MHG Fund Update - December 2021
1 Top 10 Holdings Sector # % Microsoft Corporation Information Technology 8.6 Alphabet Inc Internet & eCommerce 6.3 Netflix Inc Internet & eCommerce 5.2 Starbucks Corporation Restaurants 4.9 Yum! Brands Inc Restaurants 4.7 Visa Inc Payments 4.6 Pepsico Inc Consumer Defensive 4.5 Intercontinental Exchange Inc Financials 3.9 Meta Platforms Inc Internet & eCommerce 3.8 MasterCard Inc Payments 3.7 TOTAL: 50.2 Sector Exposure by Source of Revenue # Geographical Exposure by Source of Revenue # Performance Chart growth of AUD $10,000 ^ Consumer Defensive , 15% Restaurants , 13% Health Care , 4% Internet & eCommerce , 21% Information Technology , 14% Consumer Discretionary , 0.1% Payments , 8% Financials , 4% Infrastructure , 11% Industrials , 1% Cash , 8% US , 46% Western Europe , 16% China , 7% Emerging Markets ex - China , 13% Rest Of World , 10% Cash , 8% $5,000 $10,000 $15,000 $20,000 ^ Calculations are based on NAV prices with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and entry fees (if applicable). Fund Inception 4 August 2015. Returns denoted in AUD. * 3 - year returns are calcul ated and rolled monthly in AUD, with the outperformance consistency indicating the percentage of positive excess returns sinc e inception. + MSCI World Net Total Return Index (A$ Hedged). ** Risk measures are calculated after fees. An adverse market is defi ned as a negative three - month return rolled monthly for the MSCI World N et T otal R eturn Index (A$ Hedged). Down market capture shows if a fund has outperformed a benchmark during periods of market weakness, and if so, by how much. # Sectors are internally defined. Geographical exposure is calculated on a look through basis based on underlying revenue expos ure of individual companies held within the portfolio. Cash exposure includes profit/loss on currency hedging. Exposures may not s um to 100% due to rounding. Fund Update: 31 December 2021 Magellan Global Equities Fund (Currency Hedged) (Managed Fund) ARSN: 606 840 206 Ticker: MHG $19,229 10.7% p.a. Fund Facts Portfolio Manager s Lead Portfolio Manager: Hamish Douglass Co - Portfolio Manager: Arvid Streimann Structure ASX - quoted Global Equities Fund, A$ Hedged Inception Date 4 August 2015 Management Fee 1 1.35% per annum Fund Size AUD $317.9 million Distribution Frequency Semi - annually Performance Fee 1 10.0% of the excess return over the higher of the Index Relative Hurdle (MSCI World Net Total Return Index (A$ hedged)) and the Absolute Return Hurdle (the yield of 10 - year Australian Government Bonds). Additionally, the Performance Fees are subject to a h igh water mark. iNAV tickers Bloomberg MHG AU Equity MHGIV Index Thomson Reuters MHG.AX MHGAUiv.P IRESS MHG.AXW MHG - AUINAV.NGIF 1 All fees are inclusive of the net effect of GST Fund Features • ASX - quoted version of the unlisted Magellan Global Fund (Hedged) • Fund is actively managed • Minimum administration for investors; no paperwork needed to trade • Units can be bought or sold on the ASX like any other listed security • Efficient and live pricing • Provision of liquidity by the Fund • Settlement via CHESS • Magellan has significant investment alongside unit holders. 3 Year Rolling Returns (measured monthly) ^* Against MSCI World NTR Index (A$ Hedged) 1 Year 3 Years Since Inception No of observations 12 36 41 Average excess return (% p.a.) - 1.5 1.7 1.6 Outperformance consistency 17% 69% 71% Fund Performance ^ Fund (%) Index (%) + Excess (%) 1 Month 5.5 3.9 1.6 3 Months 7.0 7.8 - 0.8 1 Year 13.4 23.7 - 10.3 3 Years (p.a.) 15.3 20.0 - 4.7 5 Years (p.a.) 13.3 13.9 - 0.6 Since Inception (p.a.) 10.7 11.7 - 1.0 Capital Preservation Measures ** Adverse Markets 3 Years 5 Years Since Inception No of observations 8 13 17 Outperformance consistency 88% 85% 88% Down Market Capture 0.5 0.6 0.6 Market Commentary Global stocks surged to record highs in the December quarter as concerns abated about the economic damage of the new Omicron covid - 19 variant, US companies posted stellar earnings reports, and US Congress postponed a debt - ceiling showdown and passed more stimulus. The rise occurred even though the Federal Reserve decided to red uce its asset purchases after US inflation reached a 39 - year high and inflation accelerated worldwide. During the quarter, 10 of the 11 sectors rose in US - dollar terms. Information technology (+13.2%) rose the most while communication services ( - 1.7%) was the sector that fell. The Morgan Stanley Capital International World Index rallied 7.8% in US dollars, to be up 21.8% for 2021. In Australian dollars, the index gained 7.1% in the quarter and 29.3% over the year. US stocks climbed as better jobless numbers and encouraging reports on earnings, especially from the banks and Big Tech . A report showed consumer prices climbed 6.8% in the 12 months to November, the most since 1982. In response, the Federal Reserve said it would accelerate its 'tapering' of monthly bond purchases. The central bank said it would prune its asset buying such that in January it would buy only US$60 billion of Treasuries and mortgage - backed securities compare d with US$120 billion a month pre - tapering, while most Fed policymakers said they were prepared to raise the US cash rate three times in 2022. While reports showed an economy at full employment (the jobless rate fell to a pandemic low of 4.2% in November), the US economy expanded at a revised annualised rate of only 2.3% during the September quarter. In political news, the House of Representatives, over the unanimous opposition of Republicans, passed the US$2.2 trillion Build Back Better Act only for the ce ntrepiece of President Joe Biden's domestic agenda to be blocked in the Democrat - controlled Senate. The House, with some Republican support, approved a US$1.2 trillion infrastructure package that