Magellan Financial Group has joined what chief executive Hamish Douglass believes is already a trillion-dollar industry by seeding "low carbon" investment strategies that will target institutions worried about carbon exposure the same way they are worried about interest rates and currencies.
Low-carbon puts an estimated $US30 billion ($40 billion) of funds within Magellan's reach, building on its $46.5 billion funds management empire and expanding its theoretical capacity to $US85 billion. The success of Magellan's low-carbon strategies will depend on whether Mr Douglass is right in arguing there is room for both the breed of institutions which are actively divesting from fossil fuels, and those that are not as edgy but highly alert to the risks carbon poses.
"There's already the element there of people wanting to divest, and we could fit into that, but there's a vast amount of money there that aren't at the divestment angle but are genuinely concerned about risk. It's just a lot of people haven't thought about carbon as a risk before," the Magellan boss and chief investment officer told The Australian Financial Review. "The lightbulbs are going off."
A plunge in performance fees saw Magellan post a 20 per cent drop in first-half net profit on Thursday as its global investment strategies failed to beat the market. Performance fees plummeted to just $3.6 million from $42.8 million but Magellan still managed to increase funds under management, supporting 10 per cent growth in management fees, which rose to $146.1 million from $132.7 million. Magellan shares fell 4.5 per cent to $24.03.Mr Douglass said Magellan's approach to low-carbon investing was unique because it was neither "deep ESG", nor like the passive green offerings in the exchange traded fund universe.
"What we're not doing is to say we're going to build a portfolio that's only investing in wind and solar and all that type of stuff, venture capital and that, this business will still be owning businesses like Microsoft and Alphabet and Apple," he said. "Apple's going carbon neutral. It's a massive power consumer but it's going to 100 per cent renewables."
But in sticking to its ethos of quality, low-volatility businesses with a value investor's eye, Magellan risks being accused of greenwashing by a cynical audience. MFG Global Low Carbon and the massive Magellan Global Equity fund have eight stocks in common in their top-10 holdings, disclosures show.
Mr Douglass underscored that Magellan was targeting a specific market in large-cap United States equities and the new strategy was three years in the making. Magellan is "having a vision that it isn't just the divestment camp, that there is going to be an emerging space of people who are trying to manage risk. We're taking a view into the future of what's going to become increasingly important."
A pension fund, for example, could select MFG Global Low Carbon to offset exposures to carbon-intensive utility stocks elsewhere. MFG Global Low Carbon will also have a broader universe of stocks to choose from because it can go lower in market cap than Mr Douglass' $US34 billion fund that he personally manages.
"We don't have to go invest in some speculative wind power generation scheme in order for people to invest because some of those deeper ESG strategies, that's all they invest in. But most of them have got terrible investment performance," he said.
"We're not here preaching to people, what we're telling people is there is a risk in your portfolio by being too exposed to carbon and therefore you should think about the amount you have exposed to carbon, and are there better ways to thoughtfully construct your portfolios to reduce that risk? That is the big missing element."
Sam Churchill is leading carbon research inside the firm and deputy chief investment officer Dom Giuliano is the portfolio manager responsible for the low-carbon funds. Mr Douglass said Magellan had developed extensive research to figure out what the true exposures are of global companies. That included measuring carbon footprints for franchisees in franchise businesses, accounting for scope one and scope two emissions, and evaluating companies which do not report to the carbon disclosure project.
Mr Douglass believes that climate change is "a fundamental risk for society and the future of the world" but downplayed any ideological agenda, because it was still about making money and reducing risk.
"I have personal views around that and I have very strong views on where I think the technology is headed. Almost in spite of government policy around the world, technology in terms of renewable storage is becoming cheaper and cheaper and cheaper and technology will actually displace a lot of fossil fuel generation over time," he said.
Despite its inability to generate significant performance fees, Magellan still managed to boost net inflows during the half. Around $1.2 billion was added from retail investors and $1.8 billion from institutional investors.
"We're there to get downside protection in adverse markets and the second is we're seeking to get people in the global fund net of our fees 9 per cent per annum. In the last three years we've delivered 11 per cent per annum, five years 19 per cent per annum, since inception 11 per cent per annum," Mr Douglass said, defending the performance.
"How we measure up against the MSCI over a 12-month period is interesting but frankly not that relevant because we're in 25 stocks and the MSCI is 1600 stocks. We don't do mining or energy. Actually, if you did MSCI ex-energy in the last year we slightly outperformed it."
