Emma Kirk - Beyond Oz
We spoke about the characteristics that Magellan looks for in companies:
- High Switching Costs: Companies who are not so easy to replace or switch from, e.g. Apple or Microsoft.
- Economies of scale: Companies that do not incur any extra cost for adding new users once the business is set up, e.g Google.
- Network effects: Companies who have two parties on either side of a transaction to makes it stronger, e.g. Mastercard.
- Strong brands: Brands that already have a strong reputation regardless of the market condition, e.g. Louis Vuitton
“We're only, we're only about 2.4% of global markets. And I think that's the thing. We very much have a home bias. We love our Aussie stocks. We love our franking credits and there's nothing wrong with that, and it's a great way grow your wealth over time. But what you're missing out on is exposure to particular sectors that Australia just doesn't have. These are the likes of technology and consumer staples. The Australian market's dominated by resources and banks. And so you're missing out on different types of businesses that are growing exponentially.”
EPISODE TRANSCRIPT CONTINUES BELOW
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EPISODE TRANSCRIPT (UNEDITED)
Shares for beginners.
Emma Kirk (6s):
You definitely need diversification. You don't want all your eggs in one basket. And it's also understanding your own risk tolerance level. I am a person though that when I do my retirement planning, I'm planning to live to a hundred. So I'm in the camp sometimes. Like I think you can reduce your risk when you get into retirement, but at the same time, move it a long time to live in healthy living. And so you don't want to come too far back down the risk spectrum so that you end up running out of money.
Phil Muscatello (31s):
G’day and welcome back to Shares for Beginners. I'm Phil Muscatello. The Australian share market makes up about 2% of global markets. We're tiny and there's a smorgasbord of investments around the planet that we miss out on if we just invest here in little old Oz. To talk about these markets, I'd like to welcome Emma Kirk from Magellan financial group. Emma is the key account manager listed funds at Magellan Magellan, almost rock stars in the investment world. I know that from the Australian shareholders association, they love Magellan there because you've been generating pretty decent returns over many years, mainly in international markets. But before we get started in that, tell us about yourself and how you got started in the finance industry.
Phil Muscatello (1m 14s):
Emma Kirk (1m 14s):
So I'm a veteran of financial services. So I, I started in financial services when I was 18, but I was very lucky. My parents were financial planners. And so I grew up talking about all things, financial services when I was in year 12. I, I can remember when super guarantee came in and I did it as my economics assignment at school. I was very excited about it, but my parents worked for a company called retire, invest and primarily focused on retirees and they used to run seminars and I would carry around the sandwich trays at the end of those seminars. And so for very early on in my life, I had high exposure to the impact of good financial planning and by getting educated, how it can actually make a massive impact on your life.
Emma Kirk (1m 57s):
So that was kind of my first entry point. I then went and worked at amp for 10 and a half years, starting when I was 18. And I did a variety of roles across superannuation insurance, financial planning, funds management that was in Brisbane. Then I moved to Sydney and I joined a company called security, which was owned by as guard, which was owned by George. And we eventually got taken up into BT financial group. So I worked in kind of as a second in charge for licensee kind of thing. So I got to understand how an Australian financial services licensee works. And then my husband and I had a quick career change. I went and did executive search in financial services for a little while. And then I actually came back to a and Zed and helped build their advice remediation framework.
Emma Kirk (2m 39s):
And that might sound like a big, long word that's way. Now, if you're a member of the Royal commission and looking into the quality of advice that were given to people, well, that was actually working out how to rectify 10,000 pieces of advice gone bad. So that was super interesting. And that's a really good insight as to how people can, they're very trusting of people in financial services, which is a great thing. You've got to have trust, but it gave me a lesson in the fact that you still should do your own research. You can't just hand over that responsibility to someone else you can ask for guidance, but ultimately you should make sure you know what you're doing. And if that person is doing the right thing by you. So that was a good, good lesson for me.
