As Omicron shakes the market, was Hamish Douglass right?

Magellan Financial Group (ASX:MFG) and its founder Hamish Douglass have been a lightning rod for investors, analysts and the media in recent months. After over a decade of outperformance, Magellan’s flagship global fund came back to earth, with Douglass’ unwillingness to chase returns in ‘value’ stocks seeing the fund underperform.

Combine that with the decision to invest in up-and-coming investment bank Barrenjoey and the unfortunate events around the ANT Financial IPO, and it couldn’t get worse for the group. More recently, fast-growing but similarly performing global manager, GQG Partners (ASX:GQG) has seemed to attract funds away from the group.

Then came Friday, when the first rumblings of ‘another’ mutation of the coronavirus, dubbed “Omicron” by the WHO, saw significant volatility re-enter the market. Among the hardest hit were the most popular “value” and “recovery” plays, into which a growing list of fund managers had been flooding in the pursuit of short-term returns.

Few may remember, given the short-term focus of the market, that Douglass warned about this on several occasions in the last 12 months, something we covered here.

The concept of mutations has been raised in almost every major Magellan update since the beginning of 2021, with Douglass actually derided at one point for appearing to be spend more time on virology (the study of viruses) than on effectively managing his underperforming portfolio.

Are the tables about to turn? As initial news about the mutation emanated from South Africa on Friday, the market tanked, but with a particular focus. Many of the most popular and widely held stocks suffered significant sell-offs, including Flight Centre, Qantas, Oil Search and Pilbara Minerals.

Such is the nature of extended bull markets, with this one now over a decade old. Naturally some excess creeps into markets. The last 12 months alone has seen a flood of new managers, in everything ranging from small to large-caps, technology to resources, private equity and venture capital, launching their own strategies after periods of significant and strong performance.

In many cases, they have delivered exceptional returns, albeit on a short-term basis, during a period dominated by momentum. But as always, you only real know the quality of risk and funds management when times get tough. Historical returns are built over many years, not just a few.

As usual, an initial bout of volatility saw a flood back to ‘quality’. Previously unloved sectors, including utilities and healthcare, which couldn’t find a buyer for the last 12 months, were immediately back in demand. Interestingly, Bitcoin also fell around 8 per cent on the day, as it appears many newer investors see it as a risk asset, rather than a hedge like gold bullion, which rallied strongly.

Moving back to Magellan, Douglass had flagged his preference to focus on building a ‘resilient’ portfolio that was prepared for both inflationary environments, but also unlikely to see the selloff that came should a mutation eventuate. The initial signs are somewhat positive in this regard, with the likes of Microsoft, Netflix and even Alibaba outperforming the broader market.

Of course, only time will tell how long this sell-off lasts and if the latest COVID mutation is particularly dangerous.

Drew Meredith

Drew is editor of The Inside Network's publications and a principal adviser at Wattle Partners.