This month we undertake a quick review of NVIDIA, a company we believe is one of the most important in the future of the global economy. Without getting too technical, NVIDIA is one of the world’s largest producers of Graphic’s Processing Units or GPU’s.

What’s a GPU? Some say GPU’s are the soul of a computer, whereas the traditional CPU is the brains. Where CPU’s work through a series of tasks by calling up information from a hard drive, GPU’s break complex problems into millions of simple ones to work them out at once. What does this mean? It means they can drive substantially faster processing power as well as making them ideal for graphics which requiring rendering to occur immediately.

NVIDIA designs these GPU’s with a particular focus on four key markets: gaming, professional visualisation, data centres and automotive uses. Their key competitors in the sector include the likes of Intel and Qualcomm among others. One of the more interesting uses is the parallel processing capabilities between computers that GPU’s allow, which drives the processing capabilities of super computers used by researchers and scientists to solve complex problems.

The company was founded in 1993 but a couple of Sun Microsystems engineers, Chris Malachowsky, Curtis Priem and Jensen Huang, a Taiwanese American. It currently employs over 11,000 people and has a market capitalisation of over US$150bn. The company is seeing substantial growth from the increasing use of its chips in motor vehicle guidance as well as the automation of factors all around the world. This processing power is also key to powering the likes of internet of things, connecting your fridge to your WiFi for example, and the 5G networks expanding all over the world.

The company is by no means cheap, having returned 80% over the last 12 months and currently trading on a P/E multiple of 67 times. Yet their business remains inherently strong, as one of just a few players in the sector, seeing Q3 results 14% above consensus. The companies market position affords strong margins, 63.6% in Q3 up from 59.8% in the previous quarter and delivered a profit of

$899m from $3.0bn in quarterly revenue. One of the great opportunities lies in the huge growth in the transport sector, a market expected to grow to $69bn by 2029.

NVIDIA truly is one of the standout companies of the future.

Lennox Australian Smaller Companies Fund

This month we take a closer look at one of Australia’s best performing smaller company managers, Lennox Capital.

The company have partnered with Fidante Partners who look after administration and distribution of the fund. The founding principles James Dougherty and Liam Donohue own 60% of the company and have worked together since 2005. James and Liam were the portfolio managers of the Macquarie Australian Small Companies Fund and the Macquarie Emerging Companies Fund. Lennox has grown to $200m quickly since its establishment in 2017.

What’s the fund?

The fund is a specialist smaller company exposure with seeking to outperform the ASX Small Ordinaries Accumulation Index through bottom up stock selection.

Why Lennox?

The managers of Lennox have quite a strong track record. At Macquarie they achieved a return of 19.70% per year over 3 years and over 5 years 13.88%. It is this time spent focusing on the Australian market and having the skill to generate alpha that we believe sets Lennox Capital apart, as we believe small Companies in Australia will continue to grow in the years ahead but are generally underrepresented in most portfolios.

Where does it fit in your portfolio?

We believe it fits the requirements of the Value Bucket as its underlying investment philosophy is to identify Australian companies’ ex ASX 100 Index with a market capitalization of roughly $150m. The team focuses on purchasing an undervalued company that will benefit from substantial earnings growth.

Why Invest?

The Lennox Capital Australian Small Companies Fund uses both qualitative screening and in-depth fundamental research to identify investment opportunities. Combine this with a robust investment process which where key insights are gained through deep-dive research ‘on the ground’. Lennox’s research process is driven by fundamental, in-depth and comprehensive analysis of a business’ operations. Lennox apply this practically in two ways

– external research (site visits) and internal research (detailed financial modelling). The process culminates in the production of Lennox’s forecasts for future earnings. These are ultimately used to assess the attractiveness of the business using a range of valuation metrics. The portfolio is a collection of the investment team’s best bottom up ideas. It holds a concentrated number of securities that Lennox believes have medium term valuation upside as well as minimal near-term earnings risk. The portfolio is managed with strong adherence to Lennox’s risk framework and investment objectives. The investment team ensure the portfolio is appropriately diversified.