Phil Muscatello (3m 20s):
If I could just interrupt for a minute, it's great that you had this background right from an early age. I think a lot of families don't even talk about money. It's not even something that ever comes up in a way. You're very lucky that that's happened as well, but people now also have to realize that they actually do have to grasp their investing future don't. They
Emma Kirk (3m 38s):
It's so important. We do a great job of making it full of jargon and terms that people can understand. But if you can peel it back, there was some real basic principles at play that if you can just get your head around, and this is why your podcast is so amazing, you can navigate your way through it. And you can also kind of tell when somebody's telling you something, that's probably not true. You kind of your ability to sense whether it's too good to be true or not actually comes into play. That's really important.
Phil Muscatello (4m 6s):
Yeah. Well, I just also think it's important that people, like you say that you do your own research, you do start understanding what's going on with investments, so you don't get ripped off.
Emma Kirk (4m 14s):
No, and that's it, it's your money. You've worked hard for it. So whether it's inside super outside, super it's your money. And so you're the custodian of it. And you want to make sure that you're being the best custodian that you have, because it means that when you get to retirement, when you get to have the joys of having all that effort, you know, you get to enjoy it and have a sense of comfort. And hopefully that's what life's about. So yeah, no, it's a good thing to do. Okay. And finally you ended up at Magellan. Yeah. And so four years ago I was approached to join Magellan by Frank castrati, who some of your listeners may know I've known Frank since I was 18. And he asked me to come and join Magellan. And I was dumbfounded because I've always been a big fan of Magellan that I actually invested pretty much all my funds into Magellan funds before I ever worked here.
Emma Kirk (4m 57s):
And so the opportunity to work for such an amazing company, I jumped at the chance and I'll be really honest with you. It's everything that it says on the wrapper. It's such a great company, great culture, good people, really invested in, in making sure that people understand what we do and just bringing out new and interesting stuff for people that's hopefully solving their problems. So it's been a wonderful journey
Phil Muscatello (5m 19s):
And what's it like as a woman working in finance? I think a lot of younger women often don't look at the finance industry as a career, but how are you finding it?
Emma Kirk (5m 28s):
Oh, look, I love it. I think it's an extremely rewarding career path. And I think there are lots of opportunities where I think a lot of women worry about coming into financial services. Firstly, I think it's, there's a, probably a lot of maths involved in it. They kind of go, oh, it's numbers. I don't think I'm great at mathematics. I don't want to go down that pathway. It's actually a lot less mathematics than you'd imagine. So that's kind of the first thing. It's actually more about relationship management. It's more about being able to read people, understand them and, and help them solve a problem. That's pretty much what financial services is for me. The second thing I think is, and this actually comes back to when I went off and did executive search for a little while. I interviewed hundreds of people in financial services, male and female.
Emma Kirk (6m 11s):
And one of the things I learned during that was that if I put a role description in front of a female, and if she had about 80% of the skillset for it, she would say, I don't think I can do that role. I don't think I've got the right skills for it. If I put the same job description in front of a male who had a similar skill level, that would be like, yeah, not a problem. Yeah, I can do this easy. And so the, I found there was a real distinction and it comes back to women's confidence. They tend to think that unless they can do something perfect and they've got a hundred percent of the skillset that they shouldn't have a go. And I think that's the biggest thing with that is that in any industry, you're not going to know everything upfront. Part of it is learning on the job. And so it's having the confidence to put yourself out there and going, all right, can I can do 80%?
Emma Kirk (6m 55s):
I can learn 20%. And so having good mentors on the way is really important. I had some great mentors, both male and female. And I always found that if I was willing to ask the question, they were willing to answer it. And so I think the biggest thing is that more women should join financial services, but have the confidence and also craft a way, go find those mentors, go ask those questions, be annoying. Like, you know, I always found every time I ask a question, somebody answered it. And I learned over the years that there's no such thing as a dumb question. Nobody knows everything.
