Tag: Australian Market
Business Strategy & Outlook:
Blackstone has built a solid position in the alternative asset-management industry, utilizing its reputation, broad product portfolio, investment performance track record and cadre of dedicated professionals to not only raise massive amounts of capital but maintain the reputation it has built for itself as a “go-to firm” for institutional and high-net-worth investors looking for exposure to alternative assets. Unlike the more traditional asset managers, who have had to rely on investor inaction (driven by either good fund performance or investor inertia/uncertainty) to keep annual redemption rates low, the products offered by alternative asset managers can have lockup periods attached to them, which prevent investors from redeeming part or all of their investment for a prolonged period of time.
Blackstone is one of the world’s largest alternative asset managers with $880.9 billion in total assets under management, including $650.0 billion in fee-earning assets under management, at the end of 2021. The company’s portfolio is broadly diversified across four business segments–private equity (24% of fee-earning AUM and 32% of base management fees), real estate (34% and 39%), credit & insurance (30% and 16%), and hedge fund solutions (11% and 13%) –and it primarily serves clients in the institutional channel. With customer demand for alternatives increasing, and investors in alternative assets attempting to limit the number of providers they use, large-scale players like Blackstone are well positioned to gather and retain assets for their funds. That said, investors in Blackstone are betting that the company’s outstanding investment track record and fundraising capabilities will continue into the future. While the confidence in the firm’s ability to earn excess returns over the next 10 years, it will become increasingly difficult for the company to do so longer-term as increased competition from peers (including more traditional asset managers like BlackRock), continued pressure on fees, and a general maturation of the segment (from a solid period of above average growth due to shifting investor demand for alternatives) weigh on results.
Financial Strengths:
Blackstone’s business model depends heavily on having fully functioning credit and equity markets that will allow its investment funds to not only arrange financing for leveraged buyouts and/or additional debt issuances for the companies and properties it oversees but cash out of them once their investment has run its course. While the company saved itself a lot of headaches during the collapse of the credit and equity markets during the 2008-09 financial crisis by having relatively little debt on its own books, debt levels crept up to less-than-ideal levels during 2010-19. Given that asset managers like Blackstone have a high degree of revenue cyclicality and operating leverage, and are generally asset light, they should not maintain more than low to moderate levels of financial leverage.
The company entered 2022 with $7.6 billion in longer-term debt (on a principal basis) on its books, with 60% of that total coming due during 2030-50. The company also has a $2.25 billion revolving credit facility (which expires in November 2025) but had no outstanding balances at the end of January 2022. Blackstone should enter 2023 with a debt/total capital ratio of 44%, debt/EBITDA (by our calculations) at 1.1 times, and interest coverage of more than 30 times. On the distribution front, share repurchases have been rare over the past decade, with the company repurchasing (net of issuances) just over $3 billion of stock (most of which was bought back in the past four calendar years). Dividend payments, meanwhile, exceeded $25 billion during 2012-21 and are expected to account for 85% of distributable earnings annually going forward.
Bulls Say:
- Blackstone, with $650 billion in fee-earning AUM at the end of 2021, is a “go-to firm” for institutional and high-net-worth investors looking for exposure to alternative assets.
- The company’s ever-increasing scale, diversified product offerings, long track record of investment performance and strong client relationships position the firm to perform well in a variety of market conditions.
- Customer demand for alternatives has been increasing, with institutional investors in the category limiting the number of providers they use—both positives for Blackstone’s business model.
Company Description:
Blackstone is one of the world’s largest alternative asset managers with $880.9 billion in total asset under management, including $650.0 billion in fee-earning asset under management, at the end of 2021. The company has four core business segments: private equity (24% of fee-earning AUM, and 32% of base management fees, during 2021); real estate (34% and 39%); credit & insurance (30% and 16%); and hedge fund solutions (12% and 13%). While the firm primarily serves institutional investors (87% of AUM), it does serve clients in the high-net-worth channel (13%). Blackstone operates through 25 offices located in the Americas (8), Europe and the Middle East (9), and the Asia-Pacific region (8).
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Approach
IVV tracks the S&P 500, a free-float, market-cap-weighted benchmark composed of large-cap US equities. Constituents are determined by a set of criteria and an index committee. The minimum market cap for companies in the index is about USD 5 billion. A slight quality tilt exists because of its conservative eligibility requirements pertaining to unprofitable companies and recent IPOs. Moving away from the cross-listing structure in September 2018, IVV now invests directly into a US-listed version of the strategy. Although it lacks exposure to small and mid-caps, the constituents of this index account for about 80% of the total market cap of the US stock market. Portfolio turnover is expected to be very low, in line with the underlying index. IVV distributes quarterly. IShares can reinvest dividends. Also, the underlying US-listed version engages in securities lending, adding some incremental returns to the Australian vehicle’s overall performance. In terms of its portfolio role, the ETF can be used as a core international equity holding, although it should be paired with an ex US equity offering for full global exposure.
