Morningstar - Q2 2021 - 23

positioned to address these environmental, social,
and governance risks by increasing sustainable
sourcing (such as recycled and organic materials)
and supply-chain efficiency, which contributes to
reducing waste. Sustainable sourcing could increase
sourcing costs by 1% to 5%, which is unlikely to be
passed on to consumers. However, big, branded
players with bargaining power can pass on some of
these increased costs to suppliers.
Jelena Sokolova, CFA, is an equity analyst at
Morningstar Netherlands.

Magellan Keeps an Eye
on the Horizon
AUSTRALIA + NEW ZEALAND

Australia
Magellan Global Open Class Fund, which earns
a Morningstar Analyst Rating of Gold and
is led by one of the canniest stock-pickers in the
Australian market, portfolio manager Hamish
Douglass, had its worst year in a decade in 2020,
delivering investors a negative return of 0.20%
and underperforming both the world large-blend
Morningstar Category (which was up 5.69%)
and the MSCI World Ex-Australia NR AUD
index (up 5.73%). While the fund held up against
the index for most of the year-and provided
superior downside protection during the COVID-19
downturn-it came unstuck in the last
two months, giving back all its outperformance.
Morningstar fund analyst Chris Tate says
Magellan's returns last year were hampered
by three key decisions Douglass made
during the year: a big bet on Chinese e-commerce
giant Alibaba BABA that went south when
China abruptly halted the Ant IPO; energy sector
exposure; and a shift to cash in the March
downturn that held the fund back in the strong
market rebound.
But Tate says 2020's underperformance shouldn't
be a cause for shareholder concern. " If you
take out the last two months of 2020, Magellan

had a good year, " he says. " They had one stockspecific issue and were tripped up by a pretty
niche market rotation. They've clearly done a lot
of research-it's not unrealistic to believe the
market has got ahead of itself at the point. They're
taking a slightly more cautious stance than
the market and focusing on capital protection. "
Douglass himself is taking 2020 in stride. He
recently sat down with Morningstar for an
interview on The Long View podcast with Jeffrey
Ptak, chief ratings officer at Morningstar Research
Services, and Christine Benz, Morningstar's
director of personal finance. (Find the conversation
at https://www.morningstar.com/podcasts/
the-long-view/98 or download The Long View
via major podcast apps.)
" 2020 was just an extraordinary period, where
we had these extreme risk-on and risk-off periods.
But we had a one-in-100-year global pandemic
that's hugely complex. We've had the largest
fiscal stimulus and the most unorthodox monetary
policy we've almost ever seen in history at
the same time, " Douglass said. " But that doesn't
mean the long-term investment cycle has
fundamentally changed. "
Douglass is keeping his eye on the horizon:
" I genuinely believe, and it's a core of what we do,
that the long-term focus of taking a fiveto seven-year view is our competitive advantage
in finding mispriced opportunities and short-term
volatility. Even what we've seen in the last
12 months shouldn't distract you from the journey
that you're on. "
Magellan's 2020 underperformance doesn't
negate an exceptional long-term track record since
its inception in 2007. Magellan Global has
thumped both the index and category peers; it also
delivered downside protection in 2008, 2011,
and late 2018. This record is not without blemishes,
though: Magellan Global underperformed in
2016, wrong-footed by Brexit and falling bond
yields in the first half and the Trump reflation trade
in the second. But that was short-lived. In 2017,
performance improved, and the strategy
edged out the benchmark in what was a strong
year for global equities, which was impressive
given its minimal exposure to emerging markets.

Consistent outperformance has attracted investor
dollars to parent firm, Magellan Financial Group
MFG:AU. Magellan Financial Group manages more
than AUD 100 billion, with over AUD 75 billion
in global equity strategies, placing it within the top
five largest in-house managers in Australia.
Morningstar equity analyst Shaun Ler believes
investors will stick by Douglass. He sees
opportunities for Magellan Financial Group to grow
assets under management, making note of
the recent Magellan Global fund restructure that
merged three retail funds into a single trust
and a broadening of its market with a low-cost ETF.
" Even if Magellan underperforms at times in the
future, we think net outflows are likely to be limited
and temporary given the durability of its economic
moat, " Ler says. " There were only two months
of net outflows over the course of 2016 -17 following
Magellan's subpar performance in 2016. "
Ler noted in a recent analyst report that Magellan
possesses a narrow moat, owing to clear
intangible brand assets and switching costs,
stemming from its reputation for delivering
superior absolute and relative returns: " Magellan
has shown it can attract and retain client funds
throughout market cycles. "
Emma Rapaport is an editorial manager at
Morningstar Australia.

Pursuing Sustainable
Income in Japan
ASIA

Japan
Because of Japan's aging population, demand
for income from investments has been high.
But in an environment of ultralow bond
yields for the best part of the last two decades,
income generation has been challenging.
Funds aiming to meet the demand for income
sometimes offer payouts that far exceed

morningstar.com/lp/magazine

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Morningstar - Q2 2021

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