Magellan warns of potential ‘black swan’ event

Magellan has warned a black swan event ‘cannot be ruled out’ given the current banking crisis but reassured investors in its $7.2 billion Global fund that it has minimal banking exposure. 

In an update, Allan Pullen, portfolio manager and financial specialist at the firm, updated investors on the impact of the Silicon Valley Bank and Credit Suisse collapses on the fund. 

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The Global fund currently has 12% allocated to financials, including investment manager Brookfield Corporation and financial exchange data company Intercontinental Exchange. It then had a further 9% allocated to payments, including Visa and Mastercard, which both sat in its top 10 holdings. 

However, while it had previously held two banks, the management team had already begun reducing this exposure late last year.

“I should point out that given Magellan focuses on high-quality companies, we have no exposure to Credit Suisse or Silicon Valley Bank; they simply don’t pass our quality filter. In fact, the Global fund has only very limited exposure to banks,” Pullen said. 

“We did hold two banks last year as rate increases resulted in an improvement in profitability but sold one of those holdings late last year as economic risks rose. So our only exposure is a ~2% position in US Bancorp, one of the highest-quality banks in the industry.”

However, Pullen admitted the banking crisis with the collapse of three banks in quick succession had “eery similarities” to the start of the Global Financial Crisis (GFC), one that was heightened compared to 2008 by social media and digital payments.

“The US has thousands of banks and failures are not uncommon, but the size of SVB and the failure of three banks in quick succession has some eery similarities to the early stages of the Global Financial Crisis, and there was a risk of a loss of confidence in the banks more generally and bank runs. 

“When depositors lose their faith in an institution and try and withdraw their money at once, even a well-capitalised bank can be vulnerable, and in the era of social media and electronic money, this can happen pretty quickly.”

On the other hand, Credit Suisse, which had struggled with low profitability and governance failures, was designated a Globally Systemically Important Bank, which meant the regulators were able to step in and resolve the situation by selling it to UBS.

“Despite the surface similarities to the GFC, our broad view is that the banking sector is in a very different place to the GFC; capital levels are higher, credit losses are low, and profitability for most banks is solid. This is particularly true for the large retail banks in the US, Europe, and Australia for that matter,” he said.

Looking at the knock-on effect of the various bank collapses, Pullen was hopeful it would not become a second GFC but acknowledged it had led to increased economic risk.

“Combined with the rapid response from regulators, our view is that the likelihood of this spiralling into a second financial crisis is low. However, banks with weaker business models will continue to come under scrutiny, and given the importance of confidence in banking, further issues in the sector cannot be ruled out entirely.

“While we do think the risk of a full-blown financial crisis is low, the risk to economic growth has increased, and we can’t rule out a black swan-type event in the current environment.”