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Magellan Global Fund (MGF)

Our Q&As are emailed in our Saturday Morning Report, find the answer to this question below.

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Magellan Global Fund (MGF)

Hi James, I am a holder of MGF, Magellan Global Fund (Closed Class), which at $1.76 is trading well below its NTA of $1.955.  They currently have a share buyback in place and are buying back volumes of the stock almost every day.  Since the restructure of the fund early in December something like 18% of the share turnover has been under the buyback.  My question is what are they doing with the shares they are buying back? They also  operate MGOC, Magellan Global Fund (Open Class), which is the same portfolio as MGF but the stock always trades at its NTA.  If they were to take the cheap MGF stock they are buying back and re-issue (sell) it as new MGOC shares, they would be making a reasonable killing.  Similarly, if they just sold the underlying stock holdings in the MGF shares that they’ve bought back, they make the same margin. So my question is do you have any idea what is going on? Les

Answer

Hi Les,

This is a good question – a fair amount in it. MGF is a ~$3bn closed class fund which invests in companies in the global financial services, consumer and infrastructure sectors while charging a 1.35% management fee. When a company buys back shares, they buy them back then cancel them, incrementally reducing the share count and theoretically, each share still on issue should be worth slightly more. It also supports the share price and can be used as a way of closing the gap between the share price and the net asset value (NAV) of the fund, although it obviously doesn’t increase NAV given they are swapping $1 of cash for a $1 of stock.

The trouble is all about performance with the fund returning only 3.29% over the last 6-months, significantly underperforming its benchmark in the process. I can see the arbitrage you are sensing and Geoff Wilson over at WAM has also flagged this opportunity – i.e. buying  $1.95  of value for $1.75 hence the launch of his new LIC which is listing under code WAR.  

The reason they have launched MGOC is to ensure that investors (going forward)  can buy a structure that won’t trade at a discount to the asset base which is the case in an open ended structure versus a closed ended structure (although open ended structures also have cons). From my understanding, the best they can do is buy back shares on market in MGF and cancel the shares to try and close the gap, or greatly improve performance so the natural demand for shares increases, however they cannot do anything with MGOC to benefit from the discount given they are different entities. The only real way they can close the discount immediately is by winding up MGF, selling the securities and returning the funds to shareholders, however that’s unlikely to happen.

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Magellan Global Fund (MGF)
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