Magellan Global Fund

About this Review

What this Rating means

Global Equities 28 March 2008

Sector reviewed Total Funds rated Date of this Sector Review

About this Fund

Fund reviewed Fund Size ($m) Responsible Entity Fund Commenced Retail Fee (p.a.) Structure Availability
About the Fund Manager

Magellan Global Fund $A 25.4 (January 2008) Magellan Asset Management Limited July 2007 1.36% pa plus performance fees Retail, Wholesale

The Recommended rating indicates that Lonsec has conviction that the fund or product can achieve its objectives and, if applicable, outperform peers over an appropriate investment timeframe. The manager or product has a number of competitive advantages in people, process and product design. The investment is a recommended entry point to access this asset class or strategy

Lonsec Opinion of this Fund

MFG was established in 2006, and for what is arguably a start-up firm, is well resourced, having been capitalised with more than $A100 million in order to attract appropriately qualified investment professionals and an experienced legal/operations/marketing team The MFG team adopts a value approach to investing, driven by in-depth bottom-up financial analysis and qualitative research. The team aims to identify companies with a sustainable competitive advantage and a return on capital materially in excess of their cost of capital. MFG looks to invest in these outstanding companies at attractive prices, which can potentially be held for a minimum of three to five years. Portfolio construction is notably benchmark unaware (relative to most global equity managers reviewed by Lonsec) and centered around three broad industry sectors: financial services; franchises (consumer and retail); and infrastructure Key to the investment process are Hamish Douglass and Chris Mackay, who both come to MFG with experience predominantly from the investment banking arena. Lonsec has met with a number of MFGs investment professionals, and considers them to be high quality, particularly, Douglass and Mackay While the MFG team is relatively small, the average experience level of the 13 member investment team is 11 years, which compares favourably with that of Lonsec assessed peers. Lonsec considers the team suitably resourced to implement its investment strategy. As to be expected with a relatively new team, (the majority of the team joined the firm in January/February 2007) the time spent working together as a team is relatively short Lonsec has also been impressed by MFGs establishment of non-investment related areas of the firm. For example, the firms legal and operational staff have been in place from MFGs inception, versus gradually building out these areas as assets under management increase

Fund Manager Ownership

Magellan Asset Management Limited Publicly listed on the ASX $A 342.4 (January 2008) 1

Assets managed in this sector ($m) Years managing this asset class
Investment Team

Team size dedicated to this Fund Team Structure Located Key Portfolio Manager(s) Number of Analysts Turnover/Team Ratio (past 2 yrs)
Investment Process

13 Global Industry Sydney

Hamish Douglass, Chris Mackay 11 n/a

Style Targeted Return(p.a.) Typical Tracking Error (p.a.) Typical Stock Numbers Currency Approach Country Allocation Stock bet limits Sector/Industry bet limits Country bet limits Emerging markets limit
Fund Rating History

Value 12-15% p.a. over 3 5 year period Not targeted 25 - 50 Unhedged Residual of stock selection max of 20% (hard) None - residual of stock selection n/a Non OECD exposure limited to 20% (hard)

March 2008

Initial review Recommended

WE STRONGLY RECOMMEND THAT POTENTIAL INVESTORS READ THE PRODUCT DISCLOSURE STATEMENT Lonsec Limited ABN 56 061 751 102 AFSL No. 246842 Participant of ASX Group This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document

