Aaah, it’s nearly the end of the year. Santa is either short the market and chuckling at our stupidity for thinking there’d be a rally in his name, or he’s just dicking around home waiting to see if Omicron is going to derail everything before he tries to deliver all the toys with a mask on.

It’s been a long year. I haven’t had the big slam-dunk trade yet – not like last year. I’ve had a few middling ones, but mostly it’s been a lot harder, with a lot more risk. It’s still a bull market, but I’m underperforming, so I’m getting twitchy and wondering what I’m doing wrong.

There have been some big blue-chip selloffs – Fortescue/BHP/RIO, WBC. (You just know it’s getting weird when NAB is one of the best-performing banks, though!)

All the BNPL and other meme-stock rubbish turned out pretty much exactly how I thought it would – no-one can fly high forever on revenue growth alone. (Even Wesfarmers stuff up from time to time, I seem to remember vividly that misstep they made back in the ’90s…or was that someone else..?)

It wasn’t easy to come up with a title for this article, but when I finally settled on this one it certainly made me chuckle… there have been a lot of companies that turned out to be the next Afterpay, but not in the way they were hoping!

When Afterpay came crashing into our worlds – taking kids’ pocket money and converting it into debt, enabling the self-obsessed consumer generation to get more junk now – it flew high. Admittedly… well done to all that got on that train early, and then off. A bunch of people got rich.

During the mad scramble upwards, now that companies in Australia were being revalued based on revenue growth (and not that pesky ‘profit growth’), the question on everyone’s lips was… “who is the next Afterpay?”.

Multitudes of share-market spruikers used the line to sell newsletters and stock tips, a few investors who’d loaded into similar “high-revenue growth, negative profit” companies even used the line on companies that weren’t even close on a good day.

A lot of people thought they’d be another BNPL – so… Zip went nuts, and for a while so did Splitit, Douuuugh, Beforepay, IOUPay, OpenPay…

Nah, none of them were the “next Afterpay”. But also, yeah, they sort of all turned out to be. Just not in the way that they’d hoped…


Next Babcock and Brown?

Followers don’t often get the same explosive share-price growth that the “who’s the next Afterpay?” question thinks it’s asking, but they certainly get the pop. Too much hype, too many people looking at share-price appreciation, and not enough people looking at “intrinsic company value” appreciation.

Humans are humans. BNPL exploits that “I Want It Noooooooowwww!” voice that is genetically built into every living thing, no differently to Coles having chocolate at the cash registers.

People in a bull market fall victim to it and will chase absolute rubbish investments that make absolutely no sense and give up on fundamentals, because fundamentals are boring. Crypto is another good example, people want it because they want to get rich, not because it makes any real sense.

So, Magellan. Where to now?

It’s taken a hiding. It might go lower. It’s getting flogged in the press. Everyone loves a “zero to hero” story, but I’ll tell you what, they love a good rich-people saga and stumble more!

Hamish broke up with his missus. His CEO quit, for personal reasons, which may or may not mean that they had some sort of salacious “Axe Capital” style bust-up, with women and fists involved. Probably not, though… Bretto probably just wanted to go and be rich somewhere else – because being a CEO can really suck.

We’ve seen all this before in fund managers. Some real nightmare scenarios.

Babcock and Brown were the “smartest guys in the room” before the GFC. The new “millionaires’ factory”. At one point it seemed like they were going to own every airport, office building, supermarket and every other major piece of infrastructure both here and overseas.

Until, that is, the companies that had lent them money started getting squeezed by the people they’d borrowed money off, and started calling in their short-term loans – that BNB had used to fund long-term investments. Not unlike owning a house with debt secured by another house, that was bought with equity in another house, that was funded with a 30-day payday loan. And so… they went into a trading halt and never came out.

Magellan is not the next Babcock and Brown.


Okay, next Platinum Asset Management, then?

Then there is Platinum Asset Management. For years and years, Kerr Neilsen was the go-to fund manager. He had been building wealth for years and had a fairly clear run at it as he had set up Platinum with the backing of George Soros in the ’90s, and fame begets fame. They ran Platinum as a private company right up until 2007 when it listed on the ASX, and Kerr was one of the most revered investors in Australia.

