Magellan Global Trust and global equities insights: Q&A with Hamish Douglass

The Trust has two main objectives. The first objective is capital preservation. The second is to generate attractive risk-adjusted returns over the medium to long term. We achieve this by investing in a high-quality portfolio of what we consider to be the world's best businesses at prices that we believe are attractive for the long term. We believe that by doing this we will reduce the probability that our investors will experience a permanent capital loss, even if share markets go down from time to time, as inevitably they will.

Magellan is seeking to provide an attractive vehicle for investors making an investment in global equities in a form they are highly familiar with - an ASX-listed closed-ended vehicle. We think retail investors value regular cash distributions and these have been missing from many other global equity products. We think that a 4% cash yield differentiates the Trust.

There are a number of other distinguishing features of the offer. One is that Magellan will pay all the costs of the launch of the Trust, in cash, so that the opening cash net asset value per unit equals the application price of $1.50 per unit. The other is that we have put in place an attractive reinvestment plan that includes a 5% discount in respect of cash distributions. The amount of the discount will be paid for by Magellan to ensure that the holdings of those unit holders not participating won't be diluted. We think this will be very attractive to investors.

The priority offer is to be made to 250,000 to 300,000 underlying Magellan shareholders and investors in our retail strategies. The priority offer offers eligible applicants a loyalty reward of additional units equivalent to 6.25% of the units allotted to them under this offer. The full amount of the loyalty reward will be paid for by Magellan. The loyalty reward is our way of showing we value the support we have received from our investors and shareholders.

We believe Australian investors should strongly consider allocating a meaningful portion of their equity investment to global equities. Many of the world's best companies are found outside Australia. In fact, the Australian stock market is heavily weighted to specific sectors, these being resources and financials. The ASX has a low exposure to technology businesses, yet many of these technology companies are driving the world into a future where they will reap the benefits in terms of earnings and higher share prices.

We think the world is entering a period when technological change will upend many business models, including ones that might look immune today.

Walmart, for instance, the largest retailer in the US, introduced automated checkouts into their stores at the start of this decade. An unexpected consequence was that chewing gum sales dropped 16% in volume terms over the following years. What had happened was that the business of impulse purchasing, buying gum while waiting at the checkout, had been disrupted. Chewing gum is an oligopoly business with strong brands, yet it was disrupted by a relatively low-level technology change.

The question we are asking ourselves is where might the next chewing gum effect occur. Further advances in artificial intelligence are expected to trigger far more wide-ranging disruption across many industries. We consider it crucial to ponder how business models could change in coming years and make sure that we're invested in the right areas.

A number of industries face disruption risks. Even before we think of the longer-term implications of artificial intelligence advances and the change these could bring to knowledge-based industries such as professional services and research and development, there are a number of industries in the midst of disruption.

The growth of Alphabet (owner of Google) and Facebook have already decimated print advertising, yet TV advertising has held firm. In coming years, the shift of eyeballs to new services such as YouTube and Netflix and the massive data and audience-targeting advantage of the major digital platforms will be a significant headwind to TV businesses.

In retailing, companies like Amazon and eBay, in particular, have redefined what competitive advantage in retailing means today. In combination with changes in the advertising market, the value of many consumer brands is under pressure. For decades, the value of a company like Procter & Gamble has grown because of its high-quality brands such as Gillette, Oral B and Pantene. However, this brand strength has been created on the back of dominating TV advertising and dominating shelf-space in large traditional retailers. Both of these strengths are fading as these industries are disrupted.

Driverless cars are significantly challenging auto makers and other parts of the auto supply chain and could dramatically reduce the number of cars that people might need to buy. We think about what that might imply for the fossil-fuel and mining industries. They appear to be headed for a shake-up because demand for those types of goods and commodities is likely to drop.

You could break down the opportunities into two key areas; businesses that win from change, and businesses that will be unaffected as they face a low risk of long-term disruption.

In the winners' bucket, you will find key investments that we've held for a long time; the consumer technology platforms and the payments businesses.

Consumer technology platforms such as Google and Facebook are the two globally leading advertising businesses. It doesn't matter who comes up with a new successful online business, we know that they will advertise on Google or Facebook. The financial outlook for the two companies is essentially a judgement as to how much market share they are expected to take of the traditional TV and print advertising markets.

The payment space is attractive for two key reasons. The first is that these companies are benefiting from a long-lasting shift around the world from cash and cheque to electronic payment, a shift that is only getting started as 85% of all payments in the world are still made by cash or cheque. The other angle is that businesses such as Visa, MasterCard and PayPal have built hard-to-replicate networks where they bring together millions of merchants and banks on one side and billions of cardholders on the other.

Businesses involved with biological goods have a low risk of long-term disruption; the restaurant industry is a good example. No matter what happens with technology, people will still eat and go to restaurants so we think there is little disruption risk for food businesses with strong brands and strong distribution networks such as McDonald's, Starbucks and Yum! Brands, the owner of KFC and Pizza Hut. These companies also have attractive growth potential in terms of rolling out new outlets, particularly in emerging markets.