Phil Muscatello (7m 26s):
That's another thing as well, is that not all the jobs are about finance itself, these days, the marketing side of it and the social media side of it. And those kinds of skills that young people have far more important because the communication dynamic has completely changed.
Emma Kirk (7m 39s):
Yeah. And it's far more important now because there's so much information out there. You know, you talk to us about social media then. I mean, there's people on Tik TOK who are just giving advice. And so wouldn't it be great to actually have people who are able to communicate to the millennials and the gen Z, but actually give them proper information in a way that's digestible to them. And I think that's going to be the way of the future to be quite honest.
Phil Muscatello (8m 2s):
Yeah. Let's have a look at Magellan. The history of Magellan, a brief potted history of Magellan.
Emma Kirk (8m 7s):
I, it, I will give you the succinct version and we can deep dive into any part as we go through. So Magellan was formed in 2006 by Haymitch Douglas and Chris MCI. And when they first set up, they established the first fund, which was called the Magellan flagship fund, which is now known as MFF capital. So some, some of your listeners may have heard of MFF capital. It's currently run by Chris MCI and it's a listed investment company
Phil Muscatello (8m 32s):
And that's international. We're looking at international investments, aren't we?
Emma Kirk (8m 36s):
So I'll give you the background quickly as to why we're called Magellan, because that's also interesting as well. The reason why we called Magellan is that Peter Lynch was an amazing fund manager over in the U S and he had a fund called the fidelity Magellan fund and it was the best performing fund in the U S for years. And so the reason why we called Magellan is in homage to Peter Lynch, one up on wall street, one of them all straight and learn to earn. And so that's the reason why we have that name. And it was specifically around us actually investing in global equity. So we're a global equities house and always have been. And so MFF was started as the first fund. And then on the 1st of July, 2007, we launched the Magellan global fund.
Emma Kirk (9m 16s):
And we also launched the Magellan infrastructure fund, which is run by Gerald stack. So those funds have been running since one, July, 2007. Great time to start a fund just before the GFC. So a really good test of those funds in that particular downmarket. So they were the main funds from there. We, we then add added a hedged and unhedged version. So we can talk about currency hedging at any time if you want, but we added those versions of the funds,
Phil Muscatello (9m 43s):
Just briefly talking about hedging. That's just to protect against movements in say the currency that's going to occur. It's one kind of hedging on our hedging co covers a whole range of things. This is
Emma Kirk (9m 55s):
Currency hedging at the way, I like to explain it. You've just got to imagine that let's say you gave us $10,000. We've got 10,000 Australian dollars and we then have to go and buy the underlying stocks that we own in the currency in which they trade. So if we were going to go buy Facebook, we'd go and convert it to U S dollars. If we were going to go and buy Reckitt Benckiser, which is UK, we buy pounds. If we were going to buy something like Nestle, it would be in euros. And so we convert the money first, buy the stocks. And what that means is that you're holding those stocks in that particular currency. And so the value will go up and down and have the overlay of currency with it. You can also get a currency hedge version where we take out forward contracts in relation to that currency, which effectively takes currency off the table.
Emma Kirk (10m 38s):
There's no right or wrong and currency. If you can predict what's happening with the currency ahead of time, tell me because it's really hard to predict, but one of the psychologies around it that I talk to people about is more often than not. You've probably got most of your investments in Australian dollars. So to go into global equities, maybe unhedged might be a good way to do that because you're not only getting exposure to those actual foreign stocks, but also you're getting some diversification across your currency as well. So no right or wrong in it. And over time, they tend to work out to be very similar in returns, over five to seven year period. Anyway, so that's aging <inaudible>,
Phil Muscatello (11m 20s):
I believe you've also got the first active ATF that was ever on the market in Australia.
