Hamish Douglass fasts for 16 hours every day. His daily exercise routine is a cardio workout that also includes planking non-stop for 20 minutes. He planks because for half of his life he had a bad back, and keeping his core strong is the one thing that helps. Some years ago Douglass, had a laminectomy, a common major surgical procedure that removes part or all of the vertebral bone to ease the pressure on the spinal cord or nerve roots. Douglass, who admits that he looks older than his 53 years – he smiles and says that it’s the lack of hair – is the fittest and healthiest he’s been in a long time, which is important. Douglass, the chairman and chief investment officer of Magellan Financial Group, is in the toughest fight of his career.
The number of billionaires across the world is today greater than it ever has been. Most people who have achieved billionaire status have done so because they possess a brilliant business skill or idea. Douglass and his former investment banking colleague Chris Mackay are no exception. When they co-founded Magellan almost two decades ago they focused on investing in global equities when few funds were doing so from Australia.
Magellan grew phenomenally to become one of the most formidable investment houses in Australia with $115 billion in assets. Its success has made Douglass one of the highest profile fund managers in the nation. But the past year has been a bruising one for him and the business. Magellan’s share price has almost halved because its flagship global equity fund has significantly underperformed the market, and stockbrokers such as UBS have whacked a sell rating on it. “The scorecard is brutal,” says Douglass.
At the start of the year Douglass was a billionaire, but that is no longer the case as his fortune is tied to Magellan, where he is the second biggest shareholder through his company Midas Touch Investments. Douglass is sanguine about the underperformance and the fall in his personal wealth. “I’m not interested in trappings of money,” he says. “I get the bus to work every day.” While Douglass doesn’t have the expensive cars, yachts and jets of some billionaires, he does have a house in the United States, a farm and a home on Sydney’s lower north shore, which he is renovating for the first time in 20 years.
Only a year ago, Magellan was a market darling. But in the past 12 months its global fund, for which Douglass is responsible, has underperformed the benchmark by about 20 per cent. It’s also just underperforming the benchmark on a five and seven year basis. Mistimed bets on Chinese technology stocks have partly driven that underperformance.
However, since inception the global fund has beaten the index by nearly 4 per cent and delivered an 11.75 per cent return each year, while Magellan’s funds under management have kept growing.
“I haven’t found an institutional investor who has questioned the performance over the last 12 months,” says Douglass. Last month, Douglass returned from a three-month overseas work trip visiting institutional clients in the UK, Europe and the US, and also executives of the companies that Magellan owns.
The group has large stakes in global companies that include Microsoft, Amazon, Alibaba, Yum, Nestle, Facebook Alphabet, Starbucks, PepsiCo and LVMH.
He says there will be tough years but wants his clients and the market to judge Magellan’s performance over the long term not the short term, and notes that even venerated US stockpicker Warren Buffett’s Berkshire Hathaway has had its down periods. “These are just blips in a long road. We haven’t lost anybody any money. We make people incredible returns over time. We’ve made people over $60 billion since we set Magellan up.”
Still, UBS analyst Shreyas Patel argues that Magellan’s “below-average performance” will put pressure on the premium fees it charges clients. It also faces more intense competition from rivals such as GQG Partners, which listed on the ASX last month.
Patel says the risk to Magellan’s fees and some recent retail outflows are the reasons why UBS put a sell on the stock.
“I haven’t found an institutional investor who has questioned the performance over the last 12 months.”
Hamish Douglass, co-founder Magellan Financial Group
Tough year for rock stars
It’s been a tough year for a number of Australia’s ‘rock star’ fund managers, not just Magellan. Shares of Kerr Neilson’s Platinum Asset Management and Rob Luciano’s VGI Partners have also slumped. Unlisted asset manager Caledonia is also experiencing serious challenges with a sharp drop in the share price of one of its biggest investments, online US real estate group Zillow, which has been hit in the past few weeks with multiple class action lawsuits.
Magellan’s flagship global fund, which accounts for the bulk of the group’s earnings, has underperformed because of its position in defensive stocks that typically perform well in market downturns, and also a large exposure it had to China with investments in Tencent, the gaming and social media group, and retail and technology company Alibaba. Both companies were subject to a political crackdown by the Chinese Communist Party, causing their shares to tank.
