14 Jan

MHHT Fund Update - December 2021

Top 5 Holdings In alphabetical order Sector # Alphabet Inc Internet & eCommerce Meta Platforms Inc Internet & eCommerce Microsoft Corporation Information Technology Netflix Inc Internet & eCommerce Visa Inc Payments Sector Exposure by Source of Revenue # Geographical Exposure by Source of Revenue # Performance Chart growth of AUD $10,000^ Restaurants , 6% Internet & eCommerce , 45% Information Technology , 21% Payments , 9% Financials , 8% Industrials , 7% Cash , 5% US , 44% Western Europe , 20% China , 7% Emerging Markets ex - China , 14% Rest Of World , 10% Cash , 5% $8,000 $10,000 $12,000 $14,000 ^ Calculations are based on exit price with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and entry fees (if applicable). Trust Inception 11 October 2019. Returns denoted in AUD. # 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. Exposures may not add to 100% due to rounding. Fund Update: 31 December 2021 Magellan High Conviction Trust (Managed Fund) ARSN: 634 789 754 Ticker: MHHT $12, 895 12.1% p.a. Trust Facts Portfolio Managers Hamish Douglass and Chris Wheldon Structure Global Equity Fund Inception Date 11 October 2019 Management Fee 1 1.50% per annum Trust Size / NAV Price 2 AUD $861.5 million / $1.82 97 per unit 2 Distribution Frequency Semi - annually Performance Fee 1 10% of the excess return of the units of the Trust above the Absolute Return performance hurdle (10% per annum). Additionally, the Performance Fees are subject to a high water mark. Tickers Solactive iNAV ICE iNAV Bloomberg (MHHT AU Equity) MHHTAUIV Index MHHTIV Index Refinitive (MHHT.AX) MHHTAUDINAV=SOLA MHHTAUiv.P IRESS (MHHT.ASX) MHHTAUDINAV.ETF MHHT - AUINAV.NGIF 1 All fees are inclusive of the net effect of GST . 2 NAV price is cum distribution and therefore includes the distribution of $0.0238 per unit payable on 19 January 2022 . Trust Features • 'Open - ended' active ETF • Actively managed global equities trust, invested in 8 - 12 of Magellan's best ideas • Target Cash Distribution yield of 3% per annum paid semi - annually • Minimum administration for investors; no paperwork needed to trade • Investors can buy or sell units on the ASX like any other listed security or apply and redeem directly with the Responsible Entity • Settlement via CHESS Trust Performance ^ Magellan High Conviction Trust (Managed Fund) (%) 1 Month 0.0 3 Months 4.2 1 Year 21.2 Since Inception (% p.a.) 12.1 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 s timulus. The rise occurred even though the Federal Reserve decided to reduce 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 te chnology (+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 qua rter 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 respon se, 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 compared 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 U S 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 centrepi ece 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 federal gov ernment'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 news. 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 dampener a fter 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 va riant 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$350 bill ion 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 dollars over the qu arter 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 investments in Microsoft and Intercontinental Exchange. 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 bac k of rising energy price volatility. 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 fi scal outlook for 2022, which fanned concerns 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 expecti ng. Meta fell after the renamed Facebook warned 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 other wise. 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 i n 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 renam ed the shell company Intercontinental 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 excha nge 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 chem icals, 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 suc h 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 Y ork 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 benchma rk contracts. 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 milli on fixed - income 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, a nd the industry’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 businesses 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 fro m the exchange 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 are 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 clea ring of contracts. 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 disrupting 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 large ly directed 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 businesses, 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 do es not take into account 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 or subscribe for interests in any type of investment product or service. You should obtain and consider the rele vant Product Disclosure 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 r elevant financial product. 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 person guarantees the future performance of the fund, the amount or timing of any return from it, that asset a llocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieve d. Statements contained 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 statements. 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 obt ained from its use. No representation or warranty is made with respect to the accuracy or completeness of any of the information co ntained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon an y part of the information 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 p roperty of their respective owners. Magellan claims no ownership in, nor any affiliation with, such trademarks. This material and the in formation contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consen t of Magellan. MHH44561 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 that 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, would 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, p ossibly, increase 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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