Transcript

Matt Heine: Hi, Hamish. Welcome to the show.

Hamish Douglass: Matt, it's great to be with you.

MH: I thought we'd, if it's all right with you, give you a bit of a break from market talk and maybe go back to, I guess your achievements in life, and particularly how you got started in the industry, which I always find is fascinating turning to our guests. Did you always want to be a stock picker?

HD: Well, it's very interesting. I didn't start my career as a funds manager or a stock picker. I actually started in investment banking and the story actually pretty much started on the first day I joined an investment bank. I joined a bank, called Schroders in Australia. They used to be in the advisory business as well, and on the day I joined, it was very fortunate when I joined as a young graduate. On the same day, a gentleman called Chris Mackay also joined Schroders. Chris is a number of years older. He'd been working first as a lawyer and then he worked at Wardley in investment banking, and he'd come across and joined Schroders on exactly the same day, and I sat next to Chris and Chris on the day I joined put probably about 20 years of Berkshire Hathaway annual reports on my desk and said, "I suggest you read these."

So Chris gave me this introduction to Warren Buffett via the annual reports on the first day I came into investment banking. I'd actually worked in investment banking my summer vacations when I was at university and I sat down and I read all these Berkshire Hathaway reports and actually I went to our librarian at Schroders and I really wanted to educate myself about Australian business and I asked the librarian, a woman called [inaudible 00:02:12] would she put every brokers report that came into Schroders, we had an asset management business as well, could I get a copy every day of every brokers report that came into the company? When I used to go home at night, it was normally fairly late, I used to sit down and read inches of these brokers reports every single night and I did that for ages.

I said, I need to know every company in Australia if I'm going to be an advisor. I have to learn these companies. So Chris Mackay on one side of me with the Berkshire Hathaway and then I had this desire to learn about businesses and got very interested in the stock market and probably about a year or two years after, Chris and I used to talk a lot about investing, even though we were on the investment banking side and we set up a company called Magellan Equities and we actually managed some money for some family friends, early on when we were at Schroders. It probably wasn't permissible to be managing money on the side when we were working at Schroders and if you look on our share register at Magellan, there's a company called Magellan Equities as one of the major shareholders and that company's now fully owned by Chris, which goes back to that whole generation.

Then for around 16 years, both Chris and I stayed in investment banking. He went on to become chairman and chief executive of UBS and I went on to become the co-head of the investment banking side of Deutsche in Australia and New Zealand and had very fortunate careers on the advisory side, on the M&A advisory side but then in the end, Chris went to the whole business. I ended up having leveraged lending, the banking side, equity capital markets, sitting under the investment banking side of the business and we're fortunate, we got great exposure to advising a lot of companies and then in 2006, Chris had stepped down in 2005 from UBS and I said to Chris, "Why don't we do what we did in Magellan Equities and why don't we set up a real asset management business?" And he said, "Well, what a great idea, Hamish. What about you just get yourself out of Deutsche Bank and when you've done that, we'll do something together."

So it was kind of a long journey, a 15 or 16 year detour in investment banking where we picked up a lot of relevant experience but it started literally on day one of my career, I got super interested in stocks and investing and the sort of Buffett way of thinking. Of course for many years, we used to, when we were investment bankers, go across to the Berkshire Hathaway meetings, etc.

MH: It's interesting, a lot of the guests that I speak to talk about luck and there's probably a couple hours worth of discussion in what luck is, but they talk about good luck and being in the right place at the right time but also people luck and it's the people that you come across in your life in fortunate positions like that. What an incredible story and way to start a business.

HD: Yeah, people luck is a huge part of it. Chris is obviously, from those days, hugely influential in introducing me to [inaudible 00:05:21]. I was very fortunate having other wonderful mentors. When I was younger, there was a man called Peter Mason who ran Schroders. He's gone on to have an illustrious career after that but a very, very charismatic and smart individual. Had people like Brian Wilson, who I sat on third with but he was in the Schroders days with me. There was a man called Tony Burges, who was [inaudible 00:05:52] Deutsche Bank with me, who's an incredibly smart and focused individual.

We've teamed up with wonderful people at Magellan. Brett Cairns, who was actually a great friend of Chris' but he's actually our chief executive now, a wonderful partner, great lateral thinker. People like Frank Casarotti on the distribution side who educated me so much around how the market actually operates here from an advice point of view. He's built up a wonderful team of colleagues. It's just very fortunate, the people you come across in life.

MH: Absolutely, and you talked about I guess the early days, starting to build out your investment philosophy if you like, based on 20 volumes of Berkshire Hathaway reports. As you went through the Berkshire Hathaway career, how did you start to formalise your investment philosophy and beliefs, which have obviously been so important in your success to date?

