Glenn Freeman: I'm Glenn Freeman here on the sidelines of Magellan's Investor Roadshow in Sydney and I'm speaking with Hamish Douglas. Hamish, thanks very much for your time today.

Hamish Douglass: A pleasure to be here, Glenn.

Freeman: Issue on everyone's lips at the moment is coronavirus.

Douglass: I haven't noticed.

Freeman: This is the first time that it's been a social media pandemic. Is it different this time to some of the other cases like SARS, for instance?

Douglass: Well, it is different in terms of the amount of communication that's occurring, and I'd say the extent of the panic and the fear of the spread of coronavirus and certainly social media contributes to that. But social media is also (indiscernible) Facebook's doing the ability to really communicate to people and they're really trying to take away fake news around coronavirus. But there certainly seems to be a community panic issue around the world, the whole run on toilet paper in Australia I don't kind of remember when we had SARS and there was a bit of stocking up on things in SARS, but it wasn't to the extent that it's occurring at the moment.

Freeman: Yeah. In response to what's happening Have you changed your portfolio positioning within the Magellan Global Funds.

Douglass: Well, let's start at a high level. Did we do anything before coronavirus? No, we didn't. We were relatively fully invested coming into coronavirus. Actually, we changed our position at the beginning of 2019. When we changed our view on what the Fed was likely to do and interest rates. It is inevitable, a real pandemic is going to hit the world, whether this is the real pandemic or not is a debatable question. Is this a severe seasonal flu? Or is it truly of pandemic type proportions? Here I think it's too early to call that I think it's unlikely to call that, but so you don't seed in cash in the fear that a pandemic is going to happen even though it's going to happen, you just don't know whether it's going to be next year, or it's going to be 20 years away. Remember SARS was in 2003. So, after SARS you could have said, well, I'm really worried, in the middle of SARS, this is going to get terrible and sold out of markets. That could have been a very, that would have been a very costly thing to have done.

Now it's broken, and the data is broken. I would say the first thing is do you sell out of markets because of the panic that's occurring. I would argue that's a very unwise thing to do. I think it is completely speculative. Now, as this thing unfolds, whether it's really going to get severely worse, everyone's expecting it to get worse. So, we know it's going to get worse, but what how are markets going to price that? So, it could be that you sell out of markets at the moment in the hope that markets are going to get cheaper. But it could be the data comes out that it looks more contained, we are getting another major central bank stepping in here, and the markets could recover 10%, so selling out of markets and they recover 10% will be very costly. Or if you sell out and they go down, and then you take advantage of that you'll make some money. I think either one of those outcomes is speculative. Now all the information out in the domain.

So, we're not in any way panicking of selling out, we know the next three months is going to be a lot of volatility in markets, we hope we'll get to take advantage of that. If there's a lot of volatility and we get some stocks, we really like it sold off, they get affected more, and they're off 20% or 30%. We may buy some of those and sell things that are much less affected or even use some of the cash that we have. So, we want to take advantage of the situation. We're not about to panic about the situation. This will pass in three to six months, very likely the extent of the economic hit that's taken and the profit hit that's taken to companies is difficult to gauge at the moment. It's very, very fluid on the social media question we know we're having an economic impact because one kid at school gets sick the whole school's shut down. It's going to happen in business here Facebook closed their Seattle office because they had one case of coronavirus.

So, it's probably going to mitigate its ultimate spread here, but the economic impacts because of these reactions, I think in 12 months time looking back, it's going to have very little impact. And then most likely impact it's going to be we're going to have lower interest rates, and actually lower interest rates prevailing is probably going to drive higher valuations for businesses, as we come out of this. So, selling out of the markets with interest rates going down because you're panicked by the social media and toilet paper reaction at the moment. We think would be pretty unwise to do for anyone who has a slightly longer term investment perspective. But there will be opportunities presented, and we may well try and take advantage of those.

Freeman: And on that point, you talk there about valuations, and there's people speculating that that stocks are overpriced, I say, but if they're if say stocks are trading at 26 times is that overvalued, is it too expensive, but I think you are suggesting that it's not? Not necessarily.

Douglass: Well, first of all, you cannot make a comment on just absolute multiples. It's all relative to interest rates at the end, which is the discount rate? Because all you're doing in investing is looking at the future cash flows that can be generated out of business, and then you're discounting them back to present value. And if the discount rate goes down, those present value of cash flows goes up. And the very simple example, I would give you that in a, let's say, we take a world with a 10% discount rate, a business that grows at 4% per annum, is worth around 17 times its free cash flow. If we take that discount rate to 8%. That very same business is worth around 26 times it's free cash flow. So just a 2% movement in the discount rate, which is like the long term bond rate going from 5% to 3%, and we've got long term bond rates down at 1% now.

These businesses are probably trading at 23 or 24 times. So, compared to historical levels, these businesses look pretty overvalued in a world where they used to average 17 or 18 times their free cash flow. And if this were a business like PepsiCo or McDonald's or something like that, that new valuation is probably implying a long term bond rate of 3% or more. It might be a long time before we say 3%, again, so your real question you have to ask yourself is where do you think the future direction of interest rates and what discount rate should I be using? If interest rates stay at 1%? I can tell you buying a PepsiCo or McDonald's at 23 times free cash flow is better than fair values. It's actually cheap. It's actually cheap but compared to history when interest rates used to be much higher it was overvalued. That is the investment dilemma we are all facing at the moment.