Exposure to any one security and thematic are limited and liquidity within the portfolio is actively monitored. It holds between 20 and 40 individual companies. An investment is sold after it breaches any one of three reasons. It will be reduced as it approaches the team’s investment target, there is a breakdown of investment thesis or the company becomes sub-investment grade. We think this sell

discipline ensures maximum returns from stocks. We believe Lennox Capital Australian Small Companies Fund is best placed to provide outsized returns and exposure to stocks outside of the ASX 100 that otherwise is difficult to do. The manager charges a fee of 1.10% plus 15% of outperformance above the benchmark.

What does it invest in?

Every business that is considered an investment opportunity is assessed using Lennox’s proprietary quality screening tool. Businesses are assessed on 4 key factors: the ability of management, sustainability, quality of earnings and industry dynamics. Only businesses that pass Lennox’s quality screen and for which they believe they can confidently forecast future earnings are eligible for further research. Some of the best performing stocks have been A2 Milk, Wisetech Global, Altium and IDP Education. The current portfolio includes holdings in Adairs, Megaport, Austalian Finance and Collins Foods.

How has it performed?

Since inception the Lennox Australia Small Companies fund has returned 14.54%. The short- term performance has been below the benchmark adding 18.68% over the last 12 months as at 31 December 2019 compared to the index which added 21.36%. Since inception the fund has made 14.54% per annum beating the benchmark return of 10.76%. The fund’s strong short-term performance has come from its approach to selecting investments.

What income does it provide?

There is a common misconception from investors that managed funds will provide regular income each year. However, the income is determined by the success of the underlying investments with only realised capital gains or dividends received being distributed at 30 June each year. Investors should not expect regular income and will see the unit price of the fund increase throughout the year, than fall when a distribution is paid in July.

Nike Inc.

This month we undertake a quick review of Nike Inc. one of the best performing companies in the US in 2019 and a core holding within the Aoris Fund discussed above.

We all know Nike from its ubiquitous swoosh logo, and whilst the company remains the biggest shoe producer in the world, they are mich more than that. The company was originally founded in 1964 by the now billionaire Phil Knight, it apparently takes its name from the Greek Goddess of Victory, Nike. Nike is the basic marketing guru’s example of how important branding can be in an incredibly competitive market. Today, the company has expanded substantially from its beginnings, with brands and athletes spanning almost every global sport from Golf to Basketball and Ice Hockey. Nike owns the timeless Jordan Brand and is well known for being the winner of the Jordan Sweepstakes before he embarked on the greatest career in the history of professional basketball. But enough history, we need to consider the financials.

Nike recently reported their second quarter’s results, managing to buck the trend of slowing growth in what is apparently a mature industry. The company saw revenue growth of 10% on the previous quarter to $10.3bn, driven by growth across all geographies. Nike managed to improve their gross margin in the quarter, bucking the trend of their competitors, and was able to leverage 10% revenue growth into 35% earnings per share growth. The company highlighted their investments into constant product innovation and the digital transformation of their production, marketing and distribution. Looking more closely, the core Nike Brand continues to represent the majority of revenue, $9.8bn, up to 12% in constant currency terms, whilst Converse grew 15% to $480m with the momentum coming from its expansion into Asia and growth in Europe.

Nike is increasingly focusing on its global branding, having identified the opportunities in the Asian Middle Class Thematic, which is core to Wattle Partners approach. Their financials indicated that China was one of the fastest growing regions, with total sales improving 20% on quarter, and profit up 24%.

Aoris International Fund

Aoris is a specialist global share manager founded in 2017 by Stephen Arnold. Stephen previously managed the Evans & Partners Global Equity Strategy from 2011 to 2017, delivering a return of 18.3% per annum with over $1bn in assets under management. Stephen founded Aoris in an effort to bring his successful investment strategy to a broader group of investors.

What’s the fund?

This month we are reviewing the Aoris International Fund, which is a long-only global equity strategy. Aoris are unique in that they have a high conviction approach, holding just 10 to 15 companies and provide transparency into every investment at all times. Aoris have identified that avoiding the companies that fall into the bottom 20% of the market in any given year is the closest thing to guaranteeing outperformance. They understand that the poorest performers typically suffer from high debt levels, inflated valuations and poor returns on investment capital, which are key considerations of the team.

Why Aoris?

