Q&A with Hamish Douglass Co-Founder, CEO & CIO at Magellan July 2015

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Hamish Douglass, Co-Founder, CEO and CIO at Magellan, has been the Lead Portfolio Manager of the Magellan Global Fund since its inception ten years ago. With the fund showing double-digit returns over the decade, we asked Hamish how it has evolved during this time and what he remembers as being his best and worst investment decisions. We also find out what advice he would give to himself if he could travel back in time.

Can you give us a brief history of the Magellan Global Fund (the Fund) from an investment perspective?

Our investment philosophy is based on owning outstanding global companies, purchased at a price that provides a reasonable margin of safety. We take a benchmark-unaware approach and the global portfolio tends to hold only about 25 stocks at any point in time.

It’s interesting that over the past 10 years the global portfolio has only held 63 names in total, a fraction of the number in the MSCI World Index, which exceeds 1,600 stocks. The fact that we have only replaced about four stocks a year in the portfolio shows we are selective and that we hold our investments for the long term.

Our dominant investment themes have changed over the decade due to the changing opportunities available. In the early days, a large theme was the emerging-market consumer, which we accessed via lower-risk multinationals with consumer brands known the world over. Soon after the global financial crisis we anticipated that US housing construction would recover and invested in The Home Depot and Lowe’s, two home-improvement companies that would benefit from that. The shift towards a cashless society led us to buy MasterCard, Visa, eBay and American Express. In recent years, the most important driver of stock selection has been our consideration of network effects around software, platforms and technological advancements. You’ll find Apple, Alphabet, eBay, Facebook, Microsoft and Oracle among our biggest holdings today.

The biggest change that we’ve seen over the last 10 years, is the expansion of our investment team which has grown from 12 people, when the global fund began in 2007, to 36 now.

Has the philosophy behind the Fund evolved over the past 10 years?

Our investment approach was founded on two principal objectives: to achieve attractive risk-adjusted returns over the medium to long term, and to reduce the risk of permanent capital loss. I would say that the global financial crisis showed the importance of capital preservation. Having capital preservation as a paramount goal ensures that we try to be aware of what could go wrong with any investment that we make or thematic exposure that have.

What have been your best investment decisions over the last 10 years?

A little more than a year after the Fund started, Lehman Brothers collapsed, yet other financial stocks stayed near all-time highs. At that time we sold our major investments in financials because we thought other investors were mispricing systemic risks in the financial system. That proved a very good decision.

We have long liked payments companies such as MasterCard and Visa; the fact that new entrants need to be simultaneously accepted by millions of consumers and merchants means these giants are largely protected from competition.

Investing in Microsoft in 2013 has also proved a good decision. Other decisions around which technology stocks to own have proved fruitful, especially the investments in Alphabet and, more recently, in Apple.

...and what has been your worst investment decision?

Mistakes are inevitable in investing. What is critical to generating superior long-term returns is minimising the number of errors, especially those that lead to the permanent loss of capital.

Of the stocks we have owned over the past 10 years, only five have been mistakes in the sense they detracted noticeably from returns. One of these was an investment in the UK retailer Tesco in 2010. Within two years, the stock fell by more than a third after the company downgraded earnings forecasts due to problems related to its core UK businesses and concerns arose about its balance sheet. We aim to learn from our mistakes and when we review a declining stock we analyse it as we would any other investment; that is to say, we ignore the price we originally paid. Our reappraisal of Tesco judged that new management could turn around a company that enjoyed significant competitive advantages such as the strongly positioned UK retail segments that gave it economies of scale. We still hold Tesco today.

If it were possible to go back in time, what advice would you give yourself on the Fund’s launch?

I would remind myself that successful investing is about owning companies that can generate excess returns for years to come. I would tell myself to be wary of turnarounds because they are often just poor companies enjoying some fleeting benefit.

Other advice would be to keep in mind the cognitive biases that afflict all investors. Most of our mistakes have largely been due to our cognitive biases. This is when we have fallen susceptible to confirmation bias, have oversimplified a complex problem or strayed outside our circle of competence. Our aim is to have systems and processes in place that minimise the number of mistakes we are prone to make due to our cognitive biases.

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