Magellan High Conviction Trust (ASX:MHH)

Full Report Can be Accessed on

The Magellan High Conviction Trust (expected ASX code: MHH or ‘the Trust’) is seeking to list
on the Australian Securities Exchange by raising a minimum of $250 million with no stated
upper limit at an offer price of $1.50 per unit. The Trust will be managed by Magellan Asset
Management Ltd (the Manager), a wholly owned subsidiary of the ASX-listed Magellan
Financial Group Limited (MFG). MHH will replicate the Magellan High Conviction Fund
(‘MHCF’), which has a 6.5 year track record and has performed strongly. MHH will be based
on a very high conviction, concentrated, ‘best ideas’ global equities and benchmark agnostic
mandate with a portfolio of the Manager’s 8 to 12 best global stock ideas based on the same
investment process that underpins the long running Magellan Global Fund (MGF) and the
Magellan Global Trust (MGG). It will be managed by the same investment team, portfolio
manager and according to the same investment methodology as these two investment
vehicles. The Trust has a distribution policy of targeting a cash distribution yield of 3% p.a.
which is to be paid semi-annually. Currency exposure will be actively managed. MFG will
bear all the costs in cash associated with establishing and listing the Trust, reflecting well on
MFG’s commitment to both the longer term success of the Trust and interests of its investor
base.
INVESTOR SUITABILITY
The Trust is an extremely concentrated global equities mandate that historically, by way
of MHCF, has been materially overweight to technology stocks. IIR is also mindful that,
without the use of external third-party distribution channels for the IPO and the direct
communication of the offer to existing MGF, MHCF and MGG investors, many new investors
may already have exposure to the latter two investment vehicles. As such, many investors
will already have exposure to the stocks contained in the Trust’s portfolio and, furthermore,
by definition of being best ideas, these stocks are likely to have allocations in the MGF and
MGG portfolios. That said, the Manager readily acknowledges the Trust is not suitable for
all investors given its potentially high inherent risk profile, notwithstanding an investment
philosophy that focuses on high quality companies with sustainable competitive advantages
and predictable earnings. From a portfolio perspective, while not a mandated strategy,
we would expect the Trust to continue to exhibit its predominant exposure to the North
American and European markets as well a material exposure to the technology sector on
account of the Manager’s emphasis on companies with sustainable long-term competitive
advantages. IIR acknowledges that over the last 6 month period the MHCF portfolio has
been more defensively positioned with less cyclical risk in recognition of growing economic
risks. Investors should note that the Trust can hold up to 50% cash. The high conviction
and concentrated nature of the mandate may mean that the Trust’s returns, volatility and
drawdowns may vary considerably relative to the broader market (for which purpose IIR has
adopted the MSCI World NTR Index as basis of comparison) and its peers.
RECOMMENDATION
IIR ascribes a “RECOMMENDED” rating for MHH. IIR holds the Manager in high regard,
with a strong and stable team and investment committee, proven processes and strong
performance track-record. Additionally, we are impressed with the Manager’s approach,
processes, and track-record in downside risk mitigation and capital preservation. Structurally,
the Trust benefits from the 5% discount DRP plan, the priority offer to existing shareholders
/ unitholders, and the Manager’s disclosure and capital management initiatives to mitigate
discount / premium to NAV risk. The offer structure creates a strong alignment with
investors’ interests, with MFG bearing all establishment and listing fees as well as effectively
underwriting the priority offer to ensure non qualifying investors are not diluted and adversely
impacted. On the flip side, we do identify several risks investors should be aware of. Firstly,
as noted above, the very concentrated nature of the portfolio and the fact many new
investors may be ‘doubling up’ on existing stock holdings. Secondly, fees are undoubtedly
high for a large cap mandate, although we do note the ‘payback’ investors receive through
MFG bearing all establishment and listing costs, underwriting the priority offer and funding
the ongoing 5% discount DRP.