Aoris’ differentiating point is simplicity, and a focus on finding high quality companies. The research team achieves this by excluding a number of more popular sectors from the universe of opportunities. For example, Aoris will not invest in businesses with high leverage (financials/banks), low return on invested capital (energy), cyclical revenue (mining), regulated income (utilities), opaque (healthcare), narrow product offerings (IT) or commoditized products (retail). The result is that Aoris portfolio is tilted towards service providers and traditional industrial or diversified companies that are more suited to negotiating difficult economic periods. The result is a portfolio of high quality companies, operating in diverse industries offering true diversification.

Where does it fit in your portfolio?

Aoris meets the objective of the Value Bucket as the fund seeks to generate a return of between 8-12% per annum, with just 1-2% coming from dividends. This objective return is achieved by targeting companies offering 6-7% annual growth in their intrinsic value, or more importantly their profitability, 1-2% from dividends and 2-3% from market revaluations. More simply, the fund focuses on buying businesses that are growing earnings and revenue, not one or the other, and which have both breadth and diversification of those revenue streams, removing any cyclicality.

Why Invest?

Aoris exhibits two of the most important characteristics of successful active fund managers; low portfolio turnover and high active share. Low turnover is driven by their core, high conviction portfolio whilst active share relates to the fact that the underlying portfolio differs substantially from the benchmark index. The Aoris Fund will complement the alternative global funds in most portfolios due to the substantial difference in underlying investments. The fund will not hold the likes of Facebook, Amazon, or the major banks, due to their strict screening process, meaning there will be limited, if any, overlap with the other funds in your portfolio. The management team have shown a unique and repeatable ability to identify companies with economic and competitive resilience, even during the worst of times, and their focus on return on invested capital, continues to be a driver of real value in an increasingly expensive market.

The fund charges a competitive management fee of 1.1% plus a performance fee of 15%. We have successfully negotiated a discount to this fee on behalf of all clients of Wattle Partners.

What does it invest in?

Aoris will only buy and hold individual companies, they will not bet on companies falling in value. The portfolio is highly concentrated, at 10-15 holdings, meaning every investment will have a real impact on the performance of the portfolio. At present, the key holdings are spread across the globe, but with 51% of revenue coming from the US, 23% from Europe and 17% from Asia. These holdings include global luxury business Louis Vuitton Moet Hennessy (LVMH), make-up and skincare retailer Loreal, consumer credit reporting company Experian, consulting business Accenture and sportswear brand Nike.

How has it performed?

The fund is a long only strategy, meaning The fund delivered a return of 18.7% for the 12 months to August 2019, outperforming the MSCI benchmark which returned just 7.0%. Importantly, the fund has not had a single holding in the bottom 20% of the market since its inception.

Listed Investment Companies

One of the topics gaining the most attention in December and over the Christmas break was the proliferation of listed investment companies that have emerged in recent years. The sector has doubled in size following its exemption from the Future of Financial Advice Reforms, as they allowed fund managers to pay advisers, stockbrokers and accountants ‘stamping fees’ of up to 6% of the amount invested by their clients. Sounds very similar to the likes of Great Southern and Timbercorp doesn’t it.

As we have seen in history, whenever there is a loophole available, it will be leveraged by interested parties. The sector attracted attention after Chris Joye from Coolabah Capital provided an in-depth analysis (below) whilst news was released about Treasurer Frydenberg’s briefing on the subject in 2019. Interestingly, little has been done about the issue and ASIC is essentially powerless from protecting investors from being ripped off due to the loop hole. What follows is Chris Joye’s most recent column on the sector and recent changes.

A revolution is coming for conflicted financial advisers – Coolabah Capital

In one of the biggest shake-ups of the financial advice industry in years, the government’s Financial Adviser Standards and Ethics Authority has blanket-banned conflicted sales commissions, including previously acceptable “stamping fees”, for advisers recommending listed investment funds to both retail and wholesale clients. These conflicted payments were already banned under the 2012 Future of Financial Advice (FOFA) laws, which reshaped the financial planning market by ensuring advisers were only ever paid by their clients and not by product manufacturers, like fund managers, trying to motivate them to sell their wares to retail and wholesale customers.

