Hamish Douglass and big tech

-- | 25/11/2020

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Lex Hall: Let's talk about while we're on—while we were on tech. You don't own, if I'm not wrong, in the Magellan Global Fund, you don't own all the FANGs, do you? And which ones don't you own and why?

Hamish Douglass: No, we don't at the moment; we don't own Apple at the moment, but we only sold that recently. And that was purely on valuation grounds. We actually, you know, we like to be very disciplined at Magellan; we think it had gone ahead of our view of value, it's a wonderful company. You know, we bought it at less than $100 a share, when it was out of favour; we made a lot of money, and it just got beyond our valuation. Rightly or wrongly, we haven't owned Amazon ever. It is one of the best businesses in the world: the AWS business, their cloud business is extraordinary. Their ecommerce business is deepening their economic moat and competitive advantages, but really it was the valuation; we struggled to actually understand the valuation of the business. It wasn't about the business or the business quality, but unless we have a very firm view around there's a margin of safety in the values there, we won't buy notwithstanding we actually would probably put it in the top five businesses in the world.

And I would say it's not just FANG; you have to add the Chinese. We own the two big Chinese companies; we own Facebook and Alphabet, which owns Google. Not normally put in the FANG is Microsoft and it should be in the FANG, you know, it's depending on Apple’s share price on the day, it's the second largest company in the world now. You know, it's $130 odd a share and we bought it at $22 a share when it was deeply out of favour, maybe it was $24, between $22 and $24, back in 2014. And there's one other where we may have bought that we will disclose, but we're very disciplined in price.

These companies are extraordinary, they have very powerful what's known as network effect, you know, they tend in almost winner takes all, not Amazon, but most of the others are almost winner takes all markets because of the power of network effect operating here. Of course, that's going to attract regulators, they are attacking very, very large global markets, and because they are digital goods effectively, you can attack markets globally with this. They are massively disruptive, like the entire advertising markets moving from sort of all television stations, and all newspapers and all sorts of other forms of radio advertising, which we just to a few players in the world, which is extraordinary, and very, very large shares. You know, these big cloud platforms, there may be four hyperscale players in the world. We're going to move all the computing power of the world, and there's going to be so much more data in the world and so much more software. You know, software's going to eat the world as we start digitalising everything and all this is going to be hosted on maybe four companies' platforms in the future, on a global basis.

Hall: Perhaps that's a good time to mention regulation, does that spook you at all?

Douglass: No, we expect regulation. Wherever you get a company, which has very high market share in an important industry, you have to expect regulators will come in and look “are consumers being protected?”, and what's the—are they shutting out competition from competitors in that?” So, it is logical for the regulators to come in. First of all, I would say is, you know, the seven or eight sort of technology companies we own, most of them are facing either limited or very different technology risks. You know, we own Visa and Mastercard, they've been regulated in the past, they're facing some disruption risk from things like open banking and real-time payments in their debit franchises, in the long term. It's kind of not regulated; the regulators are changing the rules to open up the system. Microsoft really isn't facing much regulatory risk; the Chinese companies are deemed as national champions in the payment space yes there's some regulatory risk, but in the ecommerce space there is very limited regulatory risk there, they don't have the same privacy risks.

And then you really come down to sort of Alphabet and Facebook. If we owned Apple and Amazon, they're the four that are really getting caught up with the regulators. We own two of the four, you know, combine they may be 12 per cent of our portfolio or so and they have different risks. We understand the risks. We spend a lot of time speaking to people in Europe and in Washington, including, you know, former chairs of the Federal Trade Commission were the ones who have been investigating Facebook. We spend a lot of time with the Department of Justice in trying to understand the break-up risk in there and the other issues going on with Alphabet. We speak to politicians in the United States and elsewhere and it's a very, very public debate that's happening. So, we're unlikely—we will get regulation, but we're unlikely to get surprises of what the boundaries of that regulation could be. And then we look at the price compared to what we think the realistic regulatory intervention is going to be and the cost of that on the business.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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