I am delighted to write to you as an investor in the Magellan Global Fund (the ‘Global Fund’ or the ‘Fund’), the Magellan Global Fund (Hedged), the Magellan Global Equities Fund and the Magellan Global Equities Fund (Currency Hedged) for the 12 months ended 30 June 2016.
Over the past 12 months the Magellan Global Fund has returned -0.1%, in Australian dollar terms after fees. Over the past three and five-year periods the Magellan Global Fund has returned 13.1% and 19.0% per annum, respectively. Since we commenced the Fund (1 July 2007) the Magellan Global Fund has returned 10.6% per annum.
The Magellan Global Fund(Hedged) (see note 1) recently reached its three-year anniversary since being launched. Over the past 12-month period this version of the fund returned -0.9% in Australian dollar terms after fees. For the two-year and three-year periods, the Magellan Global Fund (Hedged) has returned 5.6% and 8.7%, respectively.
We launched the Magellan Global Equities Fund and the Magellan Global Equities Fund (Currency Hedged), in March and August 2015, respectively. Over the last 12 month period the Magellan Global Equities Fund returned -0.1% in Australian dollars after fees. The Magellan Global Equities Fund (Currency Hedged) returned -4.6% since its inception on 4 August 2015.
Our returns over the past 12 months have been negatively impacted by two key events:
1. The Brexit vote on 24 June 2016. It materially impacted the share price of Lloyds Banking Group (which fell by 23% between 22 June and 30 June), and the British pound which fell by 10% between 22 June and 30 June, impacting the Australian dollar performance of our investments in Lloyds Banking Group and Tesco. The combined impact on the Fund’s performance from the decline in the Australian dollar value of these investments since the Brexit vote, was a detraction of 1.2% during this period. Whilst the uncertainty created by the Brexit vote is likely to impact Lloyds Banking Group in the short-term, our assessment remains that both Lloyds Banking Group and Tesco will deliver attractive investment returns over the medium term.
2. We had been anticipating that the US Federal Reserve (the ‘Fed’) would progressively increase short term interest rates over the past 12 months and longer term bond yields would start to rise from historically low levels. Consistent with this view we positioned the Fund over the past few years by selling down our investments in consumer staples, increasing our holding of US dollar cash to approximately 15% and holding investments in three US-based banks (Bank of New York Mellon, State Street and Wells Fargo). Contrary to our expectations, the Fed has made only one rate increase and longer term bond yields have fallen rather than risen (the US 10 year treasury yield has fallen from 2.38% at 1 July 2015 to 1.47% at 30 June 2016). Clearly I have been wrong on the rate of tightening of US monetary policy and the direction of longer term bond yields over the past 12 months. This has impacted our investment performance over the period. Whilst we continue to remain cautious and believe that it is more probable than not that the Fed will tighten monetary policy over the next few years, we have moderated our expectations on the extent of the likely rise in longer term bond yields over the next three to five years.
Notes
1. Hedged to movements in the Australian dollar, relative to the currencies of stocks’ domiciles.
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