Portfolio of 20 to 50 high quality global companies that meet our low-carbon investment guidelines that is designed to achieve attractive risk-adjusted returns and preserve capital in adverse markets
To achieve attractive risk adjusted returns over the medium to long-term;
To preserve capital and reduce downside volatility;
Meaningfully lower carbon intensity than broader equity markets.
Globally agreed climate goals provide the guiding framework for the Magellan Global Sustainable Strategy. According to modelling by the Intergovernmental Panel on Climate Change (IPCC), implementation of the 2015 Paris Agreement to limit global post-industrial era temperature increases to 2 degrees Celsius will necessitate a 30% cut in global emissions intensity over the next five years and, by 2100, a carbon neutral world.
Magellan believes it is highly likely that the world will move further towards addressing climate change risks by reducing carbon emissions. Climate change is therefore an increasingly important issue for global companies and investors, with the potential to profoundly affect business models through government regulation (eg carbon pricing), technology and changes in consumption patterns. These factors directly and indirectly impact the relative cost of companies’ products and services, customer demand, and pricing power.
Magellan incorporates a proprietary low carbon overlay in portfolio construction by:
Screening out companies based on their carbon emissions intensity.
Limiting the overall carbon emissions of the portfolio through a portfolio carbon emissions intensity cap. Both these caps will be revised over time to remain in line with evolving carbon reduction goals.
Excluding companies with fossil fuel exposures or interests, such as for example companies engaged in the extraction, storage and transportation of fossil fuels.
The caps and exclusions set a very high standard compared to global equities benchmarks. Magellan believes this is appropriate given the magnitude of the risks associated with climate change and the ambitious nature of globally agreed climate goals.
Magellan’s investment team conducts detailed due diligence on companies’ exposures under the caps and exclusions to verify their low carbon status. As a signatory of CDP’s climate change program, Magellan has access to detailed climate change reports and data on companies. Magellan is a signatory of the United Nations Principles for Responsible Investment (UNPRI).
The Magellan Global Sustainable Strategy adopts a long-term investment approach by investing in outstanding companies at attractive prices within a low carbon framework, while exercising a deep understanding of the macroeconomic environment to manage investment risk.
Magellan perceives outstanding companies to be those that have enduring competitive advantages that allow them to sustainably earn returns on capital that are materially in excess of their cost of capital.
While Magellan is extremely focused on fundamental business value, it is not a typical ’value’ investor. The Magellan Global Sustainable Strategy will invest in companies that have relatively high price-to-earnings and price-to-book multiples, provided that their businesses are outstanding and their shares are trading at an appropriate discount to their assessed intrinsic value. Equities that appear undervalued on the basis of a low price-to-earnings or price-to-book multiples will often prove to be poor investments if the underlying business is fundamentally weak and exhibits poor returns on capital.
Magellan focuses on risk-adjusted returns, rather than benchmark-relative returns. As a result, the Magellan Global Sustainable Strategy’s investment process is designed to generate an unconstrained, concentrated portfolio of high-quality companies.
Magellan believes that an appropriately structured portfolio of 20 to 50 investments can provide sufficient diversification to ensure that investors are not overly correlated to any single company, industry-specific or macroeconomic risk.
The Magellan Global Sustainable Strategy’s investment process integrates four key disciplines:
The Magellan Global Sustainable Strategy typically invests in companies with market capitalizations in excess of $US 5 billion.
Intensive bottom-up stock analysis and industry research is undertaken in order to identify outstanding companies. This involves the assessment of potential investments against key quality criteria, as well as assessments of their intrinsic value. MFGAM uses a proprietary ranking tool, the MFGAM Conviction Scoring Matrix, to rank companies based on these factors. This process enables the portfolio to be weighted towards higher conviction ideas (on a risk-adjusted basis).
MFGAM’s detailed macroeconomic analysis is overlayed during portfolio construction, alongside the application of both fixed and dynamic risk limits. This process ensures that the portfolio is not overly exposed to aggregation risk (risk which arises from correlated portfolio positions) or macroeconomic event risk. Macroeconomic event risk can be a significant source of negative returns for investors. MFGAM will make significant changes to the portfolio if it believes that macroeconomic events could lead to significant and sustained loss in value for investors. Such events would include a financial crisis, a sustained oil price shock, a global pandemic or a major global conflict.
The Magellan Global Sustainable Strategy considers a broad spectrum of environmental, social and governance (ESG) issues as part of its investment approach.
Investors can access the Global Sustainable Strategy via a separately managed account (subject to conditions being met) or via the following investment vehicle.