Packer, Starbucks and sweet success

By Damon Kitney

He’s made a fortune in funds management but Hamish Douglass says that the secret is to keep moving and never get complacent.

The founder and CEO of Amazon believes every day at what is now the world’s biggest retailer should be treated like Day 1 to avoid “stasis”, a state of being where everything remains the same.

As Bezos puts it, “Day 2 is stasis, followed by irrelevance, followed by painful decline, and then, eventually, death.”

Hamish Douglass might have a personal net worth of more than $1 billion, but if there is one word that scares him more than anything, it is stasis.

“I still get the bus to work every day to avoid stasis,’’ he says in a wide-ranging interview with The Deal. “Ninety per cent of the funds management industry hits stasis. You want to stay with that day one mentality. You have to create the right culture. And you have to live it. People get the difference between just making statements and being real.”

It is 13 years since Douglass and Chris Mackay established Magellan Financial Group, a funds management business, now with over $100 billion under management — that largely invests in international shares such as Facebook, Visa, Apple, Oracle, Microsoft and McDonald’s.

One of its best performers in recent years has been the Starbucks coffee chain, which, Douglass believes, is well positioned to ride out the wave of disruption caused by the likes of Google, Amazon and Facebook.

Despite the short-term challenges of the coronavirus scare, he is also banking on the firm’s big expansion plans for China, believing it will become a nation of coffee connoisseurs.

With a market value now over $12 billion and a share price which has delivered a return of well over 130 per cent to its investors over the past year, Magellan has become one of the nation’s biggest international funds management success stories.

“Australia is fortunate to have home grown one of the world’s leading fund managers. Hamish is one of the rare breed of individuals who can be CIO of a world-leading fund and the head of a world-leading funds business,” says Hong Kong-based Jeff Emmanuel, a legendary Australian banking analyst turned fund manager and an early and still current investor in Magellan.

Billionaire James Packer, who to his great regret is now a former Magellan investor, describes Douglass’s ability to pick stocks as “obviously very unique and world class”.

“And he is a good friend and a good man,’’ Packer says, noting that while he has spoken publicly of investing some of the proceeds of the sale last year of shares in Crown Resorts with Douglass, they have agreed for now to keep their powder dry. “Getting the timing right is an important thing and Hamish is the first person to say that putting funds into the market over a period of time is the best way to look at it. Which is what (legendary American investor) Warren Buffett says as well,” Packer says.

Douglass, chair of the group, stresses the secret to Magellan’s success comes back to the Bezos “Day 1” principle.

It is now folklore that Westfield legend Frank Lowy once gave Douglass a single piece of advice: “Be paranoid.”

For years on his wall at work, Douglass stuck up clippings of asset managers around the world that have collapsed.

He says there are several key aspects to setting up a successful funds management business, the most important being establishing the right platform with strong cash backing.

“You also need to find an area with a real market opening. With real client need and demand. Thinking you are going to do what other people are doing and better than them is a really hard way to develop a business,’’ he says. “When we came in we wanted to bring global equities to retail Australian investors. We helped educate a whole part of the market about diversifying. (The Kerr Neilson-founded) Platinum was the only player in the space.”

Douglass also hasn’t been afraid of making mistakes. On Magellan’s 10th anniversary he lamented buying up Australian dollars as a defensive position just before the bottom fell out of the currency.

Magellan’s disastrous investment in UK supermarket giant Tesco was also a big drag on its portfolio for many years.

When Douglass realises he is doing something wrong, he is also not afraid of pivoting.

“We change our minds all the time in our investments. For four years I have been talking about the risk of rising interest rates and holding a lot of cash. When the Fed (US Federal Reserve) changed its tightening bias in January 2019, we came to the conclusion that our view was wrong. A lot of people would not be prepared to turn around and say ‘What I was saying for the past four years was wrong’.

“So we invested our cash at the beginning of 2019 and the holding went from 20 per cent to 6 per cent.”

As a result, all of Magellan’s funds delivered returns of 25 per cent or more during the past calendar year.

After completing a Bachelor of Commerce at the University of NSW, Douglass joined Schroders Australia in 1990 where he met Chris Mackay. They bonded over their mutual love of Warren Buffett and worked together there for four years.

Douglass then rose to prominence in Australia as a deal maker, climbing the ranks to become co-head of global banking for Australia and New Zealand at Deutsche Bank at the age of 35.

Now more than a decade after starting Magellan, his almost 12 per cent stake in the company — worth more than $1.67 billion — is held in a vehicle somewhat appropriately called Midas Touch Investments Pty Ltd.

But ask Douglass if wealth has changed his world, his answer is unequivocal.

“Why should it change you?” he says. “You see so many people ruined by wealth. They change their behaviour and friends. I have bought one car since I started Magellan. It was a VW Touareg. We still live in the same house we were in before we set Magellan up.’’