A lot of people said, at the time, that if Kerr Neilsen was selling out, that it was probably the top. Whether that is the case or not, they were right. It walked straight into a GFC, eventually recovered its highs in 2015, and has declined ever since.

Magellan is probably not the next Platinum Asset Management.

Kerr had one foot out the door, Mr D has not. Platinum were probably victims of competition, and they had high fees (in the before time, when you could) and to be honest, their listed investment vehicles were always highly rated but never really did me very well. So they were probably just a bit old and tired…


An Afterpay before Afterpay

So if Magellan is not the next Afterpay (chuckle) and definitely not the next Babcock and Brown, and I don’t think that it’s necessarily the next Platinum Asset, then what is Magellan?

Here is the Magellan chart since 2011. From what I can tell, Magellan was already an Afterpay before Afterpay – what a cracking ride!

From $1 to $75 a share. Profitable the whole way. If you wanted to get an intelligent, sensible view on anything, Hamish D was one of the go-to guys – still is! There are probably only a handful of people I would put on that list (and yes, Marcus Padley is on there – don’t forget we give you two months’ free access to his newsletter when you join the Marketech Focus club!).

The biggest problem in a bull market, and the problem that Douggo has (only I can call him that!), is exactly the thing that gave him that “investor fame” in the first place.

He was a sensible, rational long-term investor who did not chase high-risk hype driven stocks just because they were going up. From what I have read, he committed the cardinal sin of staying in cash a bit too long when the market rallied hard. He didn’t pivot towards the market darlings quickly enough – because those market darlings did not tick his boxes. So he must therefore still be a sensible, rational long-term investor?

We all know it’s easy to let human nature take over. I will literally buy something big when I am feeling a bit down to make myself feel better – but only if I can get it Right Noooooowwww!

So I reckon, at a guess, that they lost that mandate because they underperformed in a bull market and the investors want performance over all timeframes. I reckon a few others will probably follow them out the door. I reckon the press will keep asking questions about “whether he’s lost it” or whether his missus and his mate leaving are going to mean that’s the end of the Magellan dream run.


Not the end for Magellan

Personally, having seen a few cycles, and knowing that “Afterpay”-style revenue-growth-no-profit companies come and go, and eventually either succeed or fail, it’s easier to underperform in a bull market than it is in a bear market if you are a sensible investor. Especially as this isn’t what you would call a normal market.

And people’s greed ratchets up a notch or seven when everything is going gangbusters, and they think shifting into the better-performing funds, or shifting their focus from the boring old “boomer stocks” into the current out-performers is a good strategy.

And they look at the fees they are being charged, and wonder why they would pay someone a fee to underperform the index, when they could find some new guy with lower fees or – even do it themselves! That’s why we’ve seen all these new online trading apps pop up – they suck, but they are very, very cheap… perfect for the get-rich-quick, buy-now-pay-later, get-chocolates-at-the-check-out mentality.

But I think you should judge a fund manager in a bear market, not a bull market, and this bull market has only been going for two years. I say – don’t judge them as they lose some clients due to “still positive returns just not the highest return”, and wait to see how much they protect your downside when the market flops.

You should judge them when they are still holding Afterpay-type companies, and the market turns south. Or still holding Tesla when that penny drops.

Judge them, and negatively. Then you’ll know they were just fad-chasers, not fund managers.

You don’t want a fund manager to drop his multi-year, highly profitable long-term strategy to chase shiny things for short-term returns. Or because he breaks up with his missus, or because there is a reshuffle in management, or because a big client leaves.

So I don’t think this is the end of Magellan. Just a really tough time…

And, don’t forget, through all of this, there was a MASSIVE short position, so when it bounces, it will probably bounce hard!

(And finally, a Merry Christmas to all. There’s good news, your Christmas present from Marketech is still coming, but also bad news, it got delayed… good things come to those who wait!)

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