Magellan Global Equity Fund

Douglass, lead portfolio manager for the Fund is ultimately responsible for all portfolio decisions. While Douglass direct portfolio management experience is less than that of Lonsec assessed peers, Lonsec believes that his investment banking experience is relevant. In addition, Lonsec considers the framework within which Douglass makes portfolio buy and sell decisions to be well defined and logical The firm has experienced three departures since it was established in 2006. The most recent departure comes as a result of MFGs decision to delay the release of a standalone Franchise Fund. Given the start-up nature of the firm and culture, this is an area Lonsec will continue to monitor closely. Given the July 2007 inception date of the Fund, performance analysis over any meaningful time period is not possible. Performance for the Fund for the six month period ending 31 January 2008 was -2.9% versus -9.4% for the benchmark and -9.6% for the Lonsec assessed Global Equity peer group. Lonsec has initiated coverage of the Magellan Global Fund with a Recommended rating, primarily driven by Lonsecs high regard for the firms key investment professionals, and in-depth company research effort (Proprietor and CEO of Sussan Group). MFG Chairman, Hamish Douglass and Deputy Chairman/CIO Chris Mackay are also shareholders of MFG. MFG currently manages three funds; the ASX listed Magellan Flagship Fund (launched December 2006), the Magellan Global Fund and the Magellan Infrastructure Fund, both launched in July 2007. As at December 2007, firmwide assets under management total approximately $A500m. Size and Experience The lead portfolio manager for the Magellan Global Fund is Hamish Douglass, who is supported by a team of eight investment professionals and an additional four investment professionals from the Infrastructure team. (The firm has a total of 28 employees.) While the MFG team is relatively small, the average experience level of the 13 member investment team is 11 years, which compares favourably with that of Lonsec assessed peers. As to be expected with a relatively new team, (the majority of the team joined the firm in January/February 2007) the time spent working together as a team is relatively short. Key to the investment process are Douglass and Mackay, who both come to MFG with experience predominantly from the investment banking arena. Douglass has 17 years experience in financial services, and prior to starting MFG, was the Co-Head of Global Banking at Deutsche Bank Australasia. Mackay has 19 years experience, including broad business experience in corporate and banking law, investment banking, business assessment and management, risk management and investment. Mackay retired as Chairman of UBS Australasia in March 2006. Although the time Douglass and Mackay have spent working together at MFG is relatively short, they worked together in the 1990s, and since then have followed a similar path, albeit at different organizations, resulting in a consistent investment philosophy/style behind the Fund. Lonsec has met with a number of MFGs investment professionals, and considers them to be high quality, particularly, Douglass and Mackay. In addition, Lonsec considers the team suitably resourced to implement its investment strategy. Lonsec has also been impressed by MFGs establishment of non-investment related areas of the firm. For example, the firms legal and operational staff have been in place from MFGs inception, versus gradually building out these areas as assets under management increase.

Using this Fund

This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page The Fund is a long only international equity fund and as such will generally sit within the growth component of a balanced portfolio. As a concentrated high Tracking Error value style fund, Lonsec considers the Fund should be blended with a growth biased international equity fund and is suitable for high risk profile investors with a 5+ year investment time horizon

People & Resources

Magellan Asset Management is a fully owned subsidiary of the Magellan Financial Group (MFG). MFG is listed on the Australian Stock Exchange and has a market capitalisation of $158.3 million (as at 31 January 2008). MFG was established in 2006, and for what is arguably a start-up firm, is well resourced, having been capitalised with more than $100m in order to attract appropriately qualified investment professionals and an experienced legal/operations/marketing team. MFG has the support of several prominent Australian business people, including Consolidated Press Holdings Limited (Packer family) and Naomi Milgrom

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Magellan Global Equity Fund

Team Structure MFGs investment team is predominately located in Sydney (one analyst is located in New York and is expected to move to the Sydney office later in 2008), and is grouped into broad global sector teams; financial services, franchises (consumer and retail) and infrastructure. Reflecting the decisions of the investment team into the Fund is the responsibility of Douglass. Turnover The firm has experienced three departures since it was established in 2006. The most recent departure comes as a result of MFGs decision to delay the release of a standalone Franchise Fund. Given the start-up nature of the firm and culture, this is an area Lonsec will continue to monitor closely. Key Person Risk Lonsec considers key person risk with Douglass and Mackay to be high. While the investment philosophy is very well defined, Douglass and Mackay have pivotal roles not only in terms of investment decisions, but of the business as a whole. Mitigating the level of key person risk with Douglass and Mackay from a business point of view is the significant tie in to the MFG business via personal capital investment and equity ownership. Lonsec notes key person risk as a potential risk for investors, although one of Lonsecs core beliefs is that, given sufficient conviction, key person risk is often a risk worth taking. We believe that in this case, this is so, given the calibre of the key investment professionals at MFG. Remuneration / Alignment of Interests At the individual level, team members are motivated to perform via a performance based short-term incentive program (bonus). This is determined by performance (stock and Fund level), the profitability of MFG and a qualitative assessment by Douglass and Mackay. The bonus is not capped and can be multiples of base salary. MFG also offers a long-term incentive programme which is essentially a share purchase plan, which also acts as a retention strategy given vesting periods. In addition to the ongoing management fee, MFG is also entitled to a performance-based fee. In Lonsecs opinion, performance fee structures assist in better aligning the interests of the manager with those of investors. The Fund is subject to a dual performance benchmark, which is relatively unique and reflects the Funds focus on absolute rather than relative performance. Essentially, investors will not be paying performance fees for outperforming the MSCI World Index when the Funds absolute returns are very small (below the 10 year bond yield). Overall, Lonsec considers the alignment of MFGs interests with those of investors to be very high and a key advantage of the manager.