Until five years ago, the Douglass family (he and his wife Alexandra have four children now aged between 20 and 14) travelled at the back of the plane.

“Sometimes in the back row of economy,” he quips, before adding that they now fly “closer to the front” on international trips, partly because of his bad back.

“I had an operation on my back at the beginning of 2018. I had severe stenosis at L4 and L5 and was losing all the feeling in my legs and having trouble even standing up. It has been better since I had the operation,’’ he says.

Douglass and his wife have also established a charitable foundation known simply as the Douglass Foundation.

The only public sign of extravagance was his reported $1.9m purchase in 2018 of a 40 hectare rural holding at Moss Vale, south of Sydney, fittingly called Majellan Park.

Douglass had paid $1.7 million for a 40ha Highlands cattle farm in the same area two years earlier.

But there was also his top secret 50th birthday bash at the end of December 2018, when he booked out the entire Emirates One & Only Wolgan Valley ultra luxury resort set on a 2800ha reserve within the Blue Mountains World Heritage Area north of Sydney.

The weekend-long event for 80 guests, which reportedly included a Great Gatsby-themed Saturday night featuring New York luxury events DJ Brian B — who has played at parties for Elton John and Gwyneth Paltrow — was said to have cost $3m.

“The financial cost was made up,’’ Douglass snaps when asked about the event, which also celebrated his wife’s 50th that year. “When you are a public figure, you have to take it. The media has a right to report. Yes it was a joint 50th birthday party, but were all the facts in the newspaper written up truthfully? No they were not. It was really about family and friends. It was written up as some show-off event, which it was not.”

Douglass has always jealously guarded his privacy and ensures there are never discussions in his home about Magellan or Magellan business. When he is at home his focus is firmly on family.

“Most of the time our family life is private,” he says. “The birthday party was a rare occasion it wasn’t. Did I know there was a risk it would get out? Of course. But would I change anything? No.

“We had the most wonderful event with our family and friends. Memories are something you can’t replace. If I am ever going to do something extravagant I will do it with my family and friends.

“The only thing I got annoyed about was that people may have somehow implied that it was a Magellan thing. It wasn’t.”

Two people at the event who sat together on the bus ferrying guests from Sydney airport to Wolgan Valley were investment bankers Matthew Grounds and Tony Burgess. Grounds and Douglass went to university together and are close friends.

Burgess, Douglass declares, is “a genius who has taught me so much about analysis and understanding business”.

One friend who wasn’t at the party was James Packer, who in March that year had gone public about his mental health battles.

Douglass says he and Packer have known each other for a long time and that there is “mutual trust and respect” between them. They caught up in July last year in Europe.

“He supported us when we set Magellan up and I am eternally grateful for that. From some others to whom he has loaned his money, I think there has been a lack of gratitude to him from some of those people. He continued to back us after the GFC,” Douglass says. “He ended up selling out at $10. He made 10 times his money. I always said to James ‘I want you to make money on your investment, it is up to you when you sell’. If James wants advice or help any time, I try to help. I am very fond of him. We are good friends.”

Douglass now has virtually all his personal fortune tied up in Magellan. He still runs a small legacy share portfolio established more than 13 years ago, which he is reluctant to talk about other than revealing it holds a parcel of Wesfarmers shares.

“Since I have set up Magellan, 90 per cent of all free cash has gone into Magellan or the funds we manage. My super is 100 per cent in the Magellan global fund,’’ he says. “Occasionally I may get a family friend who wants to do something and I may give them a little bit of money. It is not material.”

Douglass also provided $5 million to seed the Matthew Grounds-backed Sohn Hearts and Minds conference which started in 2016 and raises money for charity.

Through his role on the board of the Victor Chang Cardiac Research Institute (his father had a transplant in Chang’s unit in 1990), last year he also helped bankroll an endowment of $20 million for a new professorial chair of medical research in Sydney.

Last year Magellan also raised $862 million for a new High Conviction Trust listed on the ASX, to which Douglass contributed ­$20 million.

Perhaps because of his amazing intellect, it is easy to mistake Douglass as something of an introvert, although he doesn’t agree with the description.

“I am private but not introverted,’’ he says firmly. “In fact Chris Mackay would probably say I am incredibly extroverted.”

Douglass and Mackay worked together for seven years at Magellan before the latter somewhat surprisingly stepped down as executive chairman of the firm in 2013 to focus on running the ASX-listed Magellan Flagship Fund, now known as MFF Capital Investments.

Mackay, who still owns almost 11 per cent of Magellan, has previously denied there was any fracturing of the relationship with Douglass in the split.

“I am delighted with how Magellan has developed, particularly in looking after our fund investors and financial planners with great returns and service,” Mackay says.

