Magellan Asset Management

As the Magellan Global strategy celebrates its 10-year anniversary, Hamish Douglass sat down to discuss the high and lows of the past decade and why successful investing is about looking forward not backward.

Six profitable decisions

When we started we were in the midst of the global financial crisis and we made a good decision to sell all the financial stocks that we held in the portfolio, just after Lehman Brothers collapsed. That was probably the first decision that we got right.

After that, we identified big, multinational consumer companies that were exposed to emerging markets. They were defensive businesses that were growing at a faster rate than they had been historically, with high returns on capital but seriously mispriced. Up until mid-2014, we held a meaningful portion of our portfolio in mispriced, defensive businesses. That provider a good result for our investors.

Then in 2011-12, at the bottom of the US housing cycle, we asked ourselves: "When do we think housing stocks will recover?" Off the back of that, we put nearly 10% of the portfolio into Lowe's and The Home Depot, the two big home-improvement retailers in the US. We didn't time it perfectly, selling out of The Home Depot a bit early while we still hold a majority of our Lowe's position, but we made over four times our money in those investments.

Fourth, we made a portfolio position in what we called ‘the cashless society’, investing predominantly in Visa, MasterCard and PayPal. They're almost the gifts that just keep giving. We have made a lot of money from this theme.

In 2014, we made an investment in Microsoft, which became our largest holding. We bought it for about US$28 a share, at a time when Steve Ballmer's rule was ending and people thought that the Windows business would disappear. We thought it was fundamentally mispriced. Windows wasn't about to disappear. Microsoft probably had the best applications business in the world with the Office software. It is now trading at US$70 a share. Unfortunately, you don't get such opportunities every few months, but when you see them, you have to act.

The latest transition of our thinking is around the emergence of the digital-platform company. We've got a meaningful part of the portfolio in these digital-platform businesses, including the likes of Apple, Alphabet and Facebook, which are going to be very important part of where the world's going.

I think those six decisions have contributed the vast majority of the returns that have been delivered over a decade.

Where we got it wrong

While we have got a lot of things right over the past decade, we have also made some investment mistakes. I call them due-diligence mistakes, where we didn’t do enough work around the specifics of the company when we first started out.

We had an investment in a meal-replacement business called Nutrisystems. It was early on in its strategy, and before we clicked our fingers, it was down 60% to 70%. That was a painful event we had to learn from, especially around due diligence and the barriers to entry in businesses.

At the end of 2008, we went to about 30% cash in the strategy and a lot of people were saying that was an absolutely brilliant move. I then did the dumbest thing in history and converted all that cash into Australian dollars. Not long after, the Australian dollar collapsed. When I then went to buy global equities again, the cash was worth a lot less in US dollars. I'd made a great decision to get out of equities, but then a really dumb decision to put it into Australian dollars.

The most recent mistake was our investment in Tesco, which has been the single largest detractor from returns over time. We still hold it today, but it's a different business from when we made the mistake several years ago. Again, Tesco was somewhat of a due-diligence error because we underestimated the power of the discounters in the market. You don't get everything right, but I think we've learned a lot about retailing, and it's in a fundamentally different space these days.

The lesson

The biggest lesson here is: What you learn in the rear-vision mirror, isn't going to tell you how to make money looking out the windscreen.

To watch the full interview with Hamish Douglass, please click here


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