Investment Style / Objectives

Style The MFG team adopts a value approach to investing. As active, bottom-up stock pickers, investment decisions are driven by in-depth financial analysis and qualitative research that aims to identify outstanding companies at attractive prices that can potentially be held for a minimum of three to five years. (MFGs investment style has several elements in common with that of the value approach used by Warren Buffett of Berkshire Hathaway.) Portfolio construction is notably benchmark unaware (relative to most global equity managers reviewed). In this regard, MFG only invests in those sectors where it believes it holds analytical advantage. This is expanded upon in the Research Approach section below. Investment Philosophies and Beliefs The Magellan Global Fund targets an absolute rate of return of 12 15% p.a. over the medium to long-term (3 5 years). MFGs definition of an outstanding company is a company that has a sustainable competitive advantage which translates into returns on capital materially in excess of their cost of capital for a sustained period of time. The four key characteristics MFG believes define an outstanding company include: a wide economic moat (protection around an economic franchise); moderate to high potential to continue to re-invest capital into the business at high incremental returns; low business risks (impacts the predictability of cash flow and earnings projections); and low agency risk (managements shareholder focus). Outstanding companies will be purchased given a sufficient margin of safety (that is, the discount required before shares of a company are considered attractive).

Research Approach
Overview Company research is fundamental to MFGs investment management approach. All ideas implemented into portfolios are generated through inhouse, proprietary research.

