Fund manager Magellan Asset Management refrained from significantly reducing the exposure of its global fund in the past six months despite concerns stemming from the European sovereign debt crisis.
In a letter to shareholders, Magellan Global Fund portfolio manager Hamish Douglass said unlike the group’s decision to reduce the fund’s exposure to financials following the collapse of Lehman Brothers in 2008, the manager chose not make changes in the past six months.
“We have seen volatile and difficult investment markets over the past six months. The major event driving short-term market moves has been the European sovereign debt crisis,” Douglass said.
“Notwithstanding the volatility and uncertainty, the fund remained fully invested during the past six months, with cash at 31 December 2011 of 3.3 per cent.”
In contrast, in September 2008 immediately following the collapse of Lehman Brothers, Magellan increased the cash weightings of its global fund to 31 per cent and decreased the fund’s exposure to financials to 5.4 per cent, he said.
“The principal reason [Magellan remained fully invested] is we consider the risk of a systemic financial system meltdown as a result of the European sovereign debt crisis is substantially less than the risk following the collapse of Lehman Brothers,” he said.
“We have held this view notwithstanding dramatically increasing credit default swap costs for certain European sovereign debt, soaring sovereign bond yields, an undercapitalised banking system, credit rating downgrades and failure of governments to put in place a comprehensive solution.”
While the group did not wish to underplay the seriousness of the situation in Europe, Magellan believed the lessons learned from Lehman Brothers’ collapse remained fresh in industry participants’ minds, he said.
“We believe the lessons of the collapse of Lehman Brothers are fresh in central bankers’ and policy-makers’ minds and it is likely that they will continue to pursue policies to head off a systemic meltdown,” he said.
In the six months to 31 December 2011, the Magellan Global Fund returned 8.2 per cent, and for the 12 months to 31 December last year it returned 9.8 per cent.
