When is Magellan’s Hamish Douglass going to spend the $11 billion his Global Equities strategy has sitting in the bank? And what’s he going to buy?
The deployment of Magellan’s dry powder is one of the most keenly followed developments in the industry at the moment. In a recent interview, Hamish shed some further light on the preconditions towards becoming closer to fully invested in the market.
At the current point in time, Hamish says Magellan’s core product is comfortable holding 15% cash. But there are two events that could trigger a potential change in the weighting and underlying portfolio composition.
Scenario 1 - A successful vaccine is found
Hamish says confidence in equity markets could surge if drug makers’ upcoming Phase 3 COVID-19 vaccine trials show promise.
“We could well get beneath the data coming out of phase three out of some of the vaccine trials, gives you a lot more confidence that the vaccines and the efficacy on the vaccines are going to work. And at that point, the markets would be pretty favourable and maybe the markets are 10% higher than they are today off the back of that news.”
In that event, Hamish is willing to travel back in a meaningful way to a sector that made up ~10% of Magellan’s portfolio pre-pandemic: consumer discretionary as well as other connected stocks.
“We're already thinking about a portfolio of top investments, which we would make in a fairly fully-priced market, but there could be parts of the market that is still under significant pressure. You could think of the travel-related industry.”
Magellan previously had more meaningful positions in stocks such as LVMH and Estee Lauder, and its Infrastructure strategy also owns airports. The thinking here is that even though these companies may not experience an immediate rebound in travel and travel-linked spending after news of a vaccine, they would be undervalued in an overall expensive market. As a result, their share prices may re-rate as the pathway to more normalised earnings becomes clearer.
Scenario 2 - Vaccine trials are unsuccessful
On the other hand, it could all end in disaster. Hamish says it’s reasonable to assume that trials could fail, produce inconclusive results, or not inoculate humans as intended. For example, they may help people who are infected but not actually immunise individuals against the virus.
He reckons that any disappointment on the vaccine front could lead to a “big drawback” in markets, potentially leading to Magellan deploying cash back into its current wide-moat businesses such as Microsoft, Alibaba and SAP at more attractive prices.
“And if there's a drawback in markets, if people are panicking and markets are rapidly selling off because they've... That wouldn't worry us at all. We'd prefer that. That's a better universe to buy, when others are fearful, but that just may not happen.”
Which is the more likely outcome?
Hamish is well-known for assigning quantified probabilities to a range of scenarios. This time though, he’s holding back for good reason.
“I just can't call it at the moment. And when you can't call it, that gives me quite some caution. So in a strange way, I'm kind of sitting on the fence. I can see both scenarios. I just can't handicap them.”
If a vaccine doesn’t come to market in a reasonable period of time, Hamish suspects that COVID-19 infections could soar in the Northern Hemisphere winter, and the resultant economic stress would cascade into emerging markets.
“We could actually find ourselves of really testing the limits of what the central banks can do. Because the economic scenario could get materially worse than it is today.”
And that scary thought is exactly why Magellan is remaining cautious and keeping a high amount of cash.
Watch the full interview
Watch Hamish's full interview with CommSec, where he discusses a broader range of risks including the pandemic, the US election, China-US tensions and promiscuous monetary policy. (Viewing time: 25 mins)
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