How to find the next 10-bagger (Part III)


In this series of articles, I am taking a look at the history of some of the ASX’s best performing stocks. In particular, I hope to address the following questions.

  1. What did these companies look like at the start of their rise?
  2. Is it possible to identify tomorrow’s 10 baggers?

Magellan Financial Group Ltd (ASX: MFG) is a fund manager specialising in international investments offered to both retail and institutional clients. If you had bought $10,000 of shares in the company at the beginning of March 2009, they would be worth more than $700,000 today plus you would have also received dividends totalling $70,000.

Admittedly, buying shares in a fund manager at the height of the GFC would not have been easy given market sentiment at the time. However, Magellan was trading at a 50% discount to net assets half of which were unencumbered cash and so there was little chance of losing money.

When Magellan was launched at the end of 2006, the company raised $100 million to ensure that there would be no financial pressure to chase short-term results. This is an example of the long-term approach of founders Hamish Douglass and Chris Mackay who are both still major shareholders in the company today.

Prior to Magellan, Hamish Douglass was co-head of Global Banking at Deutsche Bank in Australasia and Chris Mackay was CEO of UBS in Australia. Their backgrounds implied that they had both the contacts to market Magellan’s funds effectively and the skillset to wisely manage international investments.

Magellan was and is still different to most other Australian retail fund managers in that it only manages international funds. In 2009 it may not have been possible to foresee the subsequent surge in popularity of overseas investing, but Magellan was clearly targeting a gap in the market at that time.

It was also clear that management and shareholder interests were well aligned as Hamish Douglass and Chris Mackay gave up considerable compensation in 2008 in return for equity in Magellan. They had previously been entitled to large management and performance fees but from March 2008 were paid a flat $250,000 per year.

Along with non-executive director Paul Lewis, the pair also bought a significant number of shares on market in October and November 2008. Paul Lewis bought 250,000 shares which are worth more than $6 million today whilst Hamish Douglass purchased 150,000 and Chris Mackay bought 80,000.

Not only were the interests of management and shareholder aligned, but Magellan also invested directly in its managed funds. This demonstrates that management were not chasing short-term performance fees at the expense of long-term returns.

Perhaps another sign of things to come was that the unlisted Magellan Global Fund delivered a return of 2% in the year to 30 September 2008, outperforming its benchmark by 20%. Although a year is generally too short a time period to judge investment ability, it is certainly more difficult to perform well when markets are in turmoil.

Fund management companies can make fantastic businesses because they have the potential to grow quickly using little capital. However, success depends on the ability of those in charge which is often hard to evaluate.

In 2009 the background, share purchases, investment approach and communication style of Magellan’s management team provided hints of the company’s rosy future. The fact that it was selling for less than half its asset backing made it an extremely low-risk investment proposition.

How 1 Man Made 100x His Money After 50

Few know, that as Warren Buffett blew out the candles on his 50th birthday cake, he had just 1% of his current fortune. Think about it: At an age when most give up hope, Buffett was just getting started on the remaining 99% of his fortune. Goes to show you that it's never too late for you to potentially get rich. Which is why we've gathered the strategies we learned from Buffett, distilled them down to 11 simple lessons, and put it in an exclusive report for you to claim. Just click here to learn more about this handy investing guide.

Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.