HD: It was interesting. I did a few things early on when I started invest, some things that looked cheap. I bought a few mining companies and very quickly worked out that's not where I wanted to be and one of the first big investments I ever took in my very early days, in the early 1990s was an investment in a trust called the franked income fund and the franked income fund had been set up by the Wesfarmers cooperative and had a controlling shareholding in Wesfarmers and it traded at a discount to the underlying net asset value and its net asset value was just shares of Wesfarmers and I really liked the Wesfarmers business model and philosophy of how it was almost Berkshire Hathaway like, would move its capital around and was very, very focused on earning excess returns on its invested capital and this was a double entry, a double discount into... I thought Wesfarmers was undervalued and the frank income fund was trading at a discount to their underlying holding.

Wesfarmers, it's inevitable this would get collapsed and that discount would get closed up and actually the investment I put into the franked income fund and Wesfarmers, I still own all of those shares today and I think they've compounded over 20% per annum for nearly 30 years now. I put a lot of money for me at that time. I've always taken concentrated positions but it wasn't much money in the context of the world but for me, it was a lot of money at the time, so being very, very focused and finding some very high quality opportunities. We kind of gravitated towards quality very, very early on. I made a few mining things and quickly gravitated away and quality was all about that.

The second major investment I made was maybe two years after the float of Woolworths. I thought Woolworths had an extraordinary high return on capital and incremental capital, had a very large opportunity to keep growing our supermarkets in Australia and when I was fairly young, I owned more shares in Woolworths than the managing director owned in Woolworths and I still own all those shares today. I've never sold any of those shares and again, that's probably compounded around 20% per annum since I've owned those. Finding some wonderful businesses and letting the magic of compound interest do its magic. I'm very mathematical and early on, when I was at university, I used to love studying compound interest tables and really understanding and said, well if I live long enough, what could you turn $10,000 into? And so forth.

I often talk at Magellan, what is one of the big lessons in investing and the first thing is, find the right businesses and let time work its magic and I often cite Benjamin Franklin. Benjamin Franklin is one of Charlie Munger's heroes. In life, of course, one of the founding fathers of the United States of America and one of his great quotes I think of all time is around compound interest and he said, "Money makes money and the money that money makes, makes more money," and I think that's what investing is all about. Putting away some money today and let that money work for you over time and let it compound. It's a lesson I learned very early on. It was a mathematical insight that wasn't real insight but I learned almost when I was at university and I sort of applied that for a long period of time, to be very patient, be in very high quality businesses and let them compound for you.

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MH: Hamish, you make it sound very simple. Most kids or certainly people at university are exposed to the concept of compound interest and the power of compounding but then you also need to make sure that you're picking the right stocks and the right companies.

HD: That was the combination. Buffett was the kind of focus on quality and focus on high returns on capital and focus on an economic moat and then the mathematics of compound interest. If you get those two things right, investing's quite simple but it's actually quite hard to find businesses in this world that aren't getting disrupted. There's a lot of businesses that have high book returns on capital but those are being eroded by the powers of capitalism.

MH: When you started up Magellan in 2006, back in the very early days, initially you decided to focus on global companies and global stocks and infrastructure. Given your experience in Australia, why did you decide to branch out so rapidly at the start?

HD: Well we were very attracted to the global side of things because we wanted to focus on super high quality businesses and frankly, there just aren't enough of them in Australia and if you want to run an Aussie equity strategy, by definition you're either going to be super concentrated, ridiculously so, which of course, if you're too concentrated in our small market, you couldn't build a business of any scale, or you're going to have businesses of lower quality in your portfolio. So by opening up to the world, we could literally seek out the best businesses in the world and from a business point of view, we were still in a very early stage of overcoming this massive home market bias that you get in all countries but it was very, very large. People had very small amounts of their wealth invested offshore and really there was kind of one player in that space and it was Platinum and they had done a wonderful job.

It's nothing to go against Platinum but it was saying, there's a real opportunity here, particularly in the advice space, for people to find another manager to put some money as they diversify and put more of their portfolio in there and when you're just look about the amount of money that was in superannuation and self directed and advised money, the amount that was sitting there, you had 100 people competing for the Aussie equity slot and there was one person competing for the global equity slot and the global equity slot was going to become bigger and bigger and bigger. So initially, we envisage, let's form a global equity strategy with our philosophy and it was quite different to Platinum's, which is much more value oriented and much more contrarian than we're doing.