“At one stage about 15 per cent of our portfolio was in China. It’s a pity China’s [crackdown] happened at the same time as a cyclical rally,” says Douglass.
Magellan typically has half of its global fund in dependable defensive companies, and the remainder in companies that are exposed to structural growth changes, such as the rise of the Chinese middle class or cloud computing.
Magellan exited its shareholding in gaming and social media group Tencent at a profit, but is sitting on a loss in Alibaba, which it continues to hold.
Douglass says the group has faced large share price falls before in companies it owns citing the decline in Facebook shares after the Cambridge Analytica scandal. It rode that crisis out and tripled its clients’ money in Facebook. He says Magellan will “hold its nerve” on Alibaba. “We believe Alibaba going forward faces less intervention risk than Tencent.”
The outlook for markets in the next 12 months will be decided by how virulent the latest variant of COVID-19 is and also the inflation threat. Douglass expects consumers in the Northern Hemisphere will experience price shocks in the next two quarters in gas, electricity and grocery bills. He says if there is no reversal in the inflation trend by July next year, then markets will face a correction. It will be clear by then, he says, whether those inflationary pressures are transitory or entrenched. “I think the more probable outcome is it’s going to turn out to be transitory.”
The next Macquarie?
In recent years, Douglass and the Magellan team have been trying to reduce the dominance of the global funds business, by broadening its earnings base. They created Magellan Capital Partners, which holds investments in businesses such as mexican fast food retailer Guzman y Gomez, Finclear, which provides trading infrastructure, and investment bank Barrenjoey. Douglass expects that the first two companies will eventually list on the ASX.
Barrenjoey is led by Matthew Grounds, who was at university with Douglass, and is a former Schroders alumni of both Douglass and Chris Mackay.
Asked whether Barrenjoey could in the long term be merged with Magellan, creating a rival to Macquarie, Douglass says there are four scenarios for the new investment bank in which Magellan holds a 40 per cent stake.
It stays private, and Magellan remains a 40 per cent shareholder. The second scenario is that Barrenjoey staff, who own 50.1 per cent of the investment bank, decide they want to list the bank. Another potential outcome is Barrenjoey stays private, but some staff decide to sell and Magellan increases its stake.
The final option is possibly Magellan and Barrenjoey coming together, but that would require discussions with Barclays, which owns 9.9 per cent. “Do we have a plan that that is going to happen?” says Douglass. “No, we haven’t. But is it inconceivable that two financial services firms in asset management and investment banking could come together? Well, Macquarie has done that. It really depends upon what Barrenjoey wants.”
The underperformance of Magellan’s global fund has not been the biggest stress for Douglass this year, although he says the media’s reporting on it has caused upset among his staff, family and peers.
The biggest stress was the passing of his mother during lockdown and a funeral only 10 family members could attend. He wears the watch that she gave him for his 50th birthday, a bash he celebrated at Wolgan Valley Resort.
His mother’s declining health – she had three operations on her back – and rapid ageing in the past decade crystallised for Douglass the importance of looking after your health. It was about four years ago he began intermittent fasting of 16 hours each day. He fasts after dinner until lunchtime the following day, skipping breakfast except for a cup of tea. He was prompted to do so after research suggested fasting improved longevity. “I believe in controlling things that are within your control, and your personal health is in your control.”
Douglass says his parents set him on the path of his success by empowering him to find his own way and never suggesting what career he should undertake. He lists many mentors and influences on his professional and personal life over the decades, from investment bankers Peter Mason and Tony Flagstaff, to corporate executives Ross Adler and Frank Lowy. Douglass caught up with Lowy during his stint overseas this year.
But Douglass says the biggest influence on his career has been his Magellan co-founder Chris Mackay, who he describes as an “extraordinary and intelligent” person, even though there has been industry speculation that the two men aren’t as close as they once were.
When the two men worked at Schroders, Mackay dumped 20 years of Berkshire Hathaway annual reports on Douglass’ desk. “I would never have been in the funds management game but for Chris.”