Scaling Up [S3.E8]: The power of compounding with Hamish Douglass, Co-founder, CIO and Chairman of Magellan Financial Group
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In this episode, Hamish discusses the unique insights at the cross-sections of investing (with $45b FUM) and operating a publicly listed business (ASX: MFG).







Ed (02:08): Hamish Douglas, welcome to Scaling Up. An absolute treat to have you on the podcast. What I think is incredible and what I am really trying to elicit from this conversation is there are very few investors in the history of investing who have also built wonderful durable businesses themselves. And of course, Magellan is now a top ASX 100 business that’s got a market cap of over 10 billion. So today I’d love to draw upon your reflections and personal frameworks that you’ve developed as an investor that you’ve perhaps utilized as an operator. And these two are obviously deeply linked. The fact that you are such a wonderful investor has been a key to Magellan’s success. But welcome and thanks for joining me.

Hamish (02:49): Ed. thank you very much. It’s great to be with you. Just using a sporting analogy, I think you may be a little over your skis at the moment in terms of describing us a wonderful and durable business. We have a business that’s relatively large so far, but I’m sure we’ll get into it. I wouldn’t describe it as wonderful and durable at this stage, but it’s work in progress and we’re working on it.

Ed (03:11): Sometimes those looking in have a very, very different view to those. Looking out for those that invested their money with you both in the fund and as a listed business have both done tremendously well. So, we can agree to disagree. And maybe a great place to start is the founding story. Let’s turn the clocks back to 2006 and I’d love to hear the founding story in your own words.

Hamish (03:37): Chris Mackay had effectively left UBS and he’d always wanted to be an investor. And he had taken a controlling shareholding in a Melbourne based listed investment company called New Private Tier Holdings limited. And I was a shareholder. Chris was very generous he raised some capital. I put some shares in. It was a few years before that and then really in the beginning of 2006, I said to Chris why wouldn’t we form an asset management business? And actually, if we went right back to 1995, Chris and I worked together at Schroder’s Australia, and we actually had a joint investment company called Magellan Equities Proprietary Limited. We were fans of Peter Lynches in those days, maybe we weren’t meant to have a sort of asset management business on the side. We even managed some money for friends and family when we were at Schroder’s. I’m sure the statutory limitations has gone on our licensing requirements

Ed (04:31): I was about to say, don’t speak too loudly.

Hamish (04:33): I’m sure we’re just between friends. I’m sure no one will tell anyone. But then in the beginning of 2006, I said to Chris we should set up an asset management business. And he said, look, great idea Hamish. you just happen to be working at Deutsche Bank when you get yourself out of Deutsche Bank, I’m sure we could do something. So, it took me a little while to extract myself because I sort of co-headed their global banking business there. But I extracted myself. And by that sort of the latter part of 2006, we launched Magellan Financial Group and we actually recapitalized Magellan through a company called Pen Ghana Hedge Funds and that was a company that was controlled by Malcolm and Lucy Turnbull. People have probably heard of both Malcolm and Lucy and by both of them were friends of mine.

And it was kind of a company that wasn’t going anywhere. It was a funds of funds listed hedge fund manager and I said to Malcolm would you be interested in us using as a vehicle? Because it effectively had 30 million of investments that could be turned into cash. Malcolm said, It’s the best thing you’d ever heard of. And I think the stock price went up, I don’t know, 50 or 60% on the day we announced we’re recapitalizing this thing. And Chris and I went, well, whoa, this is not exactly what we’re expecting. It was trading at a discount to its net asset value. And it went to a substantial premium over its net asset value. So, Malcolm thought at that stage, he’d hit a pot of gold in in the restructure and we recapitalize out, we raised a hundred million. James Packer came in, Naomi Milgram came on our board.

A whole series of other people came, and we launched what was called Magellan Flagship Fund, which is now run by Chris, which is MFF Capital Investments today. And we raised $270 million, oh no, sorry, $370 million for that listed investment company. And there were a few bumps in the road, the UBS private wealth business had slated to put in a hundred million of that capital raising and when it went up the chains, they said, well, we’re not that comfortable about backing a former chairman and chief executive in Australia. Because we may be putting a sort of branding on this we don’t want and suddenly we had a hundred million sort of hole in the capital raising. And Chris goes, what are you going to do about this Amish? Well, like it was my problem. So, I said, I’ll go to New Zealand, and I think I went to New Zealand for a week and came back with about $70 million in the week.

So, we managed to close out in a period, and we had four people in a serviced office. Chris and I had never been in asset management other than of course, Magellan equities that nobody had known about sort of 20 years prior. And we raised nearly half a billion dollars in sort of four or five weeks with four people in a serviced office and no track record in funds management. Chris and I obviously knew a thing or two about raising capital. That was really the inception of sort of Magellan and a hundred million to of capital to set the firm up 370 million in a closed end investment company and four people in a serviced office. And that was the start of it.

Ed (07:28): Wonderful story. What is fascinating to me is two investment bankers, obviously at the top of their game in investment banking, but no official track record of investing. But what being listed from day one enabled you was scale. And you’ve just discussed that and brand. But on the other side of the coin is this rigor and process that needs to happen as being a listed company from day one. This doesn’t happen for many companies. Usually there’s a scaling journey to the public markets. I’d love to dig into that scaling journey and how you thought about being listed from day one as opposed to scaling up to the public markets.

Hamish (08:07): Yeah, I guess the thought was sort of the field of dreams when we set it up, build it and they shall come. And one of my friends, Joe Hogan was actually talking about that in the paper. She runs Mecca and is just opened this enormous store at physical retailings under challenge. And she’s just opened this beauty emporium in in Sydney in the old Gowings, which I actually went to see it the other night. It’s absolutely incredible. But she was actually saying it’s a bit of the field of dreams as well build it, they shall come. And we had that philosophy when we set it up, we wanted to go in an area that was highly scalable. We wanted to go in an area where we didn’t think there was a lot of competition. And we picked two areas.

One was global equities and particularly taking it to the advisor market in Australia. Platinum had established a wonderful beachhead in that, but really there was no other real players in that game. We thought if we could get some great retail distribution and we didn’t have any of the bad habits that other people had built up over decades, been taught by others. We kind of just designed our own process from an investment point of view, very influenced by what Buffet does. But our risk management sort of brought a lot of the philosophy we would’ve had from investment banking and understanding risk and frankly our business. It didn’t feel like at the time, in end of 2008, beginning of 2009, the financial crisis was probably one of the luckiest things that ever happened to us.

We had a lot of capital, obviously, markets were down substantially. The MFF was down substantially. The global fund that we had launched had actually outperform very, very dramatically, which was the fund that I was lucky enough to become the portfolio manager of, and it started us enabling differentiation. But we had already put in place Frank Casarotti, who we hired out a colonial who was probably one of the best doyens of the sort of distribution game in the country, he had built the whole Colonial first State distribution. Having the distribution people with us and in investment philosophy in a lot of capital actually worked out very well. And it was a wide-open space there was room for at least one or two other slots in people’s advisors’ portfolios for global equities and that’s what we went after.

Ed (10:20): Maybe we can just zoom into the GFC for the moment just quickly, because obviously you set the business up in 2006, 2008 through to 2010, an opportunity to buy one businesses, let’s say 40 cents in the dollar absolute Christmas time for investors if you have that long term duration that you had. But at the same time, you’re a listed business and you’ve seen your own share price really struggle to gain any traction. At the time I think I’ve heard you say you were the only buyer of your only shares and your mother, and your mother-in-law were the only three buyers during the GFC. So how did you balance the operating capability, I guess, of your business and seeing the challenges and yet on the investing side it was, it was such a wonderful time to have that long duration.

Hamish (11:06): Yeah, well we were lucky cause we had a lot of capital in the business. So, we hadn’t invested all the hundred million or we’d put some into our funds, but we probably had about 50 million in cash still in the business, which gave us a lot of confidence the business could see it through and almost irrespective of what the share price was, it was trading at a material discount to the cash asset backing. So, we weren’t overly worried about the business, we were just totally focused on the investment side. You actually needed a relative advantage you could only really go hunting for those bargains if you actually had some firepower. We were lucky how we navigated our strategies had gone down much less than markets and we’d actually taken them to cash. So, we actually had a lot of firepower. So, we did have a good time in 2009. We substantially beat the markets in 2008, but we started 2009 with 30% in cash in a very low risk portfolio. But we actually beat the markets in 2009 as well. There weren’t a lot of people who managed both sides of that. Both innings in your terminology.

Ed (12:09): Yeah, well I mean it’s a great lesson for the investors out there. The power of a cash balance and treating that as an almost a portfolio company, knowing that you can deploy that at pace when required and when markets are falling. The strategic nature of that is so key and fascinating to hear how you dealt with that. Let’s dig into scaling the team and the culture of the business. You mentioned four people in a serviced office, I think, and I’m not a hundred percent sure over a hundred today at Magellan. I’m really curious how decision making has changed over that time, both from an investment team decision and how you come to those decisions as the team has grown and also key strategic business decisions. Obviously, the structure of the organization has seen so much change in growth. Do you think that has led to better decisions or has it just been a question of managing the process a bit better?

Hamish (13:02): Well, I’ve always believed in one we want a fairly small team. We want focus in what we’re doing and in each core areas of the business, we have to have absolute excellence in what we’re doing because we push things, we push people quite hard, particularly as we’re rolling out new sort of innovative structures, the merger of these trusts, active ETFs, retirement products, and a lot of these things had never been done before. So, we need intelligent people, and we push it. So, what’s happened on the investment side we started with three sector teams, financial services, franchises, and infrastructure. Then we added a TMC team, we’ve now got a healthcare team, and we’ve actually added an emerging growth team very, very recently as well. So, we’ve always believed in operating. So, while we may have 35 people in the investment team, each team will be made up of sort of three to eight individuals and we operate them as smaller units and each of them has a leader and everything else.

So, as we’ve scaled that, the model has been very, very simple to scale. So, whether we’ve had 10 people in the investment team or 35 people in the investment team, it’s still had this small and tight unit fit and they operate within teams of people. We’ve certainly added some deeper expertise as we’re wanting bringing Mike Morell on a number of years ago, who was the former deputy director of the CIA. We’d had Janet Yellen on board who’s just had to retire from her consultancy with Magellan because apparently, she’s been offered a new role that was more important than her role at Magellan. But we do have other people Kevin Wash, who was a former Fed member. We’ve got other people from the CIA who help us on China and other matters. So, as we’ve got more scale and more profitability, we’ve been able to keep adding the layers to the onion in terms of our access to information and people, I think Janet Yellen, we were the only group in the world she consulted to.

Ed (14:57): Do you think there’s an optimal number for these decisions that are being made? Obviously, you require some diversity of thought, but the same time too many people in the room can really create more distraction than focus.

Hamish (15:10): At the end of the day, size and scale are very different concepts and I think a lot of funds management businesses get this completely wrong. They get enamored with the amount of sort of funds under management that they have, but adding more and more products and more and more people, it breeds complexity in your organization. And complexity leads to suboptimal decision making. At the end of the day, so our business has all been about scalability and not size. We are large, but it’s highly scalable, it’s highly focused. There are very few businesses in the world that have 11 billion market cap and a hundred billion in funds under management and 130 employees in total. So, it’s kind of a different model and you are asking is there anything else? One of the best decisions I ever made, and a lot of people wouldn’t do this, was giving up the role of CEO and to be focused on CIO and strategy, I’m chairman of the firm, but that’s really my strategy hat and the CIO role’s investment side and a lot of the complexities of running the day-to-day business, Brett handles and I totally trust him. He’s absolutely wonderful. So, when you scale these businesses, some people try and hold on to everything themselves and that’s a major mistake.

Ed (16:23): You beat me to my next question because I was about to ask about the transition to a CEO and how that has affected the scalability. Again, what I’m hearing is just the, the deep strategic insight almost from the start of how we going to build a very big business and let’s plan for that. And it’s fascinating to hear how it’s played out. I’d love for you to maybe touch on and describe the culture that you have built inside the business and how that has in fact evolved over the years.

Hamish (16:51): Yeah, a lot of the failings of financial firms is this sort of star culture that gets created. These firms earn a lot of money and then with it can breed a certain style of culture and we had seen that in investment banking, and we absolutely didn’t want to build, let’s call it the investment banking or typical sort of funds management culture. From day one, Chris and I said is we are not going to put the investment team at the center of the plate. It is incredibly flat, how everything operates, including down to pay. The investment team gets paid no more than say the distribution team or the head finance people or the people who runs our internal sort of investment bank. It’s incredibly flat. If you went there, I don’t think there’s any feeling that somebody in a different area of the business is less valuable than anywhere else. What happens in most asset management firms, they put the investment people up on this sort of pedestal. They carry on like there’s some god givens gifts to the world. I still get the bus to work every day and part of that is deliberate in doing that. Chris Mackay still gets the ferry to work nearly every day and there’s about three people in the office who have a car park and none of them are from the investment team.

Ed (18:11): There’s wonderful power in that and taking the ego out, well, not providing a platform for people to develop egos, but simply say, we are here as a team to perform. Everyone has a job to do within that team and will be a respected job.

Hamish (18:28): And the thing that normally takes these firms down is hubris creeps in, the people start believing their own bullshit and they start really think they’re superior. But at the end of the day, we know markets are incredibly humbling and you have to keep that focus that day one mentality where you’re incredibly hungry and you’re focused on the detail. People who go round and they start buying all the Ferrari’s and all the other stuff and they start losing all the focus and they start believing that they’ve got this gift and they’ve forgotten what it really takes, which is a lot of hard work and a lot of focus on the details. So, what I think you find and when people come into inside of just the complete lack of hubris at Magellan.

Ed (19:15): Love it. Absolutely love it. I was going to serve up a, a sports analogy of the prop forward is just as important as the five eight in a rugby team. It’s a pretty ugly job to stick your head in a scrum, but someone’s got to do it otherwise you don’t win the ball.

Essentially your business has been built around the people inside the business. The success of Magellan is determined by the people within inside the walls. I know that you are a buffet disciple in in many ways and he thinks about it the management teams are important, but growth prospects, competitive advantage, the quality of the business sometimes gives ups the quality of management. And yet your business has been built on the people inside the walls. How do you reconcile the operator in you and also the, the investor in you that knows that sometimes business quality might be more important than people in culture or vice versa?

Hamish (20:25): Let’s talk about the business a bit. If you’re talking about that compared to where we may invest our clients’ money, we are in a business with wonderful economics, but very low switching costs at the end of the day and relatively low barriers to entry. Although the barriers to entry have actually been going up in investment management for various reasons. But there’s plenty of alternate products and it’s very easy to switch out of them and therefore, people are really, really critical to what we do at Magellan. We know that whilst the economics can be mouthwatering effect, we’ve got a royalty over our clients’ investment performance and the funds and a management. They give us, and I think we’ve probably outside of maybe some toll road or some sort of gold royalty, probably the highest margin business in the world. Moutai has a margin EBIT margin of 70%.

We have an EBIT margin of 80%. when you get it really right and you can scale these businesses properly, this is a business that grows with our capital. It’s extraordinary. But at the end of the day, the switching costs are low and the economic motors we would, or buffet describe it is low. A lot of our moat comes around our people and looking after our people, our investment philosophy, but also then what we do in the business. So, a lot of how do I reconcile the two sides of it? A lot of my chairman’s hat is putting around is how do we deepen and lengthen the duration of our advantage in what we do, and we could get onto business strategy, but I spend an enormous amount of time actually studying what other fund management businesses do. Outside maybe one or two in the world most of them have pretty average businesses. I call them collecting the coupon businesses. And when they stop working, all the coupons disappear. But how do you have something that genuinely has longevity in an industry that has low barriers to entry and low switching costs? So how do you create something that has duration is outstanding for an industry that really doesn’t have duration?

Ed (22:29): You’ve read my notes cause my next topic is business model and strategy, and the first thing is the most simple but most beautiful business model in the world of all business models. So, you’ve touched on that. I’m interested to talk about the strategy and the model a little bit more. I guess I’m keen to understand what you’ve learned from other industries, other growth industries that you invest in and brought them back to Magellan’s strategy. I know that over time you’ve expanded your products and you talked about the retirement product. You’ve obviously gone into infrastructure principle on balance sheet investing. How has that strategy evolved over time? And maybe talk about that growing competitive advantage that you’re trying to lay out around the business.

Hamish (23:15): Yeah. Well, the strategy’s really got sort of two pronged. The first one is our asset management business itself; we want a very scalable and simple business model. We want to compete in areas where we really think we have an edge and therefore you’re not going to find us proliferating products and going into areas where there’s lots of other competitors. We are really trying to simplify things for clients. One of the things we’re trying to do is build up D2C business direct to consumer. We’ve obviously got two wonderful businesses, one is a direct to an advisor business, one is an institutional business, but actually connecting yourself directly with consumers is a third prong to your distribution. The problem is it’s really, really hard and it’s like scaling, it’s like trying to catch mice. How do you do it in a way that you scale that?

So, we do look at a lot of business models that have gone directly to the consumer and the first thing we worked out is we didn’t have the proper mouse trap and what we did is we pioneered effectively the listed markets here for managed funds. We keep wanting to further improve that, our first was the active ETFs, then we did the closed end listed trust, and now we’ve merged those two vehicles into one, we actually merged the backend registries together. So, you could be in a listed or unlisted unit exactly the same time, the first time that had ever been done and we had to get the registries to rewrite all their IT to do that. Is there any form of loyalty scheme that you could have that would be economic in funds management?

And the advantage that if you can build a direct-to-consumer business is everybody has their own unique experience. We all put up investment performance, which is point to point on the chart, but an individual’s view of the manager depends on the price on the day in which they buy it. So, if you’ve got all of your money with 20 institutional investors, there’s 20 data points and you’re incredibly concentrated. We’ve got a very good institutional business, but it’s concentrated. You get a CIO who changes, or something changes, and a big chunk of money can go the advice business is concentrated as well because you may get 200 advisors in a group, but they all look up to a model portfolio that construct to, they’re dependent on asset consultants, et cetera. If you can get half a million consumers, you’re effectively got half a million CIOs making their own decisions and it becomes very, very sticky.

But as I say, it’s very, very hard to do and we’ve been working on that strategy, but when we’re solving problems, we want to do things that don’t have as much, let’s call a key man risk involved with them. We’ve launched or just about to launch what we’ve called the MFG course series that is much more akin to sort of enhanced index investing. We’ve been doing an infrastructure for a decade and with lots of intellectual capital, but that’s much more like what BlackRock does, hopefully at more attractive economics than that. But really value adding, and people are trying to lower cost. So, we’re trying to solve a client problem and participate in that. And of course, retirement is something Brett’s been working on for a number of years. We think we’d merely crack that nut and we’ll be announcing something shortly.

So, it’s all about building out the durability of how that asset management business works. But of course, our business then the asset management business really doesn’t need capital and throws off enormous amounts of free cash flow. We can either just give it all back to shareholders or can we deploy that capital and create more than a dollar of value for every dollar we effectively retain in the business, which is the Berkshire Hathaway test. Are we creating a license where people will want to deal with us, where we will almost have unique positions to put capital to work that literally no one else would have an opportunity to do? I don’t want to say nobody else, but a bit like Buffet people come to sell their businesses to Berkshire Hathaway because it’s Warren Buffet. We would love to build up a reputation where people would love to have Magellan, we don’t want to control their businesses, but we effectively set up the Barrenjoey Capital, which is Australia’s newest investment bank through relationships that I’ve had very strongly over a number of years plus Brett.

And we put an outstanding team of people together and we think we are going to earn a very, very decent return. I don’t think they would’ve done it with anybody else and they probably wouldn’t have done it, but for us, putting that on the, on the table, we took a small investment in a FinTech called Fin Clear, which is really adding up, but they’re going to do the IPO and they stopped their IPO. We’ve got a number of other discussions that we’ll see what happens where we’ve learned a lot about economics of businesses over time and we’d love to invest in businesses that are high growth that we really understand the economics of, and we can be a partner of those investments and actually they become our advocates. They become our referral network because if we turn out to be great partners ass investors and we’re seen to give some credibility and add value to them we may well have other opportunities in the future.

So how do you make your business more resilient? We think investing in other great businesses, what are we, we’re an investment house. It just doesn’t have to only invest our client’s money. It could invest our shareholders money as well and if you diversify your business into different asset management businesses, but then diversified in other outstanding businesses, and it’s Chris and I called it Magellan Financial Group for a reason 14 years ago, but we’ve only just started rolling out the strategy 14 years later because we actually didn’t have a license to do it outside asset management till now.

Ed (29:03): There’s a great lesson for all business owners in that the flywheel is just, I mean it’s been spinning for a while, but it’s quickening at pace as the scale has come.

Hamish (29:14): And there are some other reasons because we’ve got the benefit at the moment of the offshore banking unit where we get our effect via all our export earnings taxed at 10%. Once we go through a certain dividend payout ratio, we start paying out a partially frank dividend and we start eating into that. But every single dollar we retain is effectively retained earnings that we’ve never paid any tax on. So, there is a huge benefit if we can take advantage of that and compound that sort of tax-free money in great businesses over time and we think we could add a lot of value. A lot of people look at Magellan at 11 billion from my point of view is we’ve only just got started.

Ed (29:54): There’s no doubt the clear strategic insight is immense. But I am keen to understand what are the frameworks that you have thought about in, in thinking about strategy? I know a lot of people rely on other frameworks like Hamilton Helmers seven Powers, I’m sure over the years you’ve dragged in different insights and formulated your own and I’m keen to understand those just briefly.

Hamish (30:19): Yeah, in terms of a framework I think I use lots of different influences when you think about sort of business strategy and what really makes a difference, if probably the greatest businessman of our generation is probably Jeff Bezos. His focus on that day one mentality, the incredible focus on the customer above everything else, the ability to take a long-term view to be there when others aren’t there of what he’s done in the cloud. Buffet and Munger they give you so many lessons particularly about understanding opportunity cost and measuring that opportunity cost. Of course, ethics and focus I is really important. The importance of compounding that as investors you should do. I often quote to young people, Ben Franklin, one of the founding fathers of America money makes money and the money that money makes more money.

I was always fascinated when I was young about mathematics, I was fairly good at mathematics. I used to do at university, have all the compound interest tables up on my table and could rattle off all the compound interest and what time and compounding does for you. And very, very influenced about what you can, you can do there. The simplicity of what you do, and I love the Einstein sort of quote, make everything as simple as possible, but no more simple. That’s what we’re trying to do. All our products and everything else, we keep trying to take out the friction and keep trying to make things more efficient for our customers in terms of the principal investments we want them compounding. So, what the lessons we have learned probably is studying what not to do in asset management businesses. A lot of asset management businesses at our scale would be pursuing m and an opportunity in the asset management game.

And we just look at that and just go, it is just short termism. It is incredibly high risk, and the chance of succeeding are very, very low. The only one that has really worked out well at scale, I would say is probably the BlackRock acquisition of BGI, which gave them the index business during the financial crisis. Just a wonderful deal, but because it’s the index business of scale, it’s such a good business once you get it at scale. But that’s a technology scale game. It’s almost not an asset management business, it’s just distribution and technology at the end of the day. Buying active funds management businesses and trying to take cost out and adding size but not scale to your business is just a recipe for disaster. We are very happy to learn from other people’s mistakes.

Ed (32:51): That’s a great case study of where you’ve actually lent on your investment philosophy and applied it to your operating capability because the long-term thinking, the organic growth story, those two elements are so intertwined strategically in what you’re trying to achieve as a business, let alone how you’re investing. So, it’s fascinating to hear that. What about the future? It feels as though there’s been no better time to invest large polar capital such as the rate of innovation and ability to compound at high rates of return. we’re seeing massive businesses growing at 40% off, off big bases already year on year. How do you think this is going to play out with your investing hat on momentarily?

Hamish (33:36): Yeah, well the first thing I’d say to you we are in a very unique world at the moment where we’ve got these platform economics and I call it capitalism without capital, that you’ve got these massive network effects and they’re incredibly capital light, how they keep expanding and of course data is sort of the engine of their business models and they’re still attacking enormous addressable markets. But the growth rates will come down and the regulators will get to them and that sort of area of excess return is not going to last indefinitely. So, we have to keep investing in intellectual capital and I often say to people is one of my criticisms of the asset management industry is that an asset manager finds a formula that works for them. They’re in an area and this area creates all this excess returns and then it stops working for them.

Then they start telling everyone that everybody’s lost their minds and they’re just sticking to their knitting. They’re going to stick what they’re doing and don’t worry; it’s all going to come back. What I look at and I say is, yeah, you get an excess return cause something’s going on that’s mispriced in the markets and when you’re in the area you participate in the excess returns. But you should distinguish between that factor risk giving excess returns in your own skill at identifying it. A lot of asset managers then they never adapt and what you always have to do is adapt. The big tech platforms aren’t always going to be the outperformers in the future. They’re a wonderful spot to be at the moment. They’re not at crazy prices, they’ve got quite a lot of regulatory risk, but as they take more and more of the total addressable markets and the sort of revenue upside disappears, they’re going to come down to more mediocre returns in the longer term, our job is to identify where the ball’s headed and find the next area.

And I think we’ve been reasonably good at Magellan is changing the shape of where we invest. We got into the big tech platforms at the right time, but we used to be in banks, we don’t own any banks anymore because we decided the excess returns were outer banks. Now we’re in the tech platforms and we’ve done some old market stuff and utilities as rates have come down, we like them from a defensive point of view. We’ll keep looking and we’re investing in a large emerging growth team at the moment to make sure we keep thinking about what’s ahead of us. Can I tell you what the top companies in the world will be in a decade? No, I can’t. Do I think these are going to go by the way that the mining companies and the oil and gas majors and the, and the banks were 20 years ago that used to dominate the top companies in the world. No, these companies are different. They truly are, but that doesn’t mean their stock prices are always going to give excess returns.

Ed (36:19): Wonderful answer. One theme I’d love to quickly touch on is just the impact of Covid on Magellan as the business. I think it’s pretty clear as investors how you’ve approached it and I know cash was such an important part of that. But as a business, I’m curious as to your thoughts as a business leader, the work from home element, how that affected decision making. All the while I guess your teams were seeing wonderful opportunities again at sort of 50 cents in the dollar. You would’ve had to work around the clock to make sure you were optimizing for that all the while making sure that your people were healthy and safe and still working collaboratively.

Hamish (37:00): Yeah, and I would say it’s been very, very good this pandemic for the business. Of course, we went on the defense early on because we really didn’t know how the healthcare side has played out. It’s probably played out in the Devana outcome in the end with these vaccines coming through and the market’s probably appropriately now pricing that risk. But what it’s enabled to do it put all these business into this forced business continuity plan. We had a BCP, and many other people and we switched it on and everyone went from work for home, we tested much of it and that just went seamlessly. So, we were well prepared, we were kind of paranoid about things like that to make sure that we can cope and that all worked very well. But what had opened up was two factors.

It has opened up our eyes that people can work differently, and we can give people a lot more flexibility and we’re not going to lose productivity. There is no way, without a pandemic we would’ve said three quarters of the office can work from home four days a week and people aren’t just going to be out on the beach and taking the piss out of it. What we found is people didn’t skip a beat. They arranged their own lives, but productivity didn’t fall, productivity probably lifted certainly in terms of the information we were getting and the reports. And we’ve implemented so many projects and restructures of trusts and all sorts of things have been going on. We’ve probably been busier than we’ve been ever during Covid. We’ve probably had more things come to our investment committee than we’ve ever had before.

Yet we’ve had people working from home, which means the first lesson coming out of this, which I think is going to be wonderful for people’s enjoyment of life, is we going to have a world that’s far more flexible in how people work. There is still an important social element in working where you need to get teams together, but also on average, people probably, I would say at our office on average would spend at least an hour and a half traveling, 45 minutes each way to work. And if we can give people three or four days where they don’t have to do that, that’s an hour and a half back in people’s life that is super, super valuable. I think that’s a first lesson. The second lesson, as a global investor, we’ve found that we’ve become a lot more connected with clients.

We always had good access. I would normally go overseas and maybe I’d take the analyst and we’d go and have a two on one meeting with the chief executive would be dependent on my travel schedule. We’re normally booking these things out three to six months in advance. You’re there, you’re meeting them for an hour and hour and a half. The conversation is a bit dependent upon what’s actually happening at the time. We tend to take a longer-term view, but there is some contemporaneous information. Now we’re finding whenever we want to speak to a chief executive in the world, not only do we have the meeting two days or a week later, so it’s very, very timely in terms of the conversation. I’m not taking one person to the meeting; I’m taking 15 people from our investment team to the meeting and the chief executives are completely happy on a Zoom or a team’s call to have 15 people because that’s how they operate their lives.

They’re often doing it from their own home. So, they’re incredibly relaxed and we are getting incredible, timely insight. I would say our ability to extract information, have discussions and include a lot more people has gone up dramatically. I would say that’s going to last. The productivity change is incredible because I would often go to Asia, for instance, to do a client seminar. One of our large clients at James Place. Every few years I’ll go up to Asia because they asked me to go there, did it a few years ago, went to Hong Kong, Singapore, and Shanghai and normally that’s over three days. We only travel there for the other two days. That’s an entire week, because at Covid we did a virtual conference with them. It was one event because all locations tied into the same one and it took two hours one evening instead of an entire week.

Ed (40:52): Incredible and I think it’s also a testament to the culture that you described earlier that people love their work so much that they in fact want to be more productive because that choice for them is now apparent.

Hamish (41:04): Another thing is we’re learning as well that with our direct-to-consumer strategy, a lot of ours are older people. If we previously said to older people, get onto a Zoom call and join us in a or get on a podcast a lot of the retirees who use Magellan products would say, we have no idea what you’re talking about. You now say to people, I’m going to do a webinar, come and listen to us. We’ll get six to 10,000 people on a webinar. We’ll get up to 10,000 people on our podcast, which is ranking in the top 10 in the world for business podcasts now and a lot of them are retirees and Zoom, they’re going, oh, I do that with my grandkids, no problems at all. And now they’re saying I don’t have to travel and everything, I’d love to do it. And the difference when we’re engaging with people digitally and by video, we get a lot more data. So, it’s kind of been a game changer how we’re thinking about a business strategy as well.

Ed (41:56): Fascinating. One, last question and it’s a little bit of fun, but I know you love your sporting analogies. I love mine. often think of portfolio construction as picking a team and you have your experience players and your up and comers and someone might, like a little specy here or there returns of the fund are clearly a scoreboard. And I’ve always thought the good investing is like opening the batting. You certainly leave more than you play out if you’re any good at it. But I’d love a sporting analogy that you think sums up the Magellan story.

Hamish (42:29): We manage in our core equity portfolio to sub-portfolios in the strategy an offensive team and a defensive. We keep our portfolio very tight around 25 investments. So, I think we’ve ranged between 20 and 27 investments in 14 years now. And people say, why do you do it? And I said, I view it just like a sporting team. I view it as a team. We’re trying to win the grand final and the first thing you have to do is measure opportunity cost, which I said is one of the lessons you get from Charlie Munger and Warren Buffet. And by keeping the number of players on the field to a set number, it forces you to make decisions. It’s easier to make a team 25, 30, 35, 40. You keep finding interesting things, but what you’re doing is you’re diluting your best ideas by just taking on more and more investments.

So, the first thing is we manage a team with a set number of players and we’re always trying to optimize those players. Then I think of them, I’ve got a team that can play offense and our team that plays defense. If you look at our returns over time, our defensive team has been super important in terms of market volatility. We’ve ended up with half the market downside in long only portfolio, which is one of the best stats I’ve ever seen. That’s because we’ve built such a great defense team and cash with the offset team. And the other thing I say to people is, the great thing when you’re operating in listed markets with a sporting team trying to win the grand final is we play without a salary cap, because we aren’t restricted.

We can invest anywhere, every listed company available. They can’t say, well, the player’s been taken. That’s a problem with private equity is you’re competing over an asset that then is taken out and therefore people may overbid the price. The great thing with the market, it’s very emotional. The price of the greatest players is hugely volatile and therefore you can keep swapping over your players. That’s how I think about it, we’re just trying to optimize our sporting team with great offense and defense with no salary cap trying to win the game. And we think long term, it’s probably much more like test cricket, we’re not playing a short game, we’re playing long game and this market this month with the market rotation, we will underperform this month. I couldn’t care less. It’s just completely irrelevant to the game we’re playing.

Ed (44:47): Well, that’s the joy of not having a benchmark and it’s how people should think of their own portfolios at home. Hamish, I’m going to stick to my guns and say Magellan is a wonderful and durable business and I think as you said, it’s only just warming up. So, I can’t wait for the next two decades to see what it becomes. But thank you so much for your time. Incredibly generous and it’s been an absolute pleasure.

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