MFG in the BUY zone, page-30

Bought in again yesterday on the basis that, at around $40 and down 20% on 3 weeks ago, MFG is now well and truly oversold.

I’m not saying this is necessarily the bottom - that’s always near impossible to pick - but I think there’s now a better chance of a bounce next week than there is of further falls.

My rationale for MFG being undervalued/oversold is as follows :

1. Lack of appreciation for the revised portfolio mix and downstream impact on funds under management (FUM)

Instead of just throwing the kitchen sink at US and China big tech Hamish has shifted a little more defensive in the past 18 months in the form of utilities and food/beverage stocks. This provides significant downside capital protection.

Such stocks are a lot less volatile and pay dividends that help underpin the 4% targeted returns that the Magellan funds generally aim for. So MFG is not just about Microsoft and Facebook and Google ......and .....gulp ....Tencent and Alibaba. It’s a common misconception that MFG is all about these stocks.

The defensives include big names like Starbucks and PepsiCo and the name behind KFC ....Yum brands. The defensives also include gas and electricity companies in the US (eg Eversource Energy and Excel Energy) These are stocks that are pretty solid no matter what the economy is doing pandemic or no pandemic.

So this is why you’ll see the NAV’s hold up pretty well across the Magellan Funds when big tech sells off....and why if we have a shakey period in the markets the Magellan funds will compare pretty well when the ‘league tables’ are published. The funds that have gone all in with Nasdaq stocks and flakey ‘sustainables’ won’t look pretty in a difficult market.......and that’s when investors will reassess risk. Magellan funds are then well placed to draw in $billions in new FUM .....the MFG sp will get a kick along with it. A market shakeout would in fact probably be medium/long term positive for MFG.

2. Over reaction to Tencent/Alibaba falls

The market seems to react like when the prices of these two stocks dive that it’s absolute poison for MFG - MFG gets smashed every time. The truth is they represent less than 10% of the whole Magellan portfolio so if they crash 10% on any given day it’s really only a 1% hit on MFG. The markdown of MFG on account of the falls in these Chinese stocks has been way overdone and the worst of the sell offs may well be behind us now.

In any case Hamish seems to have lightened exposure to Tencent - it’s not in the top 10 anymore for most of the funds.

3. Little to no sp valuation attributed to new investment partnerships

It's early days for the Hamish ‘sideshows’ (Barrenjoey, Finclear and Guzman Y Gomez) They are unproven and in establishment stage however they are the investments that provide significant potential for MFG sp growth. I’m backing these investments as medium/long term winners.

4. Overreaction to ‘disappointing’ full year results

They weren’t that bad ! Impacted by establishment costs of new partnerships - certainly not bad enough to have the stock written down 20%

So these are the reasons I doubled my holding yesterday - $40 just looks plain cheap. MFG a long term play for me. Willing to be patient now and ride out any further dips from here.