Emma Kirk (11m 25s):
So in 2015, we launched Australia's first active ETF and you might go, my active ETFs have been around forever and they have been in the U S and Canada for quite some time. Traditionally in Australia, it was only ever passive or index ETFs. And the reason that was, was around disclosure. So index and passive ETFs disclosed their entire portfolio on a daily basis. So you can have full transparency about what's in there. If you're an active fund manager, which is what we are at Magellan, we've got some intellectual property that we want to ensure we keep otherwise people could replicate our portfolios. And so we worked with the regulators and also the ISX to work out a way whereby we could put an activator on the market, but have a delayed disclosure in terms of our portfolio.
Emma Kirk (12m 10s):
So what you get with our activity F says, you get an intraday indicative net asset value. So you can see every second of the day what it's worth. So you've got a measure of that. And then from a portfolio disclosure, we do quarterly portfolio disclosures with a two month lag. So we can protect our intellectual property, but investors can actually see the true value.
Phil Muscatello (12m 29s):
You don't want to put your, all your cards on the table all at once there.
Emma Kirk (12m 32s):
No, but you want to know you want price transparency. You want to know that what you're buying is worth, what it's worth, and that's where the intraday indicative net asset value is so important. And so we worked through that with the regulators and we're able to allow that. So you can actually see the inf on our website live for all our funds. And it means that you can trade in active ETFs and get access to these wonderful funds on an exchange. We do that in 2015, and we followed up with more funds. The first one was the Magellan global equities fund. And then we followed with multiple and now all of our funds are listed on that on exchanges.
Phil Muscatello (13m 6s):
Mm. And you can actually even buy shares in Magellan itself, the whole company
Emma Kirk (13m 11s):
You can. Yes. W which is Magellan financial group, but it's, it's very different to the underlying funds. So the funds themselves are a basket of global companies from around the world that we put together. Whereas Magellan financial group is a stock that system, the ASX, and you're buying an Australian funds management business.
Phil Muscatello (13m 30s):
Oh, okay. So if you buy the stock itself, you're not actually buying all of those baskets of international stocks.
Emma Kirk (13m 37s):
No, you're, you're not actually buying into those funds. You're buying into the revenue that the fund manager produces off of that formative Magellan. Yeah. Yeah. But I would say that's very singular versus the funds. You've got access to 20 to 40 different stocks in those portfolios.
Phil Muscatello (13m 52s):
And then Ellie is a new one. That's brand new, isn't it? Yeah. It's interesting.
Emma Kirk (13m 56s):
It's funny how it's only just starting to get some exposure. Aly itself has been around for over nine years. It was started by John savvier who some of your listeners may remember actually was from perpetual. And he ran the perpetual industrial share fund, which was one of Australia's most well performing funds for very long time. He started the business early, after he left perpetual and together with Matt Williams. And also now Emma Fisher, they started early funds management. Magellan purchased that business in 2018. And we launched the Ailey Australian share fund, which goes under the ticket code, a S F on one, June, 2019. So it's actually three years old. But what we did was we actually wrote into the trustee that this trust could be both listed and unlisted.
Emma Kirk (14m 42s):
And it took a couple of years, but as at the middle of 2020, we finally got that through as well. And we created what's called a single unit structure. And that enables investors to come in via an application form. So off-market, or they can buy on an exchange on market and actually come into the same trust. If you come in via application form, you get a security holder reference number and SRN, just like any other share, you get an SRM when you do an initial public offering. So if you do an IPO, you get given an SRN, or you can buy on your hin, which is your holder identification number. If you've got an online share trading account or a stockbroking account, and you come in on healing, so you actually go inside the same trust.
