Can you please give us a brief history of the Magellan Global Fund from an investment perspective?
The Magellan Global Fund was launched on1 July 2007 shortly prior to the previous market peak in October 2007. We made some early mistakes including an investment in a US replacement-meals business, Nutrisystem, and a decision to hold cash in Australian dollars during the market meltdown in late 2008/early 2009. Our focus on downside capital preservation led us to hold significant cash in the early days and we made a timely decision to sell most of our exposure to financials immediately after the collapse of Lehman Brothers in September 2008, which was fortuitous. Our investment philosophy to invest in a concentrated portfolio of high-quality businesses with a clear aim to preserve capital has served our investors well over the past decade.
The financial crisis led to a significant mispricing of assets around the world and from early 2009 we identified that very high-quality global consumer franchises we significantly undervalued. They offered the prospects of outsized financial returns with very little risk. From early 2009 to 2014, we held significant positions in global consumer franchises including McDonald’s, Unilever, Coca-Cola, Yum! Brands, Colgate-Palmolive and Nestlé. Unfortunately, there appears to be far more limited opportunities to earn outsized investment returns from the global franchises today.
Soon after the global financial crisis, we anticipated that US housing construction and residential investment expenditure would recover over the next four to five years and invested in The Home Depot and Lowe’s, two home-improvement companies that would benefit from that. The shift towards a cashless society led us to buy MasterCard, Visa, eBay (because it owned PayPal then) and American Express. In recent years, the most important driver of stock selection has been our consideration of network effects around software, platforms and technological advancements. You’ll find Apple, Alphabet, eBay, Facebook, Microsoft and Oracle among our biggest holdings today.
Has the philosophy behind the Fund evolved over the past 10 years?
I would say that the global financial crisis showed the importance of capital preservation. Having capital preservation as a paramount goal ensures that we try to be aware of what could go wrong with any investment that we make or any thematic exposure that have.
We have also become more wary about making investment decisions looking in the rear-vision mirror. It is more important than ever to look where the world is going rather than where we have been.
What are your best investment decisions over the 10 years?
There are six investment decisions that stand out from my perspective:
- The decision to sell our major investments in financials immediate after the collapse of Lehman Brothers in September 2008. That proved a very good decision.
- The decision to hold a significant proportion of the Magellan Global Fund’s portfolio in world-leading consumer franchises up until 2014.
- The investment in Lowe’s and The Home Depot in 2011-12 and taking a medium-term view on the recovery of the US housing market.
- Our collective investment in payments franchises (particularly MasterCard, PayPal and Visa) over multiple years.
- The investment in Microsoft in 2013. This was a large contrarian investment where we did not see the demise of Microsoft due to the end of the Window franchise but rather saw a deeply advantaged enterprise that was more likely to win via its applications business, its emerging cloud business and its focus on large enterprises.
- Our investments in the digital-platform companies – Apple, Alphabet and Facebook. Each of these companies has vast user bases, strong network effects, access to data, almost infinite returns on incremental capital and widening competitive advantages.
What’s your worst investment decision?
Mistakes are inevitable in investing. What is critical to generating superior long-term returns is minimising the number of errors, especially those that lead to the permanent loss of capital.
Of the stocks we have owned over the past 10 years, only five have detracted noticeably from returns. The most notable was an investment in the UK retailer Tesco in 2010. Within two years, the stock fell by almost 50% after the company downgraded earnings forecasts due to problems related to its core UK businesses and concerns arose about its balance sheet.
We aim to learn from our mistakes and when we review a declining stock we analyse it as we would any other investment; that is to say, we ignore the price we originally paid. Our reappraisal of Tesco judged that new management could fix the balance sheet and turn around the market-leading UK business. We still hold Tesco today. It is still too early to judge whether or not we were correct to back a turnaround of Tesco.
If it were possible to go back in time, what advice would you give yourself on the Magellan Global Fund’s launch?
I would remind myself that successful investing is about owning companies that can generate excess returns for years to come. I would tell myself to be wary of turnarounds because they are often just poor companies enjoying some fleeting benefit.
Other advice would be to keep in mind the cognitive biases that afflict all investors. Most of our mistakes have largely been due to our cognitive biases. This is when we have fallen susceptible to confirmation bias, have oversimplified a complex problem or strayed outside our circle of competence. Our aim is to have systems and processes in place that minimise the number of mistakes we are prone to make due to our cognitive biases.