“The business has a fantastic base for staff and investors in the funds, is very professional with great people and strong risk controls. I am now more excited than ever for all the opportunities that Hamish, Brett (Cairns, CEO) and the teams should get over the second decade, as well as lots of challenges too,” Mackay continues. He says he is happy “working away in the background with some of the investment teams” and did not “want to jinx anything by providing running commentary”.

His listed investment company still pays Magellan Asset Management for services and research.

“We didn’t fall out,’’ Douglass declares to my assertion that some claim that the duo did. Then he details for the first time his version of what happened.

“The better way of describing that is we had two co-founders in the business who were both CEOs and CIOs. Chris said to me, ‘It is bizarre Hamish, I feel now because you are CEO that I am running the Magellan Flagship Fund as a portfolio manager. I feel like I am reporting to you. It is a structural thing. I feel I want to internalise MFF and become the CEO of that business. I want to be running my own thing.’ I wouldn’t describe it as a falling out at all. He then became CEO of MFF. He still sits in the same office in our building. He doesn’t have any reporting relationship to me in his own mind.”

He and Mackay still catch up two or three times a month.

“Chris and I have never had an argument,” Douglass says.. “There were issues when we were both running the business when we would have different views on the pathway we would take. Did we envisage after seven years this would happen? No. But it has worked.”

To close the subject Douglass is adamant there are “very few people who actually know Chris and I who would still claim there was a falling out”.

He says: “Would I have preferred that we were both co-CEOs of the business, in a utopian world I would prefer that. But this has worked for both of us. Chris also still has a massive shareholding in Magellan.”

Another issue for Douglass has been the performance of the Airlie Funds Management business Magellan bought back in March 2018 from funds management legend John Sevior, Sevior’s Airlie co-founder David Cooper and Sevior’s former Perpetual protege Matt Williams.

After a slow start, in the year to December 31 Airlie’s Australian equities fund returned 24.4 percent, marginally above the ASX 200 index return. And the Magellan shares Sevior and his team received for selling Airlie to Douglass have fared even better, more than doubling in value.

“We are delighted with the Airlie team. John sits literally in the office next to me. It is also fantastic to have Matt and (portfolio manager) Emma (Fisher) on board,’’ Douglass says. “It was a long-term relationship. We didn’t go seeking to buy an Australian equities business. We really did it because of the people. It is not material in the scheme of Magellan — it wasn’t designed to be.”

He says that financially the deal has been a “sensible acquisition” and denies Magellan overpaid. Chris Mackay describes Magellan’s link up with John Sevior as “fantastic all around”.

“I don’t think we overpaid at all,” Douglass says. “John knows he could have sold the business at a higher price to other people. And they approached us, they didn’t talk to anyone else. We are very selective about the people and the culture. You don’t want to bring culturally incompatible funds management businesses into a group like Magellan.

“We paid a very low multiple of their earnings. At the time of the deal we were trading on a much higher multiple than them.”

In October 2018 Douglass stepped down as Magellan chief executive, switching roles with then chairman Cairns (ironically the best man at Mackay’s wedding), who joined the firm after Mackay stepped down.

Douglass remains chief investment officer and lead portfolio manager of the fund’s global equities strategies. He says the transition happened like osmosis.

“It was a natural progression. I said to the board and Brett that I wanted to hand over those (day-to-day) functions. The biggest value I can add is the investment and strategy side,” Douglass says. “In a way I joked to Brett I have given away things I don’t like doing and kept things I like doing.”

Most importantly it has allowed Douglass to do what he does best.

“Hamish has a unique ability to be able to look at complex strategic situations with a bird’s eye lens and be equally incisive on detailed aspects of a company’s operations,” Jeff Emmanuel says.

“He has always applied an industrious approach to understanding the companies Magellan invests in and demands that rigour through the investment team.”

Douglass stresses the move isn’t part of a retirement plan. Instead it has freed up some of his time.

“It has enabled me to get the time to focus. We did a number of things in 2019 like launch an Active ETF (exchange traded funds) and an LIC (listed investment company). It is part of a plan. You will see as time unfolds things that will look simple but at the end of the day they take a lot of thinking and planning,’’ he says.

Most importantly for Magellan investors, the change gave Douglass the time and focus to change the firm’s view on the risk of rising interest rates.

He now describes the current zero interest rates environment as “a fundamental game changer for investment markets around the world.”

“We are in uncharted waters. The real question we have to ask ourselves is what do we think assets are worth?” he says.

While Douglass believes the next part of the interest rate cycle will be supportive of markets and asset valuations, there is another “I” word that is high in his thinking.

It will ensure that stasis has no chance of settling in at Magellan in 2020.

“The number one thing that worries me is what happens if we really get inflation in the world?” he says. “This whole thing about cutting interest rates at the end of the cycle will turn out to be a huge policy mistake.”