We're doing a different style to Platinum. Go and get a great team of people led by Frank, who came very early on and bring a new philosophy and are very focused on that advisor base of offering them the second slot and there were lots of people who were playing around but no one had really got any traction of the Platinum scale in that space and we saw there was a really business opportunity plus a meeting of our philosophy. We didn't originally envisage that we would go offshore and get a large base of institutional investors because we thought that space would be super crowded. We thought, they must be doing what we do in high quality, concentrated, there must be thousands of people competing for that money, whereas in Australia in the advice space, there was kind of no one competing for that Platinum second slot and we were very surprised when we built up a track record and we took to the world what we were doing. We were very surprised how few people actually manage money like we do. We were gobsmacked that so few people manage money in the style in which we do it.

MH: I think it's a great story and you've built from a startup in 2006, a company worth, I think $10 billion now and you're managing just shy of $100 billion. What was it like back in the early days of 2006? It was just before the GFC. Did you wonder what you'd done a few times?

HD: No, I never wondered what we had done. Of course, 2006, it was the 1st of July 2007 when we launched the Global Equity Fund. Chris had launched the Magellan Flagship Fund, that's now MFF Capital. We did that when we raised the firm but [inaudible 00:15:09] strategy, the infrastructure strategy was launched with the global equity strategy on the 1st of July 2007 and we seeded that with the combined funds under management of $20 million that we put on of the firm's capital that we had raised and we had Frank's team sitting there and I used to joke, we used to always go out to FOFs. FOFs are friends of Frank's. We used to go around and I used to go around seeing people in coffee shops on a one on one basis and it was probably after four or five months, we got out first check for $20,000 and it was incredibly exciting.

HD: But then the GFC hit, when we didn't have much funds under management and it felt pretty tough. We did relatively well but we were still down 20% and the markets were down 40% in the GFC and of course no money was coming in the door but we were lucky we raised a lot of capital to set the business up. We were financially secure but it was one of the best things that ever happened. Talk about luck, because it enabled us to differentiate what we did in our strategy. One, it differentiated the macro side of things. We were able to talk with some clarity about what was going on. A lot of it was... You have to understand the plumbing of the investment banking world to really understand what was going on in sub prime and other things. That was our forte so we came with an advantage, which could've been some luck. We navigated that situation, both during the meltdown and actually the redeployment of capital during the turning from March '09, we navigated that well and that really set ourselves up and if the GFC had never happened, Magellan may have never happened. We would've got decent returns but we may never have got that early break to super differentiate ourselves from the other global managers who were playing in this space. It felt tough but it was one lucky break.

MH: What was the culture like back then? It was obviously a very small team. It was a new brand that wasn't well known within the industry. Had to deal with research houses. What was the first year or two like?

HD: It was a lot of fun, early on. There's a lot of excitement when you're setting up a business but one of the things I always found interesting is everything we do... I'm always looking for the best answer and Brett's always looking for that and Chris is always looking for that as well but because we didn't come out of the funds management industry, we would get so often with people who would join it is, "But it's not done like that, Hamish," or, "At our old shop, this is what we do." And I used to say, "I couldn't care less what you at your old shop and don't tell me it's not done like this. We've got a blank sheet of paper, we're going to row our own boat and we're going to do what we think is right."

And even when it came down to paying rebates and things, I'd just say, "Frank, we're not doing that," and he goes, "Well we can't get funds under management unless we play by the rules," and I said, "But I don't think it's right and I don't care if we don't get any money at the moment. I want to set ourselves to the long term and we're going to start form a point of what we think is right, not what everyone else does," because what I think people are doing, I think the rules are going to change. That was thinking along, but the thing is, I don't think it's right and we used to ask dealer groups early on.

These are a limited few where people would say, "We would like, effectively, a commission to sell the product," and I used to sit down with the group and I said, "I hear what you're saying but it makes me really nervous, because if the only people you will deal with are the people who will pay you the largest commissions, I hate to think what's in your clients' portfolios, and I actually would prefer not to be part because if you've done some dud stuff with some other people, I don't want to get caught up in that and therefore I'll pass on the opportunity." It's interesting. Quite a lot of people turn around and go, "No, no, okay, we won't." But even though it was completely before [inaudible 00:19:33] came in, we never did any of that at all and it's very tempting to do that when you don't have any funds under management, but we do. But we kind of backed... We said is, we want people to come because they genuinely want to have their clients invested with us, not because of... And I don't think people were trying to be... because it was perfectly permissible and so, you know, a few things Frank used to keep scratching his heads going, "You're making this pretty tough, you know?"

