Magellan High Conviction Quarterly Update

(Please find CPD quiz below)

Key Takeouts

 

[00:00:40] Can you discuss the structure of the Magellan High Conviction fund and the commitment to clients?

The Magellan High Conviction Fund was created in response to client demand for access to the high growth, higher beta sleeve of the Magellan Global strategy. It has as a result a style bias toward growth and quality. It seeks companies in areas of structural growth, where there are tailwinds behind them (the growth piece) and then finding those companies that are advantaged to maximise that opportunity (the quality piece).

 

[00:01:25] Can you tell us about the new team member joining the High Conviction Fund?

I'm thrilled that Andrew Gowan is returning to Australia! He began his journey in Queensland, attended Bond University with first-class honours, and played sport at State level. His career took him overseas, where he worked in broking in Europe, then in Chicago and New York for various funds. Since 2018, he's been with Lombard Odier in London, achieving a strong track record. Now, with three young children, he's ready to come back to Australia, and so he'll be joining us around Australia Day.

 

[00:02:15] Amazon was the top performer in the fund last year and also the top position within the fund. What's your perspective on Amazon now after such a stellar year?

Amazon's performance over the past 12 months has been impressive, with net income growing by 150%. Significant investments in logistics on the back of the COVID-19 pandemic led to negative free cash flow and this. has now turned into approximately $50 billion per quarter in free cash flow as it leverages those investments, lowers its cost to serve and thereby capture a growing share of retail sales in the US.

Looking ahead, lets think about Amazon across its two main businesses. First, AWS, the cloud business, has reaccelerated its growth. This reflects ongoing shifts by companies to the Cloud and with companies needing to be in the cloud to support AI, is expected to see very high and persistent growth. It captures over 30c in every $1 of AWS revenues and the business is subscription-like.  It continues to invest a lot here and innovate given the opportunity it sees. Second, the e-commerce segment, which includes advertising, streaming, and retailing and the marketplace, continues to benefit from its capabilities, scale and convenience.

In terms of future prospects, we think it is possible that the company's free cash flow could reach around $10 per share in a few years. On that assumption, if priced at a 3% free cash flow yield, the stock could rise to $330 from its current $220, offering a potential 50% return. A bull case, using today’s 2% FCF yield, Amazon would be worth ~$500. It is a highly profitable company with substantial opportunities ahead, making it an exciting investment.

 

[00:04:45] Markets have had two incredible years. Are you nervous looking into 2025?

I'm see many exciting opportunities as the world changes, despite potential challenges. Climate change is a significant issue, and we need to focus on electrification and decarbonisation. The new US administration will bring changes that could be disruptive but also create opportunities for companies. While the year may have tricky periods and possible corrections, there are compelling investment opportunities in companies that innovate and execute well, benefiting from structural tailwinds and high returns on capital.

However, the uncertainty created by the incoming US administration, led by Trump, is a concern. The market is nervous about potential policy changes and their impact on interest rates and inflation. The recent unusual market behaviour, where the ten-year bond rate increased despite the Fed cutting rates, reflects this uncertainty. Higher long-term interest rates could negatively affect equities, but they may also present opportunities to buy at lower prices for long-term gains.

 

[00:07:53] What holdings fit into the broad themes you have mentioned?

Many stocks in the portfolio are aligned with structural opportunities, such as the ongoing shift from offline to online retail sales, which grows e-commerce market share by about 1% annually in developed markets. This trend benefits companies like Amazon and Bookings.com and in Latin America, we have exposure where similar tailwinds are present.

The financial sector also shows promise, especially with potential deregulation and reduced capital buffers, which could lead to a strong year in IPOs, merger and acquisition activity and asset realisation. This would be very positive for companies like Morgan Stanley and Brookfield Corporation.

Digitisation and AI continue to evolve, presenting many opportunities. We hone in on companies with subscription business models and high returns on capital, such as Salesforce, Microsoft, Amazon, and Alphabet. Despite regulatory concerns, these companies remain innovative and offer long-term growth potential. Overall, the portfolio contains many attractive investment opportunities.