The presence of sales commissions paid to advisers created endless mis-selling crises where inappropriate products were foisted on consumers in the name of capturing the associated fees, which FOFA brought to an end. The 2019 royal commission firmly reinforced FOFA’s intent by concluding that “there must be recognition that conflicts of interest and conflicts between duty and interest should be eliminated rather than managed”. Yet in 2014 the Coalition granted listed investment companies (LICs) and listed investment trusts (LITs) an exemption from FOFA.

In contrast to normal unlisted managed funds and exchange traded funds, this meant that a fundie launching an LIC or LIT could pay unlimited sales commissions to retail advisers promoting these products. This has unsurprisingly led to an explosion in fund managers raising tens of billions of dollars from mums and dads for complex hedge funds and junk bond funds by paying advisers enormous upfront sales commissions of between 1 per cent and 3 per cent of the money they source from their clients.

Under FASEA’s new Code of Ethics, which becomes legally binding on all Australian advisers from January 1, 2020, this will no longer be possible. Advisers are already talking about how the code will eliminate the gargantuan sales commissions paid by LICs and LITs and force them to compete purely on their merits like all normal investment products that have been bound by the FOFA laws.

FASEA’s code will also apply to many stockbrokers who these days are more often than not required to be RG146 qualified as a retail adviser.

Magellan presciently anticipated this development by recently raising $860 million for an LIT that paid no commissions to brokers and advisers.

Standard 3 of the code says an adviser “must not advise, refer or act in any other manner where you have a conflict of interest or duty”. It then provides specific case studies under a guidance note of what represents an illegal breach.

One example involves an adviser’s firm taking “advantage of the carve out from the conflicted remuneration provisions introduced by the FOFA reforms” for stockbroking fees. It then says that where an adviser recommends a product to earn extra stockbroking commissions, they breach the standard and cannot do so.

Another case study deals explicitly with the stamping fees advisers capture from IPOs of LICs and LITs. The guidance states that an adviser “keeping the stamping fee rather than…rebating it [is] unfair to [the adviser’s] clients”. “The option to keep the stamping fee creates a conflict between [the adviser’s] interest in receiving the fee and his client’s interests. Standard 3 requires [the adviser] to avoid the conflict of interest. It is not sufficient for him to decline the benefit as it may be retained by his principal. Either the firm must decline the stamping fee altogether, or [the adviser] must rebate it in full to his clients.”

The ban on stamping fees for LICs and LITs for all advisers is therefore black and white. Some advisers have speculated that FASEA’s code might only apply to retail, not wholesale, clients, thereby allowing them to still capture conflicted sales commissions when recommending products to wholesale customers. This column has confirmed that all registered advisers must comply with the code’s standards irrespective of whether they deal with wholesale or retail customers.

This means FASEA’s code extends well beyond FOFA’s reach, which only protects retail investors.

Under the Corporations Act, an individual can be classified as a wholesale client if the adviser can obtain an accountant’s certificate showing they have net assets of at least $2.5 million, or a gross income for each of the past two financial years of at least $250,000. The problem is that many individuals who earn more than $250,000 a year, or have a home worth $2.5 million, know absolutely nothing about finance, investing or markets. This includes scores of retirees who have seen their homes appreciate beyond $2.5 million.

Since roughly 80 per cent of all LICs and LITs are trading below their net tangible assets, with many inflicting large 10 per cent to 20 per cent losses on clients who bought them in the original IPO, advisers open themselves up to catastrophic compensation claims for losses incurred by any clients other than the most sophisticated institutional-style investors.

It would be straightforward for many normal wholesale clients to argue that they do not fully understand hedge funds or leveraged junk bond funds, and relied on their adviser’s recommendation with or without a formal statement of advice.

It would also be easy for them to make the case that the adviser’s recommendation was being influenced by the large conflicted sales commission they received for pushing the product.

Here the guidance note explains that a key legal test is whether “a disinterested person, in possession of all the facts, might reasonably conclude that the form of variable income (eg, brokerage fees, asset-based fees or commissions) could induce an adviser to act in a manner inconsistent with the best interests of the client or the other provisions of the code”.