MH: As you've grown, some of those core values which you've just talked about, how have you managed to maintain what was really important to you at the start as you get bigger and have more staff and expand the product offering?

HD: Well first of all I would say is, not expanding the product offering has been incredibly important here. We still predominantly do our two strategies. Global infrastructure and global equities. We did, at one stage, want to expand into something called global international equities, which is non-US equities, because we thought that was a very small step to the side to give an opportunity. And Nicky Thomas was being... Nicky's a great woman. It was going to give her a chance to run a portfolio. But what actually happened, it created a lot of friction in the investment team because people were being forced to cover stocks that they didn't think were relevant or weren't relevant to the global equities strategy. We were losing a bit of focus and that was having a cultural rub. No detriment to Nicky. She was doing exactly what we asked her to do. In the end I decided to stop doing that. I knew we could sell that to US clients because they predominantly don't invest in global.

They invest in US entities and non-US equities. So we're effectively going to launch a non-US equity. We knew we could sell this because most of the good ones were all full. But in the end we decided it wasn't the right thing for the culture of the company. I think trying to do too many things in a company can actually have huge cultural problems. We also had a policy very early on is... We used to joke around the no dickheads policy. We let some people go during the... Just people who were not culturally aligned. It makes a big, big difference, of getting people who are rowing in the boat. We always had an incredibly flat structure that anyone will roll up their sleeves to do anything. At Magellan we've maintained a super flat structure. You've probably seen our cost to income ratio. It's just not about the expense base, it's also about the culture of the organisation. I think people will come in and still find us, not withstanding we're nearly a 100 billion, culturally I think I would hope people would still find us incredibly humble and very client focused and not full of ourselves. I have to say, the funds management industry is full of people who are full of themselves.

MH: Hamish, how important is culture when you're looking at new companies to buy into? Is that one of the top things that you look at and try and understand?

HD: I think we want to be invested in companies... There's two parts of culture. It's about what the company actually does and what its products and its services and what need they're serving there. That's very important to us when we think about that. But we're tending to a rarefied space and then it gets down to sort of the quality and culture of the management teams. We're fortunate that we... Some of our companies have the best managements in the world. When you just look at the list of companies... There are some controversies around Facebook and things with social media, which is an incredibly complex topic. I think it's fairly balanced between enormous good they do, societies but by definition as well, there is harm that can be done on a social platform. As well as good that gets done on a social platform.

So yeah, the culture of the company is important. The culture of the management is somewhat... Sometimes it's super important. So if you're invested in a financial institution, the culture of management... I remember early on there were some of the... Some banks that were very, very high flying institutions and I just looked at them and I said is, "I would not invest in a company run by this person. They're just not culturally the right people." Many of those institutions went under by the way. But they were recommended to our analysts and I stopped it on a cultural basis. You're probably going to be less worried about that sort of cultural issue if you don't really like the person running Nestle. They're probably not going to blow Nestle up. And management tends to turn over. But in a very leveraged organisation, the culture of the people who lead it is incredibly important. So it depends somewhat at the management level, depending on the nature of the business.

MH: You made a call fairly on to start investing quite heavily into tech stocks. You just mentioned Facebook. You've still got a big holding in Apple. Often investors will say, "It's going to be different this time." And that's been a reason to actually not invest into tech stocks. Where do you see the big opportunities moving forward?

HD: Well I think, the first question, we moved into technology's a really interesting comment. I would say that a lot of the funds management industry, I'm trying to be careful here, they find something in their careers that really works for them. Okay? And they tend to be in a spot at a time that works. And when they're in that spot at that time that works, they don't often distinguish between, it's a factor that's working for a period of time and their own brilliance of identifying it. And then when they're in the period, and this factor could have worked for five years of something and generated a lot of excess return, and then it becomes this deep seated philosophy of the firm about this factor. And their brilliance in executing it. But then they never change. They keep investing in the same thing over and over and over again. And many of them go through long, long periods of under performance.

And actually their out performance may have had little to do with them. It may have just been, they were in the right place at the right time when that happens. If you look at what we've done at Magellan is, I think great fund managers evolve. They always look forward and they don't just keep doing what worked for them in the past. Otherwise they come that sort of one off factor type investor. So early on we were not in technology. We were in very simple technology. But we evolved as we started to think about the world and we moved and realised that platform related technology was going to be fundamentally game changing for many industries. And we now hold a meaningful part of our portion of our portfolio in the Microsofts and the Ali Babas and Tencents and Facebooks and Alphabets of the world, where you look sort of six years and seven years ago, we didn't have that in our portfolio. We used to own a lot of banks in our portfolio. I don't own a single bank in the portfolio today because I don't think it's a place that you really want to be looking forward.

