Magellan's Douglass sticks with China tech

Magellan Financial group, manager of a $15 billion global equities strategy, has raised its risk rating on Chinese tech stocks but says they are still fundamentally undervalued.

Tony Boyd

Magellan's Douglass sticks with China tech

January 15, 2021
Magellan Financial group, manager of a $15 billion global equities strategy, has raised its risk rating on Chinese tech stocks but says they are still fundamentally undervalued.
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Hamish Douglass, the chief investment officer of Australia's largest international equities investor, is sticking with his $1.7 billion holdings in Alibaba and Tencent despite China's crackdown on Jack Ma and tech monopolies.

In his latest market update to clients, Douglass acknowledged making a mistake in assessing how Ma would respond to the signals sent to him by the Chinese Communist Party (CCP).

Ma has disappeared from public view following the forced withdrawal of a $US37 billion ($47.7 billion ) initial public offering of his payments company Ant Group.

"I will admit I was wrong in assessing Jack Ma and how I thought he would act," Douglass says.

"Clearly, he'd been sent a message a number of years ago when he stepped down as chairman of Alibaba, which was kind of forced on him after an article was published in the South China Morning Post that was somewhat critical of President Xi and his family or asked questions.

"And I thought Jack had seen the shot being fired over the bows of the boat and would always act in his own self-interest.

"I was very surprised to see him make the comments at that conference in Shanghai just before the finalisation of the Ant IPO that was critical of the regulators in China and therefore inherently critical of the CCP.

"Unfortunately, we're seeing the reaction to that about who's in control and how companies must act. We knew there was always a risk around who's in control. We know who's in control in China. But what we got wrong was how Jack himself would act here."

Magellan has $101 billion under management with $75 billion in international equities, $18 billion in infrastructure and $8 billion in Australian equities.

The $15.5 billion global equities strategy run by Douglass under the banner of Magellan Global Fund and the listed Magellan Global Trust holds about 5.7 per cent of its assets in Chinese internet stock Tencent and 5.4 per cent in Alibaba, which was founded by Ma.

In December Alibaba was one of the biggest detractors from the performance of Magellan's core international equities strategy, which focuses on 20 to 40 quality stocks.

The Magellan Global Fund recorded a negative return over three months (minus 4 per cent), six months (minus 0.75 per cent) and one year (minus 0.02 per cent).

But it is up strongly over three years (12.03 per cent), five years (10.74 per cent), seven years (11.92 per cent) and 10 years (15.56 per cent).

Tencent is under threat of anti-trust action in China but Douglass does not think this will reduce its market share or lead to it being broken up.

"I don't really view the risk much differently to the risk attaching from an anti-trust perspective or from a regulatory perspective to the other major Western tech firms," he says.

"You know, the regulatory risk is real for all of these companies. We don't view that the end outcome is likely to dramatically impact the businesses.

"There is going to be impact on most of these technology companies as the regulators are putting in sensible policies because the issues are genuine issues around the power of these firms.

"But it's not likely to lead to sort of new firms being developed or new competition or other things suddenly developing in these markets."

He says possible changes to the monetisation of the Chinese tech platforms will be factored into Magellan's analysis.

"What I would say that in China, the government can act much more unilaterally in relation to anti-trust, and they can use the anti-trust tool effectively to punish companies not acting in the national interest and use that.

"And there's no right of appeal in China where in the West it's a very long duration sort of implementation of any sort of action on the regulatory side.

"The end outcomes may not be that different, but the speed at which they can happen in China can be much, much quicker."

Douglass says Magellan has increased its risk ratings on Tencent and Alibaba and all other Chinese technology firms to recognise the risk of political action against companies or interference.

"But we also have the view that these companies are incredibly advantaged in their markets and they are strategically important to China and very much on a mission of where China wants to be from a technology point of view," he says.

"So, we don't think China is going to sort of chop these companies in half or anything of that nature.

"But they're going to send signals about how they want them to behave. And as those signals are sent out, we can see volatility in their share prices. But our risk rating has gone up, which will affect our position sizes we may hold in there in the companies.

"But most importantly, for people we view both Tencent and Alibaba, despite all these volatility and risk at the moment, as fundamentally undervalued at the present time."

Douglass says Chinese tech entrepreneurs will keep their heads down and not criticise the Communist Party.

"It's just that Jack Ma is probably personally going to pay a very high price, which I don't know what it will be for that," he says.

"And certainly in the short term, Alibaba is bearing a price in terms of the regulation that the Ant Group is going to face."

But both Tencent and Alibaba are up substantially in the past 12 months and, according to Douglass are "very advantaged".

 This article was originally posted on The Australian Financial Review here.

Licensed by Copyright Agency. You must not copy this work without permission.

Hamish Douglass, the chief investment officer of Australia's largest international equities investor, is sticking with his $1.7 billion holdings in Alibaba and Tencent despite China's crackdown on Jack Ma and tech monopolies.

In his latest market update to clients, Douglass acknowledged making a mistake in assessing how Ma would respond to the signals sent to him by the Chinese Communist Party (CCP).

Ma has disappeared from public view following the forced withdrawal of a $US37 billion ($47.7 billion ) initial public offering of his payments company Ant Group.

"I will admit I was wrong in assessing Jack Ma and how I thought he would act," Douglass says.

"Clearly, he'd been sent a message a number of years ago when he stepped down as chairman of Alibaba, which was kind of forced on him after an article was published in the South China Morning Post that was somewhat critical of President Xi and his family or asked questions.

"And I thought Jack had seen the shot being fired over the bows of the boat and would always act in his own self-interest.

"I was very surprised to see him make the comments at that conference in Shanghai just before the finalisation of the Ant IPO that was critical of the regulators in China and therefore inherently critical of the CCP.

"Unfortunately, we're seeing the reaction to that about who's in control and how companies must act. We knew there was always a risk around who's in control. We know who's in control in China. But what we got wrong was how Jack himself would act here."

Magellan has $101 billion under management with $75 billion in international equities, $18 billion in infrastructure and $8 billion in Australian equities.

The $15.5 billion global equities strategy run by Douglass under the banner of Magellan Global Fund and the listed Magellan Global Trust holds about 5.7 per cent of its assets in Chinese internet stock Tencent and 5.4 per cent in Alibaba, which was founded by Ma.

In December Alibaba was one of the biggest detractors from the performance of Magellan's core international equities strategy, which focuses on 20 to 40 quality stocks.

The Magellan Global Fund recorded a negative return over three months (minus 4 per cent), six months (minus 0.75 per cent) and one year (minus 0.02 per cent).

But it is up strongly over three years (12.03 per cent), five years (10.74 per cent), seven years (11.92 per cent) and 10 years (15.56 per cent).

Tencent is under threat of anti-trust action in China but Douglass does not think this will reduce its market share or lead to it being broken up.

"I don't really view the risk much differently to the risk attaching from an anti-trust perspective or from a regulatory perspective to the other major Western tech firms," he says.

"You know, the regulatory risk is real for all of these companies. We don't view that the end outcome is likely to dramatically impact the businesses.

"There is going to be impact on most of these technology companies as the regulators are putting in sensible policies because the issues are genuine issues around the power of these firms.

"But it's not likely to lead to sort of new firms being developed or new competition or other things suddenly developing in these markets."

He says possible changes to the monetisation of the Chinese tech platforms will be factored into Magellan's analysis.

"What I would say that in China, the government can act much more unilaterally in relation to anti-trust, and they can use the anti-trust tool effectively to punish companies not acting in the national interest and use that.

"And there's no right of appeal in China where in the West it's a very long duration sort of implementation of any sort of action on the regulatory side.

"The end outcomes may not be that different, but the speed at which they can happen in China can be much, much quicker."

Douglass says Magellan has increased its risk ratings on Tencent and Alibaba and all other Chinese technology firms to recognise the risk of political action against companies or interference.

"But we also have the view that these companies are incredibly advantaged in their markets and they are strategically important to China and very much on a mission of where China wants to be from a technology point of view," he says.

"So, we don't think China is going to sort of chop these companies in half or anything of that nature.

"But they're going to send signals about how they want them to behave. And as those signals are sent out, we can see volatility in their share prices. But our risk rating has gone up, which will affect our position sizes we may hold in there in the companies.

"But most importantly, for people we view both Tencent and Alibaba, despite all these volatility and risk at the moment, as fundamentally undervalued at the present time."

Douglass says Chinese tech entrepreneurs will keep their heads down and not criticise the Communist Party.

"It's just that Jack Ma is probably personally going to pay a very high price, which I don't know what it will be for that," he says.

"And certainly in the short term, Alibaba is bearing a price in terms of the regulation that the Ant Group is going to face."

But both Tencent and Alibaba are up substantially in the past 12 months and, according to Douglass are "very advantaged".

 This article was originally posted on The Australian Financial Review here.

Licensed by Copyright Agency. You must not copy this work without permission.

Disclaimer: This material has been prepared by Australian Financial Review, published on Jan 15, 2021. HM1 is not responsible for the content of linked websites or content prepared by third party. The inclusion of these links and third-party content does not in any way imply any form of endorsement by HM1 of the products or services provided by persons or organisations who are responsible for the linked websites and third-party content. This information is for general information only and does not consider the objectives, financial situation or needs of any person. Before making an investment decision, you should read the relevant disclosure document (if appropriate) and seek professional advice to determine whether the investment and information is suitable for you.

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