SMSF trustees need to go global, says head of Magellan
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Australian retail investors and SMSF trustees are drastically under-exposed to global stocks, says Hamish Douglass, founder and chief investment officer of Magellan Funds Management.
"SMSFs and self-directed investors generally are dramatically underweight global equity. It's not because they don't want to invest in global equity, it's because the frictional cost of doing it has just [made it] really hard," Douglass says.
He spoke with Morningstar on the sidelines of Magellan's adviser roadshow in Sydney, after delivering a keynote presentation showcasing some of the largest technological disruptions on the horizon, including artificial intelligence, driverless vehicles and other digital advances.
"And because of what's been happening in Australia, where you've made so much money out of commodities and banks for so long, and you get all the franking credits--there hasn't been a need [for global equities]," Douglass says.
"But I do think the world is genuinely changing, so that if you want to get exposed to particularly technology and these platform businesses in the world--they're not going to be Australian businesses, but all of them are going to be operating here--in order to do that you go global."
While Magellan is a global fund manager covering a range of sectors, technology companies comprise around 25 per cent of its investment portfolio.
"We're starting to see advances in technology where you have to start saying that, [even for] some businesses you could think are highly defensive and advantaged, the rules may be about to change for some of them, because of new technology and business models being developed," Douglass says.
"We don't want a fund just of technology companies ... it's got to have defensive characteristics, because we want to have lower drawdown risks when markets go wrong ... what we really have to think about is, 'Are they really defensive in this world? Are they going to get disrupted?'"
Uber and AirBnb are two companies he references throughout the conversation, as examples of two global businesses that have successfully disrupted traditional business models.
Tech wreck 2.0?
However, he also mentions them when asked to compare the current resurgence in popularity of technology companies and the "tech wreck" of the late 1990s.
"It's fundamentally different, but there are a few similarities. We've got businesses that have formed massive network effects with massive competitive advantages, earning real revenues and profits, and you can value them on normal valuation metrics," Douglass says.
"They're sitting here today with real businesses, and their advantages are probably going to increase rather than decrease, as opposed to back in 1999 ... [when many] were completely unproven business models. Now we've got incredibly deep and proven business models."
One of the parallels he draws between the 1999 tech boom and now is the search for funding.
"In early stage venture capital, there are enormous amounts of money going in and trying to identify the next Uber or Airbnb, and we have these unicorn valuations which, some of them, make you scratch your head," Douglass says.
He says some of the more speculative tech startups have "unproven business models--they're still just trying to attract users or eyeballs, and that may look somewhat like the tech boom".
"There will be some real disasters. There's not a lot in the listed space, but in the unlisted venture capital world, everybody is chasing the next 'best' thing and getting everything valued on just metrics. It's a bit like the dot-com boom--'Oh don't worry, we'll find the business model,'" Douglass says.
That said, he believes these situations are more the exception than the rule, and that there is not a bubble forming this time around.
"I don't think we've got a bubble around Apple, or Microsoft, Oracle or Ebay. These are very realistic valuations they're trading on. They're not trading on anything like 100 times revenue with no profit," he says.
"That doesn't mean all of them are good buys, by the way, but I don't think any of these are outside of normal valuation metrics or discounted cash flows that you could legitimately do."
How to get exposure
In terms of the accessibility of global stocks to Australian investors, Douglass also refers to the difficulty and high costs as significant barriers to entry.
"The barrier to execute has been very high. One reason is that they hadn't seen the need before ... but people are smart enough, they now see that. But then we have to deliver them a solution that is effectively very easy for them to use," he says.
"If people really want to address this issue, they need to get into exchange-traded products."
Magellan's launch of its exchange-traded managed fund in early 2015, the Magellan Global Equities Fund (ASX: MGE), was designed to help address this demand.
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Glenn Freeman is Morningstar's senior editor.
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