We used to have 50% of the portfolio in consumer staples. We had very few consumer staples and own more utilities in the portfolio today. So people started as very, it's all about quality and looks like quality. Are we always going to be in platform technology? No. The world may change. So the future may look different in five years time. You have to adapt to that future. Not just say, "Well this worked for me 10 years ago, I'm just going to keep holding the same thing over and over." I think that's very, very important in evaluating... You want people to stick to their style. If you look at our style, it's all about quality. It's about our risk controls. It's about our risk limits. So the flavour always feels the same at Magellan but what we're doing evolves with how we think the world's evolving.

MH: I think that's a fantastic message. Last question for me around leadership, out of some of those companies that you just mentioned then, who are your top two or three favourite leaders, if you like?

HD: They're different. If I put nearly the single best chief executive in the world, who almost made the most amount of difference of something we own, I'd put Satya Nadella at Microsoft. He has a 10 out of 10. One, he's a wonderful individual but his execution and his vision to change the culture of the company, to change his relationship with the clients and direct the company's resources around the cloud, has been... Is flawless. He starts with advantage, it's Microsoft. But you know, Steve Ballmer had been there for a long period of time. They'd missed search. They'd missed mobile. But now they're completely owning cloud and where it's headed. So I think Nadella's incredible. We don't own Amazon but Jeff Bezos is a complete visionary.

How he developed AWS under the nose of every single tech company on the planet and they've ended up in the number one infrastructure cloud platform in the world, coming in an e-commerce company that was losing money at the time, is just extraordinary. And the competitive advantages that they're building up there. Daniel Zhang at Ali Baba is extraordinary. I kind of put him the sort of Chinese equivalent of Satya Nadella. His vision to see the digitalization of the future and the digitalization of businesses and how he can create a platform to digitalize and then connect consumers to businesses through the digitalization of enterprise, is incredible. To see how the world and then position yourself and how it can unfold before the models have actually happened, I find quite incredible. I would say that Kevin Johnson at Starbucks has done an incredible... Tough hand at the moment during coronavirus I have to tell you, with all your stores being closed down.

But has done a very, very good job since he's come on board. He's come out of both a consumer products background but also a tech background. And digitalization and how he's bringing that forward and the turn around of the business in the United State and the focus on China. He's a very, very good individual as well as a very good leader. Both culturally and visionary for the company. So look, we're blessed with some very good managements. You know, Tim Cook is extraordinary at Apple. You're talking about... You're in the upper echelons of just extraordinary management here. But there's other management we've invested in that I wouldn't be quite as complementary about. I don't want to name names but they haven't always been... We haven't always been blessed with great management. Some of that management has changed by the way. Companies or [inaudible 00:31:33] exited.

MH: No I think you're absolutely spot on with Satya. What he's done at Microsoft, effectively turning a business around of that size, when it was on the decline, is pretty extraordinary.

HD: It's incredible.

MH: Now you touched on, you mentioned coronavirus before. We haven't gone anywhere near it yet but it'd be remiss not to. As the world is slowly returning back to work, one of the questions we certainly as a business, and I have is, what the future of work looks like. The purpose of an office and how things are going to change post pandemic. So it's sort of post vaccine. What are your thoughts on where things are heading?

HD: Yeah we're giving a lot of thought to his at Magellan by the way. I think just what we're doing, we're doing a Microsoft Teams video call at the moment. We're in real time learning at the moment of how productivity can work in this world and the flexibility that you can give people. We used to travel around the world to... I would go and see or an analyst would go and see a chief executive of a company. And there would be a one on one meeting. We would do a file note. And then we would share that note with the rest of our colleagues in Australia. Since Coronavirus has broken out, we've a range, I can't... There's so many of them it's ridiculous, video conferences with chief executives of companies around the world. But instead of the one on one meeting between the analyst or myself and that chief executive, all our PMs and relevant people were invited to that video conference. Everyone gets to participate and hear. The productivity, not only are we not spending the time to travel overseas and the cost and everything, I mean I never worried about the cost of it but it's meaningful, and the carbon emissions and everything that go with it, the engagement suddenly we've got in this format has increased the utility value of that meeting.

Yet that meeting's no longer in person. You wouldn't have actually thought about that. The chief executive themselves probably would have said is, "I'm not going to do a video conference because it's not what I do." But now because they've been doing Zoom and everything from their homes and most of these chief executives have been doing this in their own houses. So I think that is a breakthrough in communication. I was meant to be in Asia week before last for one of our clients, for a client seminar. I'd agreed to do it at the end of May. I would have flown to Asia. It would have taken me three days. One day of travel to get there. A day for the meeting and a day coming back. We then did a video conference, because of course I'm not able to travel. That video conference was incredibly engaging. There were 500 clients participating. It took me an hour, and probably two hours of preparation time. Otherwise that was three days of my life for that exactly the same thing.