Emma Kirk (15m 23s):
And if ever you want to swap between the two of them, you can, I call it the house with two doors and you can swap over between the two. And so we did that with Ellie. So that was like the next evolution of the active ETF to be this single unit structure. That's kind of quite revolutionary, but
Phil Muscatello (15m 38s):
The reasons for going in different doors, I think
Emma Kirk (15m 41s):
It was one of those things that hadn't been done. So, and it's like, why hasn't it been done when I let's have a go at doing that for text different tax purposes? Well, you don't get any CGT view go between the two. So previously we had the Magellan global fund. And when we launched its active ETF version, they're two separate trusts. So if you ever wanted to go from the unlisted world to the listed world, you'd have to sell out crystallize a capital gain and buy in this new single unit structure enables you to go between those two worlds of listed versus unlisted without having a capital gains tax event. And so that just gives more flexibility to investors to determine what suits then since rolled this structure out, across the rest of our funds or nearly all of them, a lot of people have gone over to the listed side of things.
Emma Kirk (16m 23s):
There is very much a groundswell of people wanting to have the portfolios listed and they can then see them in the one spot on their online share trading a candle with their stock broker. Yeah. So
Phil Muscatello (16m 34s):
They become like an ETF. That's just like any other ATF that you'll see in your portfolio and you can track. Yeah.
Emma Kirk (16m 39s):
And that's it, that transparency is crucial for people nowadays comes back to what I said about that trust issue. It's like, well, let's make sure you can actually see what you're investing in and see the worth of it instantly.
Phil Muscatello (16m 50s):
That's interesting that I have the dynamics have changed in that and that people do want to see their investments like this, and you're really responding to a market desire. Yeah,
Emma Kirk (16m 58s):
It is. And even some people don't realize they want it until they've got the ability to, to access it. You know, I didn't know I needed this. Oh, I think I need it. So that is very much a play. And it gives people the option. We're not forcing them down one pathway or the other, it's literally up to them and they, they can choose whichever pathway, whichever door suits them to come into the fund. Mm.
Phil Muscatello (17m 20s):
Okay. Well, let's have a look at global equities. Why should people be looking at global equities? I know we said at the start it's because, you know, we're such a tiny pimple on the world markets in Australia, but we are, we do punch above our weight, hopefully, right.
Emma Kirk (17m 33s):
We're only, we're only about 2.4% of global markets. And I think that's the thing. We very much have a home bias. We love our Waze stocks. We love our franking credits and there's nothing wrong with that because I'm going to talk to you at the end a little bit further on about Aly, and it's a great way grow your wealth over time. But what you're missing out on is exposure to particular sectors that Australia just doesn't have on. These are the likes of technology. And there's also a number of areas, particularly in relation to consumer staples, the Australian market's dominated by resources and banks. And so you're missing out on different types of businesses that are growing exponentially. And so I was like to talk about at Magellan, when we look at these companies, overseas is kind of four key things that we look for in these quality stocks.
Emma Kirk (18m 21s):
And I'll give you a couple of examples of them. Cause I think that it might highlight why global investing is actually really important apart from the return. So the MSEI has outperformed the ASX over the last decade. Tell us what the MSEI is. It is the Morgan Stanley composite index. So it is an index of 1,600 stocks around the world. And it's just a benchmark. That's primarily used to talk about global markets, just a global benchmark,
Phil Muscatello (18m 47s):
Every major market in the world is working. Yeah.
Emma Kirk (18m 49s):
And so that gives you an idea as to what are the likely returns that you can get investing in global markets. And so it's outperformed the ISX over the last decade. And that really comes back to the fact that technology has been growing at an exponential rate. I always love the story about the number of years. It takes for different technologies to reach 50 million users. And so if you go back in time, you know, electricity took 46 years to reach 50 million people. The telephone took 36, but if you look at more recent technologies such as smartphones and the internet, you're kind of looking at four to five years, smartphone took for Facebook, took two years and the game angry birds took 35 days.
Emma Kirk (19m 30s):
So, you know, you've got this technology and it's getting faster and faster. And so in the last decade, we've seen this growth in technology companies and the returns on them have been phenomenal at Magellan. What we're trying to do is we're trying to find those companies that are going to be the beneficiaries from that change and disruption, particularly in technology. But we also want to marry that up with companies that are going to be resilient to that change because not everybody's going to be, you know, the winners, some people are going to be disrupted. So we want to find those companies that are also insulated from that disruption. And so one of the key areas that we look at is four kind of key qualities for companies.
