By Genevieve Wood
Global equities experts Magellan pioneered the Active ETF in Australia (and in fact the world) in 2015 and since then there has been several other reputable Australian fund managers follow suit. (There are now over 15 Active ETFs available on the ASX click here to download ASX’s full list of ETFs.)
They identified that there were barriers for Australian investors to gain access to global equities and global listed infrastructure. In order to solve this problem, they created three active ETFs:
- MGE – Magellan Global Equities Fund (Unhedged)
- MHG - Magellan Global Equities Fund (Currency Hedged)
- MICH - Magellan Infrastructure Fund (Currency Hedged)
These ETFs track the underlying investments and weightings of their unlisted managed funds counterpart, allowing investors to buy units from and sell units to other investors in the same way as ASX listed securities.
Magellan act as the market maker for these ETFs, buying and selling the underlying assets in accordance with market demand, ensuring there is enough liquidity at all times. The net asset value of the ETF is updated every 20 seconds, which provides investors with a market value of what their underlying investments are worth.
Magellan's approach to stock selection and portfolio construction
Magellan’s general approach to portfolio construction is as follows:
- 20 - 40 stocks of well selected companies that provide investors with enough diversification.
- A macroeconomic analysis which looks for both threats and opportunities to those sectors and stocks
- A rigorous portfolio construction framework and also a risk management framework.
Key sectors and markets Magellan are favoring
Magellan look for companies that they think are going to be the winners from change and disruption.
In the offensive part of their portfolio they look for sectors that are going to benefit from change and disruption:
- Global consumer platforms such as Apple and Google
- The payment sector such as Visa and MasterCard
- The enterprise software such as Microsoft
These sectors have long growth due to the connectivity around the globe.
In the defensive part of their portfolio they look at sectors that are going to be insulated from disruption:
- Quick service restaurants such as McDonald's and Starbucks
- Insulated retailers such as Costco and Lowe's
- Healthcare providers particularly because of the aging demographic
What is the difference between hedged and a non-hedged products?
- Hedged – Currency is taken out thereby eliminating foreign exchange risks for investors. Hedged investments can be a good option for those that want to avoid exposure to additional risk caused by currency fluctuations. In periods when the Australian dollar is appreciating in value against foreign currencies such as the US dollar, a hedged ETF will tend to outperform unhedged funds. Alternatively, if the Australian dollar decreasedagainst the US dollar, investments would usually be worth more because you’d receive more Australian dollars upon selling it. But because your investment is hedged, you receive no such benefit from the currency price change.
- Unhedged – An unhedged investment is one which is fully exposed to the risk of currency fluctuations. Therefore, if the Australian dollar moves it can have either a negative or a positive impact on top of returns.
For more on Hedged/Unhedged ETFs see Canstar’s explanation.
Magellan’s ETFs performance
Magellan emphasise the importance of long-term investing and suggest a time frame of 5-7 years for all of their funds. However, the return financial year today from 1 July 2017 to the 31st of May 2018 has been 13.75% per annum for their Global Equities Fund.
It is important that you remember however that past performance is not indicative of future performance.
For further information on Magellan please visit https://www.magellangroup.com.au
For a comprehensive report from the ASX click here.
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