Downside Risk

– Alex Pollak from Loftus Peak –

Wattle Partners meets hundreds of investment managers each year as we undertake due diligence and seek opportunities for our clients. There are varying levels of quality and insight but occasionally we come across those who can answer our questions and back this up with appropriate data and analysis. We recently met Loftus Peak, as specialist international manager based out of Sydney, who have been delivering exceptional returns through their Global Change Portfolio for many years. We asked them to put forward an article regarding the downside risk in portfolios and pleased to republish this for our readers.

Loftus Peak on Downside

We are often asked how the portfolio would perform in a downturn. We have had several smaller corrections in the five years since our inception, with the largest downturn in the December quarter of 2018. CNN noted at the time “The Dow fell 5.6%. The S&P 500 was down 6.2% and the Nasdaq fell 4%. December was a particularly dreadful month: The S&P 500 was down 9% and the Dow was down 8.7% — the worst December since 1931. In one seven-day stretch, the Dow fell by 350 points or more six times. This year’s Christmas Eve was the worst ever for the index.”

Since inception, we have generated solid returns based on a multi-year time frame. We believe the key to investor protection from broad market declines is delivered by our stock selection and portfolio construction process. Our process is inherently biased towards large market capitalisation quality companies which are expected to survive downturns due to strategic business positioning in secular growth trends and have strong balance sheets.

We run a  large capitalisation concentrated portfolio and hence are much less exposed to the long tail of smaller companies. It may well be that individual returns from selected small capitalisation companies can do very well, but in our view a bias to the large capitalisation disruptors with solid cash flows and the ability to move into other adjacent businesses (eg Apple into music and TV) makes for a lower risk portfolio. Focusing on large capitalisation names has meant the portfolio’s median market capitalisation is currently US$81 billion, which has the added benefit of high liquidity and the ability to quickly move into cash where necessary.

Loftus Peak’s valuation methodology is based on the bedrock that the value of a share is the discounted value of its future cashflows. This approach was successfully refined over a decade at Loftus Peak’s predecessor firm TechInvest, where similarly consistent outperformance to that of Loftus Peak was achieved. (It is worth noting that key members of the Techinvest team continue to implement this investment approach under the Loftus Peak banner). The focus of our valuation model is on understanding the potential addressable market size of the companies in 2-5 years from now and the resulting margin profile.

These filters are part of the process to screen out companies which may be disruptors, but do not work as investments because of price.
A simple case in point is Uber. There is little doubt that the company is up-ending the taxi industry, with a global disruption model which will ultimately replace the traditional transport model (taxis, hire cars etc). We avoided this company on listing, and thereafter, and continue to do so, for the simple reason that the numbers don’t really work. First, and most important, the losses from the group are not being reduced, but are widening, as the model (actuals to 2018, our estimates in 2019) below shows:

Uber: Not so much

Source: Company filings, 2019 Loftus Peak estimates

Forecast revenue in 2019 of US$13.9b (which itself is up 23%) is expected to yield only a 15% increase in gross profit; this is major red flag since the business reveals weak leverage (meaning that the amount of gross profit goes up by less than the increase in sales). This is exacerbated all the way down through the expense line items, such that the bottom line shows the operating loss (essentially pre-interest and tax earnings) tripling to -US$9b. Operating cashflows are similarly weak.

This would not automatically exclude the company from Loftus Peak portfolios. For example, if in coming years these losses lessened sufficiently – so that it achieved profitability fast enough – this would drive an increase in value in the company which would show in the multi-year discounted cash flows, and so share price. Here it becomes a matter of judgement on the business itself. We know Lyft (and Grab, and Chinese player Didi, and Ola) are all competing with Uber – so there is likely to be increased competition. This implies that losses will not be narrowing enough any time soon, and indeed that revenue growth may even slow. The way we believe the numbers will evolve means that the company does not easily fit into our portfolio – so it is disruptive, but the valuation doesn’t stack up. Netflix is a company that did make it into the portfolio, yet it often gets bad press for its results. We believe the company isn’t that well understood – it has been profitable for five years now, as the table below shows (again, all numbers are actuals except 2019)

Netflix: It works

Source: Company filings, 2019 Loftus Peak estimates

The questions which have been raised are around the company’s ongoing debt increases, which are necessary as it rolls out new content faster than its revenue grows. This amounts to an US$18b liability over the next four years (aside from that which it expenses annually against revenue) shown as a contingent liability. The company’s debt stands at around US$16b (after the additional US$2b it announced in October).