Emma Kirk (20m 10s):
And the first is high switching costs. And this is where technology companies are really great at this. So Apple's a good example of this one. So I don't know about you, but I own an apple watch. I own some AirPods. I own a Mac. I also own multiple iPads. I can never leave apple. They've got me, I'm a customer for life. And that's the thing is the switching costs might not necessarily be a dollar cost, but it's, it's the psychological cost. Yeah. I can't leave them. Microsoft is another one where you've got high switching costs. We use word Excel, PowerPoint. If I want to use an different kind of spreadsheet, nobody else is going to use it.
Emma Kirk (20m 51s):
So I can't actually leave Microsoft. I have to, because I've got high switching costs associated with doing that. So that's kind of one of the key attributes. And there's a number of international companies that have got a real hold over us in relation to those high switching costs. The next one is economies of scale. And this is where these global companies have got an advantage over anything in Australia. They have got massive economies of scale. And so for your view is economies of scale essentially says that once, you know, you've got you set up costs in setting up your business, but once you've kind of done that initial set of costing, it doesn't cost you anything more to bring on an additional user. So if you decided to use Google today to do a search, it doesn't cost Google anymore. For more people to use their search engine, the costs have already been sunk and therefore they have economies of scale.
Emma Kirk (21m 36s):
So Google's a great example of a company that has amazing economies of scale. Another one that's really good is Costco. So I don't know if any of your viewers go to Costco, but they're amazing in terms of the scale that they've got and they can make amazing revenues actually more off of their membership than their margins on their goods. But that economies of scale gives them that advantage. The next one is network effects. And so what we look for here is network effects essentially says that if you've got two parties on either side of a transaction, it gets stronger. Once again, the more people that use those different sides of the transaction. So good example of that space or MasterCard. So visa and MasterCard are primarily used around the world by people to buy goods and services.
Emma Kirk (22m 17s):
And you've got merchants who have got the, the machines in their store and you've got the card holders. If I decided I'm going to come up with the AMA credit card that's if you feel, I want you to take the Ima credit card, you'd be like, oh, well, that's great. Is anybody going to accept it? I'm like, no, no, I haven't set it up with the merchants yet. And if I went to the merchant and said, can you accept my card? They were like, how many customers have you got none? So that network effect is really important. And so visa, MasterCard have got great network effects. And then the final one is strong brands. So we look for companies that have got amazing brands that are really resilient, kind of, regardless of what's happening in the world. And some really great examples of that are things like Louis Vuitton, Moet, Hennessy, you know, I could buy a handbag for a hundred dollars or I can buy one of theirs for thousands of dollars.
Emma Kirk (22m 60s):
Functionally, it's still a handbag, but the allure of the brand and the prestige that goes with it means I'm going to pay more for that particular item. And so there is some real global players that have got that advantage from a strong brand point of view. So in summary, you've got these, these amazing things that pull us as consumers, that as an investor, you want to be a part of on the global stage.
Phil Muscatello (23m 22s):
And what's the code of that Louis Vuitton. It's actually one stocky kumbaya, isn't it? The
Emma Kirk (23m 26s):
MPH is the stock code. And so Louis Vuitton, Moet Hennessy owns a number of luxury brands around the world. So Louis Vuitton is one of there's a Moet. They have Dom Perignon. They have so many different luxury brands that sit underneath them. And primarily most of their revenue actually comes from Chinese consumers. So they are massive in terms of their revenue. I think about 60% of their revenue comes from Chinese consumers.