Portfolio
The ETF mirrors the composition of the large-cap market, allowing the market to dictate its stock and sector weightings. This allows the ETF to harness the market’s collective view about the relative value of each stock and keeps turnover low, which is among the lowest in the category. As of 28 Feb 2022, the strategy’s top 10 holdings account for about 28% of the total assets, and the largest holding (Apple) accounts for 6.9% of assets, which effectively diversifies firm-specific risk. Information technology has been the largest sector exposure within the index (25.6% as of 28 Feb 2022), reflecting the dominance of tech stocks over the US large-cap space; however, it is underweight compared with the category average.
The strategy is slightly underweight in technology, consumer cyclical, and communication services and overweight in financial services and healthcare compared with the average rival. The strategy has substantial indirect global exposure given the significant stakes it holds in several multinational companies. With a large chunk of the underlying companies’ asset-weighted revenue generated outside of the US, this feature adds to the geographic diversification of the ETF. The strategy is large-cap-focused with no small and mid-caps within its constituents.
People
We are impressed with the management team and believe BlackRock’s vast resources give it an advantage. Day-to-day management of the Australia-domiciled ETF is shouldered by Derek Dei and his team located in Hong Kong. The team is responsible for overseeing more than 60 index funds and ETFs operating in the Asia Pacific region. However, the underlying US-listed ETF is managed by Alan Mason and his team of four portfolio managers based out of the US. Mason is the longest-tenured member of the team and has served as a portfolio manager at the firm since 1991. Greg Savage deals with multi-asset strategies, Jennifer Hsui monitors emerging-markets funds, Rachel Aguirre has responsibility for the institutional developed-markets and US funds, and Amy Whitelaw oversees North America and Latin America ETFs.
These managers interact with a wider team of traders and managers around the globe to execute the fund’s day-to-day operations. The impact of personnel turnover is minimal when it does occur. Most of the portfolio management process is automated, and portfolio managers primarily review and approve trades prior to and after execution. The team employs BlackRock’s Aladdin platform to deliver much of its portfolio management tasks. Global trading desks allow traders to conduct foreign transactions in a cost-effective manner, and the team has maintained tight index tracking
Performance
VV seeks to deliver the risk/reward profile of the US large-cap equity market via tracking one of the most popular indexes, the S&P 500. In the process, it sets a high hurdle for active managers to beat. BlackRock employs its sophisticated portfolio management systems and trading capabilities to emulate the risk/reward profile characteristics of the S&P 500, achieving low tracking error against the index. Over the trailing 10 years through 28 Feb 2022, the ETF has outperformed the category average by 67 basis points per year, with lower volatility. Much of this outperformance can be attributed to the strategy’s cost advantage; lower-thanaverage cash drag; and more favorable stock exposure in the technology, utilities, consumer cyclical, and consumer defensive sectors compared with the category average. IVV has held up as well as most of its peers during downturns since inception, despite its lower-than-average cash balance. Most actively managed strategies in the category keep larger cash balances on hand to meet redemptions, helping out during bear markets.
About Fund:
As the uptake for US large-cap equities increases, particularly through the passive route, iShares S&P 500 ETF IVV continues to be a very good investment on the back of seamless execution at an unmatched fee. The strategy is expected to outperform its peers over the long term and remains the clear choice for investors to gain US exposure. The underlying benchmark, the S&P 500, is a market-cap-weighted index of the largest 500 companies in the United States. Thus, it offers giant- to mid-cap exposure, covering about 80% of the free-float-adjusted market capitalisation of the US equity market. This results in a well-diversified index, at the stock and sector levels. As such, passive strategies that track the S&P 500 stand as above-average options in a market segment where active managers have generally struggled to outperform. Consisting of highly liquid stocks, material stock-specific valuation information is quickly incorporated into stock prices.
From an Australian perspective, IVV gives exposure to a broad portfolio of some of the world’s most noteworthy companies, including sectors that are underrepresented in Australia, such as technology and healthcare. The S&P 500’s correlation to Australian equities has come down in recent years, effectively adding to diversification for Australian equities exposure. This vehicle invests into the US-listed version, which engages in securities lending to garner some incremental returns.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Approach
This exchange-traded fund is the listed entry point for the unlisted Magellan High Conviction, after converting from a closed-end structure in August 2021. Magellan believes sustainable competitive advantages enable companies to earn lasting returns above their cost of capital. Concentrating on financial services, consumer franchises, IT, healthcare, industrials, and infrastructure trims the universe to about 4,000 names. Quantitative and qualitative screening cuts this down to about 200 stocks. These filters exclude measures incorporating current market prices, although Magellan seeks firms that have enduring competitive advantages, lucrative reinvestment potential, low agency risk, and low business risk to facilitate predictable cash flows. Relying mainly on discounted cash flow techniques, analysts elongate the model’s duration for wide-moat stocks and vice versa.