had already passed the Senate. A proposal to raise the feder al government's borrowing limit by US$2.5 trillion passed both chambers of Congress just before the December 15 deadline. The S&P 500 Index soared 10.6%, to up 26.9% for 2021. European stocks advanced on encouraging earnings results and improved economic n ews. A report showed the eurozone economy expanded 2.2% in the September quarter after pandemic restrictions eased, the same speed it grew in the June quarter. A report that showed eurozone inflation reached 4.9% in the 12 months to November proved no damp ener after the European Central Bank indicated it would not overreact to rising prices. The Euro Stoxx 50 Index added 6.2% over the quarter and 21% over 2021. Japan's Nikkei 225 Index lost 2.2% in the quarter, reducing 2021's gain to 4.9%, as the new covid - 19 variant prompted authorities to close the national border to foreigners and a report showed the economy shrank a larger - than - expected 0.9% in the September quarter, a contraction that prompted the re - elected Liberal Democrat government to promise US$35 0 billion in fresh fiscal stimulus. Australia's S&P/ASX 200 Accumulation Index rose 2.1% over the quarter (and 17.2% over 2021) as iron ore prices recovered and governments eased pandemic restrictions. China's CSI 300 Index edged up 1.5% over the quarter (to be down 5.2% for 2021) on talk the regulatory crackdown on tech stocks has peaked. A report showed the pandemic had slowed economic growth to a 12 - month rate of 4.9% in the September quarter. The MSCI Emerging Markets Index shed 1.7% in US doll ars over the quarter and 4.6% over the year as emerging countries were hit harder by the new variant. Index movements are in local currency. Fund Commentary The portfolio recorded a positive return in the quarter. The biggest contributors included the inv estments in Microsoft, Intercontinental Exchange and PepsiCo. Microsoft surged on a 22% jump in revenue for the third quarter as its cloud business benefited from the global shift to remote work. Intercontinental Exchange rose as energy derivative volumes climbed on the back of rising energy price volatility. PepsiCo gained after the drinks and snacks company raised its forecast for full - year earnings when announcing third - quarter profit and revenue (9% 'organic' growth) numbers that beat expectations. The biggest detractors were the investments in Alibaba Group and Meta Platforms. Alibaba dropped after the Chinese tech company announced sales figures that disappointed for a second straight quarter and lowered its fiscal outlook for 2022, which fanned concer ns about slowing consumer spending in China. Still, Alibaba announced a 29% rise in revenue for the September quarter and forecast 20% to 23% growth in fiscal 2022 revenue, rather than the 27% analysts were expecting. Meta fell after the renamed Facebook w arned revenues in the fourth quarter will be knocked further by Apple’s privacy changes that restrict its ad - targeting , its third - quarter revenues fell short of expectations on Apple’s restrictions, and the company faced a public - relations blow and possible legal difficulties after a former employee exposed issues at the social - media company and that it was losing younger audiences . Stock contributors/detractors are based in local currency terms unless stated otherwise. Stock S tory: Intercontinental Exchange (ICE) In 1997, Jeff Sprecher of the US, who had spent years developing power plants, decided to provide transparent pricing to the US power market. Well before electronic trading of financial securities became the norm, Sprecher paid US$1 for a tech start - up so he could build a web - based trading platform. For three years, Sprecher and his team met oil, natural - gas and power companies to learn what people sought in a trading platform. Some of the innovations that resulted included pre - trade credit limits, counterparty credit filters and electronic trade confirmations – novelties taken for granted now. By 2000, the trading platform was set for launch. Sprecher renamed the shell company I ntercontinental Exchange to highlight the trading platform’s ability to cross oceans, let alone borders. In 2001, the International Petroleum Exchange of London wanted to evolve from floor to electronic trading. At the time, the exchange was a regional one that offered oil futures contracts and had less than 25% share of the global oil futures market. Intercontinental Exchange, which promotes itself as ICE, saw an opportunity to branch into energy futures and clearing and purchased the exchange. Thanks to the ability of ICE’s platform to increase price transparency, handle high volumes efficiently and lower transaction costs, the volume of oil futures traded on what is now called ICE Futures Europe swelled. A regional exchange grew into a global one. From 2007, the year ICE listed (with the ticker ICE), the company went on a buying spree of exchanges. The company snared the New York Board of Trade, which barters commodities such as cocoa, coffee and cotton, ChemConnect, which trades chemicals, and the Winnipeg Commodity Exchange, now ICE Futures Canada that mainly trades canola. A sign of ICE’s ambitions was the company’s failed bid that year for the commodities - based Chicago Board of Trade. Undaunted, the ICE takeover quest continued such that ICE , which earned US$6.6 billion in revenue in fiscal 2020, owns an exchange arm that boasts 12 global exchanges and six clearing houses that service the energy, agricultural and financial sectors. The haul includes the purchase in 2013 of the New York Stock Exchange, the world’s biggest by volume. Among feats, ICE hosts nearly 66% of the world’s traded oil futures contracts and is the world’s leading clearer in energy and credit defaults. On top of that, ICE’s exchange arm