Phil Muscatello (23m 53s):
It's a great businesses. Can also be infrastructure. Tell us about infrastructure and global infrastructure. What is it? And where
Emma Kirk (23m 59s):
Is it? So the way I describe infrastructure is I like to take people on a bit of a journey in a day in the life of Emma, because I use infrastructure all the time. So before the pandemic, when I was free, I would regularly travel around and do presentations. And so any day for me would mean getting up, getting in my car, driving down a toll road to an airport, parking in the car park at the airport, getting on a plane, flying to a destination. And then when I get up to the end, I might catch a train, make a few phone calls on that train, get to the other end, do a presentation, go to a hotel room, relax, have a nice hot shower and a nice hot meal at the end of that and go home and do the same thing in reverse throughout that day I've used infrastructure.
Emma Kirk (24m 46s):
And so infrastructure are the essential items that you need on a day-to-day basis to keep a society going. They are running water, electricity, gas, toll roads, trains, telecommunications towers, and a whole range of different things that are essential for communities. So that's that's infrastructure. I use it every day. You use it every day. And what we do at Magellan is we look for global listed infrastructure. So these are infrastructure and utility companies that are listed on a stock exchange. So we want them to be liquid, meaning that if ever we had to sell them, we could sell them on the market and get our money back as opposed to private infrastructure where your capital can be locked up, we needs to be liquid.
Emma Kirk (25m 29s):
So first thing to note it's listed, and then what we look for. We've got a definition that we look at. So there's about 300 global listed infrastructure and utility stocks around the world. And what we do is we actually take out a number so we can classify them into three key buckets. The first is utilities. So that's gas, water, electricity. The next is transportation infrastructure. And that is airports, toll roads, rails, ports, telecommunications towers, and things like that. And then you've also got social infrastructure, which is things like prisons and hospitals, where the government has taken it out to the private sector. That's only about 1% of the universe.
Emma Kirk (26m 11s):
So they kind of these three buckets. And what we do is we apply a definition overlay, and it's really important because it takes a number of risks off the table. So the overlay that we've got is we take off any particular stocks that have got exposure to three key areas, commodity price, risk competition, risk, and sovereign risk. And I'll run through each of those just briefly for you. So commodity price risk is where that particular provider has got exposure to commodity prices. So a good example of that is electricity. So you and I, when we turn on a light switch, that electricity goes through four phases before it gets to us, it gets generated. So you've actually got a power generation, goes on to transmission lines.
Emma Kirk (26m 51s):
It then gets stepped down to distribution lines to come to our house. And then it gets sold to us by a retailer. Those two ends of the spectrum generation and retailing we exclude from our universe. And the reason being is that electricity generation is so volatile in terms of the commodity prices that sit behind it. So electricity prices can go from a very high number, even down to a negative number where it's a perfect source of energy. You can't store it very well at the moment. And so it's a use it or lose it type scenario. So you're basically paying whatever it is on the day based on supply and demand. So electricity generation is out of it. And that's an example of commodity price risk with the generation competition risk is a good example sitting at that other industry spectrum with retailers.
Emma Kirk (27m 34s):
So we all have the phone call, not as much anymore though saying, could you, do you want to change your electricity provider? Yeah, I
Phil Muscatello (27m 39s):
Think they've shaved off as much as they can. I think they
Emma Kirk (27m 41s):
Have, I think the downs was low as they possibly can get, but essentially they can basically undercut each other. And so we see that competition risk as too high. So we exclude it. So we really like monopolies and oligopolies. And then the last one is sovereign risk and that's where a government can step in and make you change the way you use your infrastructure or utility asset and not compensate you for it. So examples where that occurs are things like China and Russia and Indonesia, the government can actually step in and say, we're going to make your toll road toll free for this particular period. And you've got no recourse. So those kind of three things are taken off the table for infrastructure. And then what we're left with is this beautiful universe of 130 stocks.
Emma Kirk (28m 22s):
And we love infrastructure because it is necessary for day-to-day life. We can predict the cash flows of these companies with ease and also particularly with U S utilities and even utilities around the world. They're even more predictable because the rate of return that they can earn is actually set by the regulator. And so, you know, it's actually very easy to go, okay, what's the rate of return that we're going to get from them. So infrastructure is a really interesting asset class that can provide dependable, predictable cash flows over time. It's never going to be 20% returns. It's going to be CPI plus 5%, but it's a great addition. It's a nice defensive stock. And if the definition is correct, it can really take risks out of your portfolio.