Targets must be discounted sufficiently to intrinsic value to give a margin of safety. Stocks are ranked along qualitative and valuation dimensions, from which Magellan constructs an ultraconcentrated portfolio of eight to 12 of the best ideas. Unlike the Magellan Global strategy, there are no hard limits on the portfolio’s “combined risk ratio” (a proprietary risk measure based on historic stock beta and drawdown risk). The portfolio can hold up to 50% cash, which aims to provide protection in a falling market. From November 2020, the portfolio has unhedged currency exposure, having previously been actively hedged based on the managers’ views. Magellan publishes an intraday net asset value on its website to help price discovery. It is calculated using live prices and foreign exchange movements but doesn’t use futures, so it might be a lagging indicator in highly volatile markets. The vehicle targets a spread of 7 basis points on either side, but they can widen notably during volatile periods.
Portfolio
Magellan ignores index weightings when building this ultraconcentrated portfolio of eight to 12 companies. Historically, the manager has tilted towards consumer-related and technology sectors while steering clear of commodities. By its nature, sector concentration is large, and as at January 2022, 62% of the portfolio was exposed to information technology and Internet and e-commerce, while consumer discretionary and financials names accounted for less than 10% each. The manager’s preference for giant-cap multinationals with strong franchise value also leads to a strong bias towards North America. At year-end 2021, the portfolio held only three stocks outside of the United States, with Chinese ecommerce giant Alibaba the portfolio’s smallest holding.
However, the managers carefully assess the portfolio’s underlying earnings exposure by geography, and on this basis European and emerging-markets ex-China exposure was around 32%. No single position can exceed 20% of the portfolio, and no more than four stocks can be weighted at over 12.5% each. The portfolio can hold up to 50% cash. At the end of 2021, the cash position was 5%. Turnover ranges between 30% and 40% and is lumpy given that a single stock initial purchase or exit represents a sizable trade. Given the strategy’s high level of concentration, it is suitable as a supporting player, composing only part of a more broadly diversified portfolio.
People
CIO Hamish Douglass co-founded Magellan and has been this strategy’s key decision-maker. In February 2022, he announced an indefinite leave of absence due to medical reasons, forcing a new lead portfolio manager. The firm called on Douglass’ co-founder Chris Mackay to step into the lead role as replacement. Mackay was Magellan’s CIO from 2006 inception to 2012, before choosing to focus on managing the listed MFF Capital Investments. At the same time, former head of research Nikki Thomas rejoined Magellan as comanager on the flagship strategy, after departing in 2017 following the decision to cease development of the non-US strategy she managed. Thomas had a four-year stint comanaging Alphinity’s global equities strategy. In early 2018, Chris Wheldon rejoined the group as assistant portfolio manager, concentrating on the High Conviction strategy as comanager. He had previously spent eight years at Magellan working as an analyst in the franchises team and as head of the industrials team, before a stint at US-based Davis Advisors.
There is the backing of a strong team of investors and analysts, however. This includes Dom Giuliano, who was promoted to deputy CIO in December 2014, and Gerald Stack, who oversees the team as head of investments and is chair of the investment committee. Similarly, portfolio managers Chris Wheldon, Arvid Streimann, and Stefan Marcionetti have experience as a sounding board to Douglass at the portfolio level.
Performance
Magellan High Conviction unlisted fund has delivered performance slightly below benchmark and category average since its inception in July 2013 to January 2021. Significant underperformance over 2020 and 2021 has undone the strategy’s respectable track record. Measured over all rolling three-year periods, it outpaced the benchmark over 75% of the time during its history. The returns have also exceeded the manager’s target absolute return of 10% per year. Indeed, 2016 was a setback when positioning into Brexit, then the Trump reflation rally, saw the fund lag the market. This underperformance was more than made up for in 2017 by almost 10% outperformance, driven by holdings in Apple and Facebook.
The year 2018 was more volatile, but the strategy still managed to achieve a positive return of 3.4% and beat out the benchmark. Notably, however, it lagged the flagship Magellan Global strategy by around 6.4% as the latter’s more-diversified portfolio did better during the more volatile periods of the year. The portfolio kept pace in 2019’s strongly rising market, with many of its tech holdings appreciating significantly. But the strategy’s punchy approach fell significantly behind the index throughout a volatile 2020 market. Active currency hedging also detracted value over the year to October. Fortunes weren’t any better in 2021, trailing the benchmark by a similarly wide margin, as volatility returned to technology names and Alibaba sold-off heavily.
About Fund:
The Magellan High Conviction Trust seeks to invest in outstanding companies at attractive prices, while exercising a deep understanding of the macroeconomic environment to manage investment risk. This vehicle is the listed entry point for the unlisted Magellan High Conviction. CIO Hamish Douglass announced a medical leave of absence from Magellan in February 2022, leaving a big void to fill. His indefinite absence exposes Magellan’s lack of succession planning across the investment team and the broader business. The firm has had to step outside the immediate team, albeit to somewhat familiar faces. Magellan co-founder Chris Mackay returns to the fold as lead manager; he had relinquished the CIO role in 2012 to focus on managing MFF Capital Investments. Portfolio manager Chris Wheldon provides some continuity, having been comanager alongside Douglass since rejoining the firm in 2018 after a stint at a USbased manager.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