And I suspect they would have had more clients participate than they would have had in the in person event they would have had of me going to Asia. For our work environment I would say that we will end up moving to a hybrid model of giving people more flexibility to work from home. I find the structured meetings better by video conference. So our investment committee meetings I'm finding much better in video conference than I am in a face to face room. I find them more engaging, more focused. But what you miss out with the work from home environment is the unstructured interactions and the social interactions and unstructured and social are still very important for business as well. So I think these models where people think they're just going to completely reduce all their rental costs and thing by slimming down their offices and removing all... And just have people from work from home, that I think is the wrong model. So I think what I think we're going to end up in a world that has more flexibility but also some compulsory part of in person face to face activity as well.

That's what our lessons are coming out of this. But people will do it differently. We've spoken to an enormous amount of companies off shore. Do they think they're going to materially reduce costs by what they're learning out of this? And the answer is yes. We're not looking to reduce costs for Magellan from this. We're just looking to be more productive and more flexible side of things. I think for women in the workplace who want to have children, this could be a game changer. We've always been incredibly flexible at Magellan but a lot of the feedback we're having... One, it takes the stigma away from women who may work from home or something if everybody's off at that same opportunity. That it's just offered to everyone. But we have now... You've demonstrated to senior management that people can get their work done in a more flexible environment and maybe be more productive.

But I don't think we're moving to 100% work from home. And I think very few businesses will move to that model. Because they'll miss a very important part of, as I say, unstructured interaction and social interaction.

MH: Do you think Magellan, or some of the companies that you're invested in, will reconfigure your office space to really try and amplify those social interactions? So it becomes more of a collaboration hub rather than somewhere you go to work?

HD: I don't know the answer to that. You know, we spend a whole lot of... Businesses spend a whole lot of their time moving them to hot desking and open plan and everything else to try and get collaboration and now we've seen maybe from a health perspective, that's probably not the ideal outcome. So people are almost thinking about separating teams from future health risks here to unwind some of that. I think when we go back is, we're wanting to make sure that when we bring people together, there is critical mass of people coming together on both a team basis and a firm wide basis. So we're thinking of the models to make sure that when people are at the office, you're getting a critical mass of people to occur there. So we'll probably end in a model where there is at least one day a week that's compulsory, across all teams, to be in the office on that day. And then we can structure things in that day. We have things called... We have Friday night drinks like others but we have pizza Fridays once a week. We have chocolate Thursdays every single week.

So we do a number of things that have kind of taken on the Magellan culture. Things that forces people across the organisation to get together. But in a way that people are coming down, having ice creams or pizzas and things. And it works really well that you want to make sure that you can keep those sort of cultural issues going as you give people more flexibility as well.

MH: Well one of the things that's incredibly impressive about Magellan is not only are you great investors but I'd suggest that you're probably one of, if not the most, innovate fund manager. When I say that, you've launched a number of new structures into the Australian market over the last couple of years that really haven't been seen before. I'm interested in, how does that occur? Who's driving the innovation as far as listed vehicles and actively managed exchanged rated funds? Where's that coming from?

HD: I'm very lucky. I have a wonderful partnership with Brett Cairns. Brett's an incredibly good thinker. Brett and I have this vision of simplifying investing in this country. I would say that Brett and I collaborate a lot around this sort of simplification vision. So I certainly wouldn't claim the credit for it. And I think Brett wouldn't claim the credit for it. That we collaborate on it and we think and we've got a wonderful execution team led by a guy called Craig Wright. And Brett was the one that came up with this single unit structure. I probably came up with the first idea of the active ETF but the first version to the final version, how it got simplified, was iterated many, many times. Brett then came up with the idea of this single unit. That, why do we have this unlisted world and a listed world for investing in unit trusts?

It's just madness. And it really... He could see it so clearly when no one else could see clearly. It's going to become so obviously to people. The whole thing of an active ETF that you could trade on exchange live prices and the benefits. I remember, it really came out of the first time when the stock exchange came to us from mFunds. They presented mFunds and they wanted us to be one of the foundation supporters behind mFunds. A lot of fund managers got... A lot of the big name fund managers got behind it. When [inaudible 00:40:34] was running it, the stock... I said, "I refuse to do it." He goes, "Well Hamish, why are you doing it?" I said, "It's because you're not solving the problem." You're taking out the AML friction of filling in the paperwork to become a member of a fund by leveraging off the [inaudible 00:40:50] system, which is smart. But you're not allowing live pricing. The audience you're going to needs live pricing. They want to go and buy 10,000 units. They don't want to buy $10,000 of units at an unknown price. The problem in unlisted funds, you put in for a dollar amount, but you don't know how many units you're buying.