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Magellan Global Equity Fund

Screening of Stocks MFGs research effort is focused on stocks with a market capitalisation of greater than $US 500 million, across three broad global sectors: financial services; franchises (consumer and retail); and infrastructure. MFG focuses on these sectors because they believe these are the areas they have the greatest knowledge advantage in. MFGs definition of these sectors represents greater than 60% of the stocks included in the MSCI Index. MFG performs a first cut quantitative screening of the universe based on fundamental criteria focusing on high return on capital, not market price. This narrows the potential universe for investment candidates to approximately 1,000 stocks. Companies meeting the initial quantitative quality criteria screens are prioritized by the relevant sector team. At this stage, companies that are not considered to be attractive based on the firms definition of quality, are also screened out, further reducing the investment universe to approximately 600 stocks, which then undergo a detailed, bottom-up analysis and review. Research Focus MFGs research effort involves regular company management visits with the intention of understanding how the financial details of the past have been achieved and forecasting expected results for the future. The team focuses on analysing the four key characteristics MFG believes define an outstanding company. Specifically: A wide economic moat MFG prefers companies that have a competitive advantage in terms of an economic franchise. An assessment is made of the sustainability of the competitive advantage, which in turn impacts the ability of a company to earn returns materially in excess of the cost of capital for a sustained period of time Re-investment potential. MFG prefers companies with a moderate to high potential to re-invest capital into the underlying business (i.e. at high incremental returns) Business risks. An assessment is made of the predictability of future cash flows and earnings Agency risk. MFG makes an assessment of a companys management capability, specifically the shareholder focus of management, the level of incentives offered to senior management and the track record of management acting in a shareholder friendly manner. For example, MFG would consider agency risk to be low where a companys management is likely to redeploy the free cashflow generated by business in a shareholder friendly manner Not all companies have all of the characteristics listed above. Given the MFG research teams assessment on each of the four categories listed above, the team will determine the margin of safety, or discount to intrinsic value, that is required before shares of a company will be purchased MFG has developed a Conviction Scoring Matrix to provide a framework for ensuring a company is consistently evaluated on both a stand alone and peer relative basis. The matrix includes a quantitative score representing the analysts judgement across the firms key assessment criteria. The scoring matrix is also taken into consideration at the portfolio construction phase of the process, to assist the portfolio manager in achieving diversification across the firms key criteria. Once the initial research and review is complete, the analysis is discussed within the sector team and ultimately submitted to the Investment Committee (IC) for inclusion on the firms approved list. MFGs IC is comprised of six members, namely Mackay (chairman), Douglass, Nikki Thomas (Franchise (consumer and retail) sector head), Dom Giuliano (Financial services sector head), Gerald Stack (Infrastructure sector head) and Matthew Webb (Head of Consultant and Researcher Relationships). The role of the IC is to formally evaluate the investment thesis, qualitative criteria and valuation methodology assumptions in order to make a decision on whether or not the company is deemed to be truly outstanding. A majority vote (not unanimous) from the IC is required before a company is included on the firms approved list. MFGs approved list numbers approximately 400 stocks. Lonsec believes that the stock level load per MFG analyst compares favourably with that of other highly rated global equity managers assessed by Lonsec. In addition, Lonsec has viewed several research reports produced by MFG, and has generally been impressed by the thoroughness and depth of coverage. Overall, Lonsec believes the cornerstone of MFGs investment process is the firms detailed bottom-up company research, and Lonsec views the research approach as being very well defined, logical and repeatable. Valuation approach MFG uses a three stage DCF model as the key valuation metric to determine the intrinsic value of a company. The duration of the DCF model is determined by the assessment of the depth or quality of the economic moat around the business. That is, a

Lonsec Limited ABN 56 061 751 102 AFSL No. 246842 Participant of ASX Group This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document

Magellan Global Equity Fund

company with a wide (or large) economic moat will be valued using a longer time horizon. A company with a narrow economic moat will be valued using a shorter time horizon. The investment fundamentals regarding the strength of the business franchise (and hence economic moat) have materially deteriorated Company management act in a shareholder unfriendly manner A company has not performed to expectations Overview The Magellan Global Equity Fund is concentrated (the Fund will hold between 25 to 50 stocks) and is expected to be low turnover (in the range of 20% to 25% p.a.). Douglass, lead portfolio manager for the Fund, is ultimately responsible for all portfolio decisions. MFGs approved list and Tier rating forms the basis for all stock selection decisions. As mentioned previously, MFGs Conviction Scoring Matrix is taken into consideration at the portfolio construction phase of the process, to assist the portfolio manager in achieving diversification across the firms key criteria. Portfolio holdings fall into three categories: Tier I, Tier II and Tier III. Each Tier corresponds to the relative attractiveness of a stock, where: Tier I represents high quality companies trading with large margins of safety Tier II includes companies that are slightly less attractive on one or two of MFGs key criteria, and Tier III are less attractive than Tier I or II but still warrant inclusion in the portfolio, and often provide diversification benefits in the portfolio Tier I stocks will generally be 5 to 10% of the portfolio, Tier II 2 to 5% of the portfolio, and Tier III will be lower than 2% while maintaining the total number of portfolio holdings between 25 to 50 stocks. The Fund will typically hold 5 10 Tier I stocks, 10 20 Tier II stocks and 10 20 Tier III stocks. No more than 10% of the market value of the Fund (at cost) will be invested in any one stock, with a hard limit of 20%. The Fund will not own more than 10% of the issued capital of any one company. The Fund can also hold up to 50% cash. The Fund has no specific sector or country constraints, other than no more than 20% of the Fund will be invested in non-OECD countries. Given the limited or very broad formal stock, sector, or country constraints, it should be noted that portfolio sector and country weights may vary considerably from the benchmark. Sell decisions are triggered by the following events: The