manages key global benchmark contrac ts. This list includes Brent oil, Euribor, natural gas, sterling short and long rates and sugar barometers of performance. In recent years, ICE has branched out such that the exchange business, which brought in 55% of ICE revenue in fiscal 2020, is one of three divisions. The second arm, responsible for 27% of revenue in fiscal 2020, is the fixed income and data services business that sells data and technology to help investors make and execute decisions. ICE assess prices for roughly three million fixed - i ncome securities spanning about 150 countries in 73 currencies, as well as providing advanced analytics and indexes for fixed - income markets. ICE’s other business is mortgage technology, which pulled in the remaining 18% of revenue in fiscal 2020. This arm has digitalised the mortgage process to reduce costs and increase efficiencies. The ICE mortgage business is the largest to automate the entire process, is the industry’s leading platform with more than 3,000 customers, partners and investors, and the ind ustry’s only loan registry. This platform offers significant growth potential as more US mortgage originators are expected to turn to ICE’s digitised offering. ICE is a promising investment in three ways. The first is that the exchanges and other businesse s possess sustainable competitive advantages that form a daunting ‘moat’ for the parent company – where moat is a colloquial way to say a company is protected from competition. Most of ICE’s earnings are derived from trading and clearing fees from the exch ange businesses and linked data. These businesses are moated because they enjoy economies of scale, network effects and industry structure that intimidate would - be competitors. Another moat for ICE is that when it comes to derivatives and listing, there ar e limited substitutes. The holder of benchmark contracts is favoured in negotiations, even if others are seeking to undercut on price. A second advantage ICE enjoys is that the company is vertically integrated – it controls the execution and clearing of co ntracts. This enables the company to exert pricing power, attract volumes, and improve counterparty and systemic risk management. The other advantage that makes ICE an attractive investment is the company is well managed. While ICE has a history of disrupt ing others, the Sprecher - led team has prevented ICE being disrupted. Management has steered the business towards attractive industry structures (derivatives exchanges), unique data sources and value - add analytics. As important, the team has largely directe d ICE away from equities exchanges, where regulation and technology have upended the pricing power and volumes over the past 15 years. All up, ICE is well placed to provide compounded returns for its investors for the foreseeable future. ICE, as do all bus inesses, faces risks. One is that the company’s revenue is tied to trading volumes over which it Important Information: Units in the fund referred to herein are issued by Magellan Asset Management Limited ABN 31 120 593 94 6, AFS Licence No. 304 301 ('Magellan'). This material is issued by Magellan and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into acco unt your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell o r subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclos ure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or to continue t o hold, the relevant financial pr oduct. A copy of the relevant PDS and TMD relating to the relevant Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au. Past performance is not necessarily indicative of future results and no perso n guarantees the future performance of the fund, the amount or timing of any return from it, that asset allocations will be m et, that it will be able to implement its investment strategy or that its investment objectives will be achieved. Statements contai ned in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. This material may contain 'forward - looking statements'. Actual events or results or the actual performance of a Magellan financial product or service may differ materia lly from those reflected or contemplated in such forward - looking stat ements. This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is a ccurate, complete or timely and does not provide any warranties regarding results obtained from its use. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in thi s material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the inform ation contained in this material. Further information regarding any benchmark referred to herein can be found at www.magellangroup.com.au. Any third - party trademarks contained herein are used for information purposes only and are the property of their res pective owners. Magellan claims no ownership in, nor any affiliation with, such trademarks. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan. MHG44561 has little influence. The fact that trading volumes often increase in turbulent and falling markets means that ICE is well placed to weather a market slump tha t falls short of a prolonged ‘bear market’ where trading was light. ICE’s other risk is that its business is exposed to adverse changes to regulations. Moves by regulators to separate execution and clearing, and actions that might reduce trading volumes, w ould disrupt ICE’s revenue. ICE is protected to some extent in this regard because regulators are aware that such moves against exchanges, especially ones that feature large derivatives trading, would boost trading costs, hamper innovation and, possibly, i ncrease systemic risks. ICE, thus, is well placed in a world where Sprecher’s vision has helped electronic trading become the norm. Sources: ICE filings and company website.
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