Hamish Douglass and Kerr Neilson go head to head
Facebook and Google, the two companies that have done more to disrupt the global media and advertising industries than any others in history, are the common links between Australia's two most successful managers of international money.
But the direct "apples to apples" comparisons between Hamish Douglass at Magellan Financial Group and Kerr Neilson at Platinum Asset Management ends with these two stocks being in their flagship portfolios. The investment strategies adopted by Douglass and Neilson are very different and that is reflected in the returns they are likely to earn in the 12 months to June 30.
The latest available figures, which are for the year to May 2018, show Douglass's flagship fund, the Magellan Global Fund returned 9.7 per cent while Neilsons's flagship Platinum International Fund returned 14 per cent. On the surface that's a big win for Neilson over Douglass. But a longer-term analysis shows them performing neck and neck over time.
Over three years its Magellan 8.4 per cent and Platinum 8.32 per cent, over five years its Magellan 14.3 and Platinum13.89, over seven years its Magellan 17.7 and Platinum 12.96 and over 10 years its Magellan 13.5 and Platinum 10.5.
It is definitely worth exploring the divergent strategies of Douglass and Neilson because of the lessons it carries for investors who want to build their own portfolios by copying the greats or are thinking about choosing managed funds in these volatile times.
Neilson built his reputation over the past 20 years primarily serving the interests of retail investors. Today Platinum has about $27.7 billion in funds under management and his stake in the company is worth about $1.7 billion.
He will step aside as chief executive and chief investment officer of Platinum this weekend and hand the reins to Andrew Clifford, who co-founded the firm in 1994. Clifford says Neilson will continue to be part of the Platinum investment team. For example, in the past month while in Japan visiting companies, Neilson churned out a four page note for Clifford recommending investment in a high growth company.
Platinum differs from Magellan because of its long standing interest in Asia, particularly Asian emerging markets. Neilson and Clifford have always been counter-intuitive. Over the past 20 years they launched specialist funds in technology, global brands and Japan at the same as other investors were taking a negative view of these strategies. The Platinum International Fund has pushed back against the US-centric view of the world. Over the past five years it has been moving East. Asia Pacific now accounts for about 51 per cent of the portfolio. As of May about 20 per cent of the fund was in Chinese shares, 13 per cent was in Japanese shares and seven per cent in Korea.
Neilson and Clifford regard China as the investment opportunity of a generation. This strategic imperative explains why Samsung is the largest position in the Platinum International Fund. Clifford says this stock is one of the world's leading technology companies and has the most integrated business model for the manufacture of smart phones.
Clifford likes Facebook because he says that with a profit growth of 40 to 50 per cent its forward price earnings multiple is actually below double digits. He says it is hard to find value of this kind in most tech growth stocks. Other notable stocks in the fund include Ping An Insurance, one of the largest insurers in China, and Jiangsu Yanghe Brewery, a fast growing manufacturer of white spirits.
Clifford says the significant change in the fund's portfolio in the 2018 financial year has been the shift into energy, materials and industrials. The fund has a large holding in the miner and commodities trader Glencore, which is one of the largest suppliers of seaborne thermal coal. Other stocks in the top 10 positions in the portfolio include Technip, Siemens, Royal Dutch Shell and Intel Corp
Douglass has had a far more rapid rise to prominence then Neilson. He pitched his fund management skills at institutional investors in the United States and won huge mandates. In the space of 10 years he has built a business with $67.3 billion in funds under management. His stake in Magellan is worth about $500 million.
Douglass is similar to Neilson in that he is a brilliant stock picker but he has carved out a reputation as an insightful thinker able to interpret the complexities of global macroeconomics. His aim is to position his flagship fund to avoid volatility. Analysis of the flagship fund's returns show Douglass has been able to achieve consistent outperformance against benchmarks. Compared to its peers, Magellan has an "outperformance consistency" of 90per cent.
While the Magellan Global Fund only just beat its benchmark in the year to May 2018 the strategy has, according to Douglass, captured 100 per cent of the upside in markets and only 50 per cent of the downside. The returns achieved this year have been struck despite having about 18 per cent of the fund invested in cash.
Douglass says the fund has avoided Chinese technology stocks in favour of the platforms in the US including Google, which trades under the Alphabet title, and Facebook. He is also a huge fan of Apple which he says is one of the world's most impressive subscription businesses. He says Facebook has yet to really capitalise on the advertising opportunities in its range of other businesses including Whatsapp.
The Magellan Global Fund has a big holding in Kraft Heinz because of expectations the company will be part of a larger rationalisation caused by disruption. The fund has been a long standing owner of Visa and Mastercard and that has delivered in spades. Douglass thinks Starbucks is a company that his under appreciated and under valued.
One of the companies that he is most excited about is Crown Castle International which owns telecommunications towers in the US. He is such a big believer in the prospects for this company that he was willing to take up $US1 billion of a $US3billion capital raising done by the company to help pay for Lightower, which was bought for $US7.1 billion.
One conclusion to be drawn from this data and from other analysis of the performance of the funds against their benchmarks is that the Magellan and Platinum are complementary.
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Reserve Bank of Australia, OECD, Australian Stock Exchange, Australian Financial Review, JP Morgan, Morningstar Australia, Colonial First State, Market Index, International Monetary Fund, The Economist.
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