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If you didn’t know, Hamish Douglass is probably Australia’s best known fund manager and is the figurehead of one of the most recognisable funds management businesses in the country: Magellan Financial Group. For years his flagship global fund has outperformed the market based on his convictions. It has afforded him rockstar status, a cult like following with investors, and the ability to get his message almost unfiltered into the media as many of Australia’s finance journalists have acted as stenographers when reporting on his thoughts and comments.
Magellan’s stellar performance has evaporated over the past 18 months. Its flagship fund’s performance has trailed the market by 14.5% over the last year. This has dragged down its historical performance up to a decade (though since inception it still outperforms) and seen investors leave its products. As Magellan is also a listed company deriving fees from funds under management, this has seen its shareprice halve over the past year.
These are just the facts, so we’re not sticking the boots in. Our beliefs on investing are simple. The market indices are the best starting point, and you tilt towards market factors such as size, value, and profitability if you want to target a higher return over the long run. After doing so, you remain disciplined and patient, because too much fiddling will only be a drag on your returns.
None of this offers any guarantee. It’s simply a process that focuses on what an investor can control because they can’t control performance. What’s happening with Magellan is what has happened with many star fund managers. Over the long run it’s exceptionally hard to beat the market.
The facts are clear, S&P’s Index vs Active scorecard consistently show us this. The reasons why are because we’re all human, and it’s hard to predict the future. Unfortunately, Mr Douglass has been dealing with terrible personal issues over the past year. Sadly, his mother passed away and he also split up with his wife. The separation has fueled a financial media circus in recent weeks. The media who previously feted him have been going at him like a pack of jackals. They build you up and they’re only too happy to rip you down again.
Whether these personal challenges have undermined Magellan’s performance, no one knows. However, as we’ve discussed before, as ghoulish as they are, studies have shown active investment managers underperform the market in the periods after parental bereavement and divorces.
Despite the fact we have different investment beliefs, we wish Hamish and Magellan the best. Having a globally renowned fund manager based out of Australia is not a bad thing. Magellan may come flying back and prove the doubters wrong.
That’s the fund management business, but there’s another angle to this story: the financial advice angle. A lot of financial advisers supported Magellan over the years. They jumped onboard and helped build Magellan by using their funds and recommending them to clients. Money has long flowed in from advisers to Magellan, but as noted earlier that has started to change. From the AFR:
It is becoming harder to keep planners onside with underperformance, and Magellan’s outflows have risen from $260 million in the June quarter to $617 million in the September quarter.
Multiple financial advisers told AFR Weekend they had advised clients to pull funds out of Magellan products, while others were still considering doing so. All asked to remain anonymous to avoid lengthy phone calls or visits from Magellan’s business development managers.
“We recommend you sell down your entire holdings of the Magellan Global Fund” one firm, which had been a supporter of Magellan’s for more than a decade, wrote to clients in October.
It might seem strange for us to defend an active manager because we believe in something different, but we’re going to make something of a case here. Why abandon Magellan now? If financial advisers are abandoning Magellan, it raises some big questions about their beliefs. Specifically, do they really have any?
Unless a client has been invested in Magellan’s global fund for over a decade, they’ve underperformed unless their adviser has judiciously been harvesting profits. The previous times these advisers have boasted to their clients about outperformance, they may not even exist anymore. These advisers will be abandoning Magellan with their clients behind the eight ball.
Why? Because they want to look proactive in front of their clients. Magellan’s underperformance has them panicking and they have no answers to their conundrum beyond switching to a new manager, which kicks the problem down the road. These advisers have told their clients they believe in active management, which is their right, but many then sell clients on their ability to select the best managers. Often claiming it’s part of their service and how they create value for clients.
The question any client should ask is: “if your skill is selecting the best managers, why didn’t you see this coming?”
The next question is about time. Focusing on the long term is one of the big investment clichés. While everyone uses it, how genuine anyone is can be judged by how quickly they panic during a rough patch. A year and half is nothing when investing, it’s a statistical aberration. Admittedly, underperforming by 14.5% in 12 months isn’t small and drags down historical performance, as we highlighted, but Mr Douglass and Magellan’s performance may well come roaring back.
All advisers preach to their clients about the long term, but if an adviser cuts and runs, or chops and changes managers after a period of short-term underperformance, the question any client should ask is: “how do you genuinely expect us to focus on the long term when you abandon a manager after 18 months?”
The next question is about selecting the replacement. If they are abandoning Magellan, they will be looking for a new fund manager to fill the hole. What are the criteria they use? They’ve already proven they couldn’t see Magellan’s underperformance coming, so how do they select the best replacement? Historic returns are just that, historic, so it doesn’t matter what their returns look like. It would be fascinating to find out how the decision is being made and sold to the client.
The question any client should ask is: “how do you know this new manager will be better than Magellan going forward, and if this manager’s performance is poor do you sell out again and look for another manager?”
Investing requires a set of beliefs because it’s the short term that tests the conviction of every investor. When a manager underperforms, as they inevitably all do, if you don’t have the fortitude to stick with your beliefs, it starts a decision-making chain of abandoning your previous conviction for your next great idea. Inevitably that next great idea will sooner or later underperform, what then?
Clients put their trust in financial advisers for things they can’t or don’t want to do. Portfolio management is one of them. Some clients may not understand that this performance chasing behaviour is futile and costly, but it will be sold as being proactive, judicious, and getting on top of a problem.
In all likelihood the advisers abandoning Magellan placed too much focus on performance, something that can never be guaranteed. They’ve created a problem for themselves and now they’re trying to sweep the problem under a rug.
There are better ways of doing things.