Magellan’s latest offering, Magellan Global Trust (MGG) is seeking to raise as much as they can. A generous offer to existing Magellan fund holders may see this IPO break through the $2 billion mark. We take a look.
You’d have to be living under a rock to have not heard about fund manager giant, Magellan’s latest offering, Magellan Global Trust (MGG), seeking to raise as much as they can. A generous offer to existing Magellan fund holders may see this IPO break through the $2 billion mark. We take a look below.
Magellan have made a name for themselves with their Magellan Global Fund, an unlisted managed fund launched in 2007 that has outperformed its benchmark by 5.90% pa since inception. The strategy is replicated in their Exchange Traded Managed Fund offering Magellan Global Equities Fund (MGE) which has grown from a standing start just over 2 years ago to over $850m. Magellan Global Trust will be a little different, with the fund holding 15-35 stocks compared to 20-40 in the Global Fund. The Trust can also hold up to 50% cash (Global Fund can hold 20%), can have up to 20% leverage (mainly for buyback of units) and can dynamically manage their currency exposure. The differences are best summed up in the below table, taken from the Product Disclosure Statement.
Source: Magellan Global Trust Product Disclosure Statement
According to the product discllosure statement, the investment strategy of the fund is as follows:
Magellan seeks to invest in a focussed portfolio of outstanding global companies and seeks to purchase investments when they are trading at a discount to Magellan’s assessment of their intrinsic value. Magellan undertakes extensive fundamental analysis on the individual companies and the industries in which they operate.
Magellan believes that outstanding companies are those that are able sustainably to exploit competitive advantages in order to earn returns on capital that are in excess of their cost of capital.
One of the unique aspects of this listing, and one that is sure to put a rocket under the IPO is the loyalty offer to existing Magellan unit holders. Existing investors in Magellan’s funds will have access to 6.25% bonus ‘loyalty units’ up to $30k or 10% of their current Magellan Investment. The bonus shares will be issued if the investor still holds their shares on 11 December 2017 and will be issued in January 2018. This bonus will be entirely funded by Magellan.
All other things being equal, this will effectively give investors eligible for this bonus a day 1 (or at least when the loyalty options vest at around day 60) return of 6.25%. Based on this we see massive demand from existing Magellan investors. This unique approach does present some risks however, particularly around the premium or discount that will apply to MGG’s share price once it lists. A vesting period will reduce the risk of a large number of investors dumping their shares for the quick return, however, the vesting period is short, and there is risk that supply exceeds demand, pushing the share price of MGG below its Net Asset Value. We’ll keep an eye on what actually happens.
In what we’ve seen from some recent LIC IPOs, the manager will not be providing investors in the IPO ‘free’ options, which for the last few years at least have been the way fund managers have enticed investors to participate in LIC IPOs.
Free options are generally provided as investors in the LIC are effectively paying the costs borne by the fund manager to list (legal fees, ASX listing costs, commissions to brokers, etc). When the fund lists, the Net Asset Value (NAV) of the fund is generally 2-4% less than the investor paid for the units. This is where the free options come in as the reward for investors to participate. If the share price rises, the options are ‘in the money’, but if the price falls the options expire worthless and the investor has only given up the 2-4% premium to participate.
Magellan will pay all listing costs, including the loyalty shares for existing Magellan unit holders. This is sure to cost them a pretty penny, however presumably they see the ability to lock in capital and the annuity income to be generated from that (through management fees) will far exceed the upfront costs. This is good news for investors in the offer.
4-5% yields are common for investors in Australia. Our generous dividend imputation system sees investors demand companies pay out a large proportion of their profits as dividends. Globally, however this is not the case, with yields of 1-2% much more common. Magellan is aiming to pay out 4% per annum yield within MGG, to entice those investors used to fat distributions to take up the offer. The risk of this is the dividends they receive from their global portfolio will likely be much lower than 4%, so the distribution will need to include payment from cash reserves or selling down of shares. This may increase tax payable for some investors and create unnecessary portfolio turnover.
In another unique aspect of Magellan Global Trust, any distribution greater than 4% will be mandatorily reinvested, ensuring that the distribution received from investors is consistent, but possibly creating surprising tax outcomes for some investors if the total distribution is high (for example due to realised capital gains), but the majority of the distribution is reinvested directly back into the fund. This approach puts MGG more in line with the more popular Listed Investment Company (LIC) structure, where the fund manager has more discretion over the income distribution they pay compared to a Listed Investment Trust (LIT).
There’s a generous dividend reinvestment plan where investors are offered a 5% discount to NAV for any of the cash part of the distribution (the 4%) if they participate in the DRP.
The fund will be listed as a Listed Investment Trust (LIT), compared to the more common Listed Investment Company (LIC) structure. We looked at the two structures when Forager Australian Shares listed last year, with the key difference being the trust structure must pay out all earnings to investors, whereas a company is able to retain earnings. This difference is partly overcome by the dividend policy as discussed above, however investors must be aware they will still be liable to pay tax on the entire distribution.
There’s over 30 ETFs and LICs that focus on Global Equities, so the options available to investors in this space certainly aren’t limited. Given Magellan already play in this space, it’s best looking at their existing offerings:
We mentioned above that Magellan will be funding all listing costs of MGG. They say in finance there’s no such thing as a free lunch, and that applies here. Management costs will be 1.35% per annum and a half yearly performance fee of 10% over the higher of the MSCI World Net Total Return Index or the 10 year Australian Government Bond yield. This is on the high side for LICs, but consistent with Magellan’s existing funds. By benchmarking against both a share and bond index, investors will be comforted that they will not be paying performance fees in years where performance was negative but still outperformed the benchmark, with the Government Bond index always providing a positive return.
This post was prepared with publicly available information available from Magellan. ETF Watch did not receive any payment from Magellan for this post, but may receive referral payments from OnMarket Bookbuilds.