary information regarding Magellan Asset Management Limited 'doing business as'/'trading as' MFG Asset Management ('MFG Asset Management') and an investment fund or investment strategy managed by MFG Asset Management ('Strategy'), and has been prepared for general informational purposes only. No distribution of this material will be made in any jurisdiction where such distribution is not authorised or is unlawful. This material does not constitute, and may not be used for the purpose of, an offer or solicitation in any jurisdiction or in any circumstances in which such an offer or solicitation is unlawful or not authorized or in which the person making such offer or solicitation is not qualified to do so. This material is not intended to constitute advertising or advice of any kind and you should not construe the contents of this material as legal, tax, investment or other advice. The investment program of the Strategy presented herein is speculative and may involve a high degree of risk. The Strategy is not intended as a complete investment program and is suitable only for sophisticated investors who can bear the risk of loss. The Strategy may lack diversification, which can increase the risk of loss to investors. The Strategy's performance may be volatile. In making an investment decision, you must rely on your own examination of any offering documents relating to the Strategy. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of MFG Asset Management. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed such statements. Additionally, this material may contain “forward-looking statements”. Actual events or results or the actual performance of the Strategy may differ materially from those reflected or contemplated in such forward-looking statements. No representation or warranty, express or implied, is made with respect to the correctness, accuracy, reasonableness or completeness of any of the information contained in this material. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. MFG Asset Management will not be responsible or liable for any losses, whether direct, indirect or consequential, including loss of profits, damages, costs, claims or expenses, relating to or arising from your use or reliance upon any part of the information contained in this material including trading losses, loss of opportunity or incidental or punitive damages. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. Nothing contained herein should be construed as granting by implication, or otherwise, any licence or right to use any trademark displayed without the written permission of the owner.

Important Information: This material has been produced by Magellan Asset Management Limited trading as MFG Asset Management (‘MFG Asset Management’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision.

This material may include data, research and other information from third party sources. MFG Asset Management makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of MFG Asset Management. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.
Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of MFG Asset Management.

How to invest

  • Magellan offers two market-leading strategies, global equities and global listed infrastructure. Find out how easy it is to invest in the world’s best companies, as chosen by Magellan’s experts.

  • Global Equity Products

    You buy from the world’s best companies, so why not invest in them? Magellan offers a range of highly-rated global equity funds, containing some the world’s best companies that we believe are positioned to benefit from long-term investment tailwinds.

    Invest in global equities
  • Global listed Infrastructure products

    Infrastructure: Supporting you every minute of every day. Our range of top-rated global listed infrastructure funds are positioned to generate inflation-protected, stable yet solid returns.

    Invest in global infrastructure
  • Magellan Sustainable Fund

    Invest in 20 to 50 high quality global companies within a framework that considers ESG risks. The Magellan Sustainable Fund aims to achieve attractive risk-adjusted returns and preserve capital in adverse markets.

    Find out more
  • MFG Core Series

    Our range of lower-cost global equity funds, designed to offer investors a unique and compelling combination of active portfolio construction and ongoing systematic portfolio management.

    Find out More
  • Magellan FuturePayTM

    Investing for income and growth, particularly in retirement. Magellan FuturePay is an innovative new fund that aims to deliver a predictable monthly income that grows with inflation, capital growth with a focus on downside protection, a reserving strategy and on-going income support, and daily access to capital.

    Invest in FuturePay