Phil Muscatello (29m 6s):
And that's the idea with asset classes, as well as people got to understand that you don't just invest all your money in the share market. There's other asset classes where you should be putting your money depending on your age as well. You know, like the older you get, maybe the less risk you want to take. Yeah.
Emma Kirk (29m 19s):
I think it is one of those things. You definitely need diversification. You don't want all your eggs in one basket, and it's also understanding your own risk tolerance level. I am a person though that when I do my retirement planning, I'm planning to live to a hundred. So I'm in the camp sometimes. Like, I think you can reduce your risk when you get into retirement, but at the same time, we've got a long time to live and in healthy living. And so you don't want to come too far back down the risk spectrum so that you end up running out of money. So that's my little take on it. Yeah.
Phil Muscatello (29m 51s):
You'll be working till you're a hundred as well. Why don't you,
Emma Kirk (29m 55s):
I'm going to retire and enjoy it. That's what I want to do.
Phil Muscatello (29m 59s):
So what can Magellan offer investors who are new to the market and who are just taking their first steps in investing? How can you help new investors?
Emma Kirk (30m 9s):
Look, I think the way that we can help investors is that we give them access to the world's best companies in one transaction. So the beautiful thing about the Australian financial services industry with having our funds available on exchanges. So exchange traded funds ours as active ETFs, but also, you know, passive ETFs and index ETFs. These are a great way for people to gain access to, you know, companies around the world in one transaction, on an exchange here in Australia. And I think that a lot of people tend to think that they have to go and trade stocks in the U S and they have to understand this. And there's some next big thing coming, and it's a quick win.
Emma Kirk (30m 50s):
Whereas in actual fact, the best thing that you can actually do is buy an ETF, whether it's ours or someone else's, which is a unit in a unit trust on an Australian stock market. So it's an Australian unit trust and you get access to the benefits of all those companies without the administrative hassle of having to go and do the foreign tax forms and you know, everything else that goes with that. It's actually quite difficult to do your tax when you own foreign stocks directly, if you hold them in an ETF or a unit trust here in Australia, you get a tax summary after 30 June, each year, that sets up all the components and it goes into your tax return
Phil Muscatello (31m 25s):
And the accountants love it. They really easy, everything just populates almost automatically. It's really
Emma Kirk (31m 30s):
Easy. And so I think that's the thing is we hear these people talking about, oh, I'm into this particular stock. And I bought this and I bought that. And that's great if you're sophisticated and you've got the time and the know how to do that. But in actual fact, the easiest thing that you can do is buy into an exchange traded fund or an unlisted unit trust. They're the same thing. It's just, the access is different. And if you dollar cost average over time, like I look back at my investment journey. I put a thousand dollars into a managed fund when I was 18. I put in a hundred dollars every month. And then as my pay increase, I put it up to $500 a month. And what was amazing was that when the market went down during the GFC, I got excited because I was buying more units.
Emma Kirk (32m 11s):
And so the magic of compound interest over time is amazing. So if you can start at it, even with a small amount buying little bits over time and just keep going, it's like a hockey stick. It starts out really, really level. And then all of a sudden it compounds on itself and it becomes this hockey stick that shoots up at the end. And the biggest friend you've got in your toolkit is time. So the earlier you start, the longer you leave it, the better off you're going to be. So I think, yes, I can give you access to global equities with Magellan, which is great and it's active. And it's amazing. But my advice, even though it's not supposed to be advice is just get started. Just have a go and you don't need to go into anything that is too sophisticated or too complex or unit trust or an ETF here in Australia.
Emma Kirk (32m 57s):
We'll give you the desired outcome that you need. If you just patient Emma, Kirk, thank you very much for joining me today
Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation