Magellan was formed in Australia in 2006, by Hamish Douglass and has grown to manage over $76bn in assets for institutional and retail investors around the world. The group employs 30 analysts and specialises in global equity and infrastructure investments allowing them to focus on identifying global markets where they can add the most value for domestic investors, rather than operate in a flooded Australian market.
Why Magellan? The Magellan team have been focusing on infrastructure investing since 2007 when this fund was launched, which has allowed them to build a competitive advantage through networks, deal flow, proprietary data and in-house modelling. The fund has grown from $0 to $1.7bn in 2019 through strong performances (16.6% p.a. over 10 years), Magellan manages nearly $10billion in infrastructure assets when you include institutional mandates. The Portfolio Manager of the fund is Gerald Stack. Gerald spent a substantial amount of his career at CP2, a specialist infrastructure investment manager and has a great deal of experience, understanding, forecasting and analysing the strengths and weaknesses of businesses in this sector. Magellan differentiates its approach to most competitors in the sector by limiting the investment universe to those infrastructure assets that are essential to the efficient functioning of a community and not sensitive to competition. They understand that investors are seeking the CPI + 5.0% returns that come from monopoly-like assets, not the volatility that comes with cyclical businesses. Therefore they avoid companies subject to political and sovereign risk, whose income is impacted by commodity prices or which require excessive population and usage growth to justify their valuations. We looked at a number of other fund in the listed infrastructure funds, including Rare Infrastructure, Invesco, Macquarie etc. However, the portfolio makeup of each seem to very correlated to commodity prices over time, which is understandable when you look at the make up of the index that they all try to outperform, while Magellan tried to minimize this risk, resulting in the main reason the investment committee approved the Magellan Fund over the rest.
Why Thematic Bucket? There is a growing trend of underinvestment in infrastructure assets across the developed world, which offers a substantial opportunity and value for those monopoly assets that already exist. The assets owned by Magellan are unique and can never be replicated or disrupted with one such example being a network of 40,000 telecommunication towers that are now relied upon to deliver data by all businesses and consumers in their daily lives. This means they will become increasingly important as the global population grows and put the owners in the position to benefit from increased spending and demand. The infrastructure sector benefitted from falling bond rates around the world, which inflated valuations, with many investors now concerned about the prospect of increasing rates. The weaker economic outlook for 2019 and 2020 has shown that bond rates may not increase as quickly as expected, increasing the value of the regulated income streams of true infrastructure assets. The Investment Committee believes one of the greatest risks facing asset markets in the next decade is an inflation spike caused by higher wage growth and the loose monetary policy of recent years. As highlighted in the past, very few asset classes offer a true inflation hedge, with infrastructure, particularly listed, one of the only investments that has delivered in the past through its combination of consistent demand and regulated income. Importantly, it is those assets that provide this type of hedge that Magellan focus on identifying.
Performance & Top Holdings: The Global Infrastructure Fund invests only into world-class listed infrastructure companies, with a preference for those who deliver reliable and predictable earnings, from consistent demand. This means they avoid businesses relying on such inputs as energy prices, population growth etc. to generate higher returns. The fund has performed strongly since inception, adding 8.6% per annum, compared to the Infrastructure Index which delivered 5.7%. More recently, it has returned 16.6% over the last 10 years and 14.9% over the last 12 months, both 5% above benchmark. This has been driven by a number of factors, including falling bond rates, but most importantly the recovering global economy since the end of the GFC. At present, the fund is well diversified, with 36% invested in the US, 24% in Asia and 23% in Europe. The largest allocations are to Airports (17%) and Toll Roads (16%) considered the kings of infrastructure assets, with Gas Utilities (13%), Integrated Power (11%) and Energy Infrastructure (11%) the next largest. Each asset is an industry and regional leader including Aena Airports in Spain, which manages 46 airports in Spain and 17 globally including London Luton, Aeroports De Paris, Crown Castle in the US, which owns 40,000 mobile phone towers including 5G, and Transurban the monopolistic toll road provider in Australia.
Reasoning: We understand that it is important to own assets and companies that are difficult to replicate, and which provide the most secure income streams possible to investors. Investing in infrastructure assets, including evolving electricity grids, cleaner energy sources, telecommunications and other utilities offer investors an opportunity to be part of the foundations on which the future global economy will be built. Whilst interest rates will remain important for valuations they are far less important for listed infrastructure assets than unlisted ones like those owned by industry super funds. This is because listed infrastructure assets are revalued daily by the market, whilst unlisted assets can be valued as rarely as every 1 to 3 years providing the illusion of security. This affords the ability to both profit from mis-pricings that regularly occur as well as achieve more diversification than the substantial size of unlisted assets allows. The underlying exposures can also be changed quickly should one particular asset or sector become more or less attractive. We believe the consistent and regulated income streams of true infrastructure assets, have an increasingly important role for Australian investors, particularly in the event that franking credit refunds are outlawed. There are two common concerns about investing in infrastructure, being the debt burden and ability to negotiate higher revenue. Most of Magellan’s underlying investments have utilised historically low interest rates to extend their debt facilities (as far as 10 years) at incredibly low levels, reducing the risk of increasing bond rates, whilst the key focus of management has been to purchase only regulated assets that have the ability to demand higher compensation should inflation increase and focus on those that are integral to daily life. For instance, the fund avoids energy generation and retailers in preference for transmission and distribution assets. The fund charges a competitive management fee of 1.05% per annum, along with a performance fee of 10% of outperformance over the higher of the S&P Global Infrastructure Index or the 10 year Australian Government Bond Rate.