But as the table above shows, the company is on track to double its pre-tax income this year, having tripled it the year before. At this rate, the company is on track to generate more than US$30b in free cashflow within our forecast horizon. Revenue is still growing at around close to 30%.

We are not concerned about the competition from Disney+ and HBO/Warner, since the real prize is to capture time spent presently viewing linear television (whether cable or free to air, eg in Australia Foxtel or Seven/Nine/Ten). This market is yet to fall to streaming (though it is well in hand). To put numbers around this, there are more than 1.5b+ billion households around the world receiving cable or free to air TV signals, which over the next ten years could probably stream (as broadband capacity grows.) Netflix is in 150 million of those households; it’s a true growth business. Disney+ and HBO/Warner acknowledge this – they are walking away from their cable TV models towards their own Netflix-like streaming product, and sacrificing tens of billions of dollars of revenue in the process. Forget the theme parks, the real white-knuckle ride will be the one the shareholders of those two companies are on.

Meanwhile, the number one contributor to return in Loftus Peak portfolios over the past five years, Amazon, was chosen because it made the cut on both these screens. We bought the company in 2014 not for its retail business, but for its emerging place as the number one cloud provider in the world.

As we noted to clients in February 2015, when the Amazon price was around US$300/share: “The market bid up Amazon 20% on the decision to break out the numbers behind Amazon Web Services (AWS) its cloud-based web hosting business. AWS formed a major part of the 40% revenue increase in the “other revenue” line in the 10k filing, which was US$1.74b in the quarter. The market thought AWS was worth $28b (US$60/share). The 20% jump in the share price looks like the market digesting the news – AWS is already a very significant player with corporate clients like Netflix, Mashable etc.” We had done the work well before this and invested accordingly, because we had seen AWS business growth in the market and the impact this would have on valuation of the company.

Lastly, a note about the index managers. Irrespective of whether Uber makes it as an investment, if it finds inclusion in an index then the index players will likely hold it. It’s not that the managers themselves don’t understand how businesses work, just that the business model of index funds is to hold the index – whatever its composition. We take a much more nuanced approach. Our multi-year DCF approach, which involves thorough internal debate on the assumptions around revenue, market size and profitability, coupled with our portfolio construction methodology is the edge that helps us protect the portfolios we manage from market downturns.



Magellan Infrastructure Fund

What’s the fund?

This month we decided to provide an update on Magellan’s Infrastructure Fund, which was added to the Thematic Bucket several years ago to gain an exposure to falling interest rates and the high quality cash flows associated with monopolistic infrastructure assets.

Why Magellan?

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 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) and the guidance of the Portfolio Manager Gerald Stack. 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.

Where does it fit in your portfolio?

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. 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.

Why Invest?

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.

What does it invest in?

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. 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.

At present, the fund is well diversified with 37% invested in the US, 21% in Asia and 26% in Europe. The largest allocations are to Airports (19%) and Toll Roads (14%) considered the kings of infrastructure assets, with Gas Utilities (13%), Integrated Power (16%) and Energy Infrastructure (10%) 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. Other key holdings include:




How has it performed?

The fund has performed strongly since inception, adding 9.1% per annum, compared to the Infrastructure Index which delivered 6.2%. More recently, it has returned 14.5% over the last 10 years and 22.1% over the last 12 months, both 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 and the lack of appropriate infrastructure spending around the world.

What income does it provide?

The Magellan Fund is no different to other managed funds, in that it only distributes income when it makes a profit, whether this is source from income, capital gains or a combination of both. That being said, the consistent income produces by the underlying assets means the fund has been a strong source of income since inception including:

  • 2019 – 3.80 cents (3.01%)
  • 2018 – 5.36 cents (4.35%)
  • 2017 – 11.27 cents (9.09%
  • 2016 -9.29 cents (8.21%)

It’s important to note that as with all managed funds, investors should expect the unit price to remain flat over time, or slowing increasing with performance, and to fall around December and June when distributions of cash are made, not unlike when a company becomes ex-dividend.