In a listed world that whole audience thinks completely differently. So I said, "You're going to try and take to the listed audience a product that will look... It'll look foreign to them. You haven't... You've run one quarter of the way round the field. You need to do the whole lap." And I said, "Don't worry, we'll come back and work something out that actually works here. But what you've worked out is kind of a half baked half solution. So we're not going to participate in it." They got seriously pissed off with us at the time. I said, "This just ain't going anywhere." They thought it was the biggest vision in history. So you know, they had part of the vision. But not the complete vision there. I think this single unit side of the thing is, I think what you'll see we're going to do on retirement side is a... Which is totally Brett by the way, that's been a total vision of himself, and we're probably going to do something later in this year that's going to be the next step of the evolution of the simplification of the sort of listed world.

We've been working on it for multiple years and of course we need to get all the regulators on board. Our retirement product has had a long pipeline of the regulatory side of things, of getting them... Because we're doing things that haven't been done before. But what we want them to do is to one, solve a real problem and make it really simple for clients and improve the efficiency in the industry. And we will then open book it to anyone. You know, on active ETFs, the team has set down to any competitor, we've said, "We'll tell you how to do it. We'll open book it." Because we think it's beneficial to clients. We're not trying to do these things proprietary to Magellan.

MH: You've talked about the audience a couple of times. Presumably when discussing simplification of investment, that's to go across both advised and non-advised parts of the market?

HD: That's correct.

MH: And with ETFs at the moment, we've obviously seen huge growth. Largely low cost and also because-

HD: Can I just go back to that one? Because that's really interesting. If you think about this single unit one, so most advice clients have always used unlisted funds on platform. It's been their business models. But then they've had direct equities that are listed. And some platforms do listed and unlisted and some haven't and it's a bit clunky. But if you then suddenly say, for various reasons because of technology changes, we'd love to have things listed, and let's say we have an active ETF but you're all in the other side of the equation that's unlisted and you decide you want to simplify your bottle because the whole world's moving to listed product, but half your world's unlisted, that's a real problem. Because if you wanted to get there, you're going to have to get your clients to sell their unlisted product and then re-buy the active ETF side of it.

And for your simplification, it's going to come at a cost to your clients. We want a world where it's completely indifferent. If you want to be in the unlisted world, traditionally where you are, because that's how your platforms operate, all you do is you give an instruction to the registry that you want the code that allows it to be unlisted. But if you want to then change and your whole business model, because technology's simplified with platforms at listed, you can do it cheaper and more efficiently, the way the reporting operates. You will just have to give an instruction to the registry and all of it will flip from your unlisted world into the listed world, which is the same fund. No consequences for the client at all.

MH: And that's the structure that you've just launched is that correct?

HD: That's what we've just launched. Yeah.

MH: It's a great structure. And have you started to see people utilising that? Or is it too early as far as moving-

HD: It's very early days. It was only launched last week. But it then enables us to think more widely. I think every fund we ever launch in the future will be under this structure because it's just, it's beneficial to people. But we've had to educate ASIC and ASX exactly what this is about, because it's all a foreign concept to them. But now they're going... And we actually had to get the unit registries to rewrite their whole software behind it. We had a project... Because there were listed registries and unlisted registries. So we've had to redo the whole back end plumbing here to make it happen.

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MH: Before we go, we are about to run out of time unfortunately, I'm interested in and I appreciate it might not be a quick answer but, with everything that's going on in the world at the moment, where do you see the future over the next one to two years? Are we going to be seeing a V shaped recovery? U shape? Or an L shape?

HD: I would say Matt it is incredibly uncertain at the moment. And I think if anybody thinks they know they're incredibly dangerous people. Because there are so many interconnected variables that can play out in so many different ways, that have so vastly different outcomes in terms of the economic impact over the next 12 or so months. If you just... And the problem at the moment is, there's two big questions. One is a big scientific question. The scientific question goes around the virus and the cure to the virus. As in, how long is this going to go on for in society before effectively we're at the end of the threat of the virus? And the science on that, when you speak to the scientists, they do not know the answers to those questions. And the problem is, is we're getting simplified press release at the moment around cures and vaccines that are very, very early on.

