Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Magellan replaces Tencent with Amazon in its high-conviction strategy
Magellan’s Chris Wheldon, portfolio manager for the Magellan High-Conviction Strategy, discussed some of the current portfolio holdings, recent portfolio changes and their outlook going forward in a recent update to clients.
The strategy, which is all about backing just a few high-quality names, has outperformed its objective return of 10 per cent a year, but struggled to keep up with buoyant markets driven higher by a cyclical and commodity led recovery.
Wheldon doesn’t waste time, quickly reminding clients of the “long-term” wealth creation strategy the fund is creating, and that investment isn’t a short-term game. He even pointed out its consistency by hitting its objective 94 per cent of the time, with an average 3-year return of 13.7 per cent per year after fees.
At the end of July 2021, the strategy’s net performance was 17.9 per cent for the 12 months and by the end of August, its performance had slipped back to 16.8 per cent for the year. Of course, the concentrated High Conviction Trust has no benchmark, but instead aims for “risk-adjusted returns” exceeding 10 per cent.
In terms of relative price strength, however – that is, taking into account the overall market trend – the Magellan High Conviction Trust price has fallen by 9.48% over the past year. However, the focus of the call was squarely on the portfolio and Magellan’s best ideas: here is the current portfolio as of August 27, 2021.
The long-term compounding machine looks to be very tech-heavy with 49 per cent of the portfolio tilting towards internet and e-commerce sources, 22 per cent from IT, 5 per cent from payments, 7 per cent from financials, 5 per cent from restaurants and 7 per cent in cash. The strategy looks very similar to Hamish Douglass’ broader equity exposures, with the group seemingly doubling down on the expectation that economies will weaken, and that big tech will continue to dominate.
The biggest news, however, was that the fund exited its position in Tencent Holdings and initiated a new investment in Amazon during August.
The move to offload Tencent was straightforward: Wheldon said, “we believe Tencent is operating in socially contentious areas including gaming, entertainment and social media that carry the risk of further, and potentially severe, regulatory intervention by the Chinese government.” Sentiment is negative, the share price has fallen, Magellan is cutting losses. It’s a good move whether driven by fundamentals or sentiment.
On the other hand, the Amazon purchase to replace Tencent isn’t so straightforward. Amazon ticks all the right boxes in regards to its business quality and long-term compounding potential, but its valuation is incredibly high for it to be a business bought at an “attractive price”. Amazon trades on a lofty PE of 60x on a share price of $3,462, making it quite an expensive purchase.
The decision to suddenly go overweight Amazon, when the portfolio is heavily overweight e-commerce at a time when the US is transitioning to a post-Covid era, is baffling.
Expectations are for online sales numbers to lose momentum in a post-pandemic environment, as consumers rush out to shopping centres for the first time in two years to brick-and-mortar shops. Amazon being one of the main e-commerce players, has forecast some astronomical projections for 2021-22 based on momentum experienced in lockdown.
According to Nelson Capital Management’s recent research note, “In the consumer discretionary sector, we trimmed pandemic winners in favor of companies we believe will outperform in a recovery period. We reduced our position in Amazon following its stellar performance through the pandemic. Though we believe online shopping is here to stay, we think some portion of consumer wallet share will transition to services and experiences.”
Have Magellan paid too much for Amazon a little too early? Only time will tell.
