The Magellan Global Trust, which opens for subscriptions tomorrow, is setting a new benchmark for ASX-listed products.
Firstly, the Magellan Group is paying the costs of the Offer (which will be in the millions of dollars). This means that the NAV (Net Asset Value) of each unit in the Trust on listing will be the same as the offer price ($1.50 per unit).
Secondly, the Trust is targeting a cash distribution yield of 4% pa, paid semi-annually. A distribution re-investment plan will be available, offering investors the opportunity to re-invest the distribution into additional units at a 5% discount to the then unit NAV. The cost of the 5% discount will be met by the Magellan Group.
Finally, existing Magellan investors (direct or indirect investors in any of Magellan’s products such as MFG, MGE, MHG, MICH and unlisted funds including Magellan Global Fund) will be entitled to a loyalty reward if they choose to invest in the new Trust. The loyalty reward will be an additional 6.25% units. The Magellan Group will meet the cost of these loyalty units.
For example, if a Magellan investor applies for 10,000 units in the Trust at $1.50 per unit (total investment $15,000), they will receive an additional 625 loyalty units (value $937.50) at no cost. The only catch is that they will need to maintain their investment in the Trust until 11 December 2017.
Loyalty units will also be capped via a priority offer, so that they will only apply on the first $30,000* invested (maximum of 1,250 units to be issued).
With this very attractive offer structure in place, some commentators have suggested that investors will flock to this Trust and that it may raise two or three billions of dollars through the primary offer. So, are there any catches?
Here is our product road test.
The Magellan Global Trust
The Trust will be a closed-end ASX listed unit trust. It will invest in a portfolio of high quality global companies.
It aims to achieve attractive risk-adjusted returns over the medium to long-term, whilst reducing the risk of permanent capital loss. It will target a cash distribution yield of 4% per annum and capital growth over the medium to long term.
The strategy is to invest in a focused portfolio of outstanding global companies and seek to purchase these investments when they are trading at a discount to an assessment of their intrinsic value. Magellan believes that outstanding companies are those that are sustainably able to exploit competitive advantages in order to earn returns on capital that are in excess of their cost of capital.
Up to 50% of the Trust’s gross assets can be invested in cash and cash equivalents, and the Trust may also borrow up to 20% of the Trust’s gross assets. The Trust will also manage its foreign currency exposure.
While the performance of the Trust will be measured against industry benchmarks and Magellan entitled to a performance fee on any excess return, the strategy is benchmark agnostic.
The new Magellan Global Trust is different to the Magellan Global Equities strategy (which Magellan uses to manage $41.3bn of funds in products such as MGE, MHG and the Magellan Global Fund). The following table outlines the key differences.
Magellan’s record as an investment manager of the Magellan Global Equities Strategy is shown in the table below. While it has been outstanding since inception in July 2007 (delivering outperformance of 5.90% pa after fees), over more recent periods, it has largely delivered benchmark relative performance.
* Inception is 1 July 2007. Benchmark is MSCI World Net Total Return Index (AUD)
Distributions
The Trust will target a cash distribution yield of 4% per annum based on the average of the month-end NAV per unit over a rolling two-year period. The distribution will be paid semi-annually as at 30 June and 31 December of each year.
Distributions may be higher than the target cash distribution rate of 4%, which Magellan hopes to announce to investors at the start of each distribution period. Importantly, the distribution may include a payment out of the capital invested in the Trust in addition to a distribution of net income or net capital or where the Trust has not generated any net income.
While Magellan is confident that the Trust will generate the income to pay the target cash distribution from the dividends and distributions it receives and any capital gains realised, dividend yields on global securities typically average around 2%.
Liquidity
The Trust will be quoted on the ASX under stock code MGG. Similar to a listed investment company or listed property fund, liquidity and secondary market pricing will be determined by other investors looking to buy or sell units on market. Unlike MGE or MHG, which are active ETFs, there are no marker makers to help set the price and assist with liquidity.
Given the Trust’s likely size, liquidity shouldn’t be a problem, however, it could trade at a premium or a discount to its NTA.
To help inform the market, Magellan will publish on its website each morning the NAV as at the close of business on the previous day, and during the trading day, a real time indicative NAV or iNAV.
Fees
Magellan will earn a management fee of 1.35%pa (1.25% pa for Management, and 0.10% pa for Administration). This fee includes the net impact of GST.
Magellan will also be entitled to a performance fee of 10% of the excess return above the higher of two benchmarks, an index relative hurdle of the MSCI World Net Total Return Index (AUD) and an absolute return hurdle of the 10-year Australian Government Bond rate. The performance fee is further subject to a high watermark.
Offer dates
The offer opens tomorrow (Tuesday 29 August) and is scheduled to close on Friday 22 September for broker and general public offers, and Friday 29 September for existing Magellan investors. Trading on the ASX is expected to commence on Wednesday 18 October.
The minimum subscription is 1,500 units or $2,250.
Bottom line
Magellan has a terrific record as a high conviction, active, bottom up global equities manager. This is, however, not your typical global equities fund, with the potentially high allocation to cash and a target cash distribution.
Existing Magellan investors will view the loyalty unit offer extremely favourably, while new investors will consider Magellan’s decision to pay the upfront costs and the DRP discount as real positives.
While this Trust will prove to be popular with investors looking to increase their exposure offshore, it is quite focused. Investors, whether new or current Magellan investors, should consider any manager diversification needs. There are no catches with the offer.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.