I almost describe it as like the gold mining situation. You put one hole down and you release the results to the stock exchange and people extrapolate [inaudible 00:47:50]. You know, we've put a few drill holes down on vaccines and released some very early information in a very, very complex area and people are extrapolating a cure from information that's impossible to extrapolate that information on. Because, about the disease itself, there are, if you study it there are just so many variables here that are unknown at the moment. To extrapolate this that we're going to get sort of, vaccines by the end of this year and start mass production and this is what the press releases are saying by the... It may or may not happen. I put it low probability at the moment. When we ultimately get a vaccine, there's some vectors that make it possible. But there are four coronaviruses in the world. They've never found vaccines to any of them to date.

But at least they know about the spike protein. That's what they're targeting. They had that information from MERS and SARS so that was early on. There's a lot of research that had gone onto MERS and SARS. It appears to be slowly mutating. They announced in 1984 that they were very confident there were going to have a vaccine to HIV by 1986. It's 36 years later, they still do not have a vaccine to HIV. They've got therapeutics. They've got anti-virals that have worked incredibly well but no repurposing of current anti-virals I think is going to be a therapeutic cure to this. We may get anti-virals but that would be years and years away, if vaccines don't work. So ultimately, we'll get a cure or we'll get herd immunity. But is it going to be 12 months? 18 months? Two years? Three years? We simply don't know. I think that's unknowable by the science as we sit here today.

The second part that we don't know about is what I regard as the... I think Morrison talks about the bride to recovery but the problem about the bridge to recovery, what they're doing is, there's a massive output gap sitting here in society. We've had massive fiscal support and income support and central bank support to effectively build a bridge over this massive hole that is sitting here. But at the end of the bridge, we don't know how far the jump is to the next bridge. You don't know if it's a five centimetre gap or it's a 300 metre gap down to the next bridge. People get excited by the unemployment stats in America the week before, two and a half million jobs being created. But I would argue is, no one knows what the real unemployment rate is because nearly every country in the world has effectively income support mechanisms in place paid by the government. These people are being paid by employers. So they're all employed. But every employee I speak to is, they're planning that as soon as this gets removed, to take out a portion of these people.

So people who think they have a job, don't actually know that they're unemployed at the moment. And so the unemployment statistics aren't a real bearing on anything at the moment. And the extent of that sort of cliff at the end of this road to recovery will depend upon whether virus and confidence... And depend whether the bridge gets extended again. So guessing what that looks like depends upon all the variables and how they inter-depend and I would say this is probably one of the greatest information asymmetries I've ever seen in my lifetime. That there are investors out there who are extrapolating press releases at the moment and simplifying it into answers in an equation that is incredibly complex and almost unknowable at this point. I think it is reasonable to assume that we could be out of this in 12 months or we could have a deep recession for five years. I think it's absolutely unknowable at this point in time, which end of that spectrum we're at.

I think the V shaped recovery, and people got very excited by that probably in the last few weeks, I've always thought that was an Alice in Wonderland scenario. I think it's so low probability of happening. But I also think a depression is very unlikely to happen. It's some form of recession but it's very difficult to gauge what it looks like at the moment. So I would proceed with caution here and I think Einstein had a great quote is, you know, you should make things as simple as possible but no more simple. I think people are oversimplifying this problem at the moment. You have to understand the limit of your knowledge. Donald Rumsfeld, I think was very insightful when he said, "There are known knowns and known unknowns." If you list out everything we know about this situation at the moment, but then you can list down all the things we know that we don't know the answer to at the moment. Once you do that, and you probably you haven't even thought of all the stuff and then of course there'll be unknown unknowns and stuff, the black swan things. Things could happen like the Black Lives Matter movement.

That has actually changed the whole risk around the reopening equation. Within a very short period of time the risk of reopening's risk has gone up materially because of a black swan event that no one would have thought... Couldn't have possibly contemplated would have happened. How many more of those things could happen in the next six months, of things we've never even thought of here? So I just think people have to be realistic to understand that we are still early on in the development, both economically and from the virus side of this. And just because we've been locked up and we feel much better that we can go where... We're running around now. We shouldn't get a false sense of security about that and become overconfident in what we're doing from an investment point of view. So we're pretty conservative at the moment here. As these markets went racing ahead and we were being conservative, we weren't losing any sleep. We don't have any fear of missing out in being conservative when we know we don't know.

MH: Hamish, I think that's a wonderful place to stop. Thank you so much for your generosity and comments and congratulations on a fantastic career and on building such a great business.

HD: A pleasure. Thank you for having me.

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Views expressed are of the interviewee and may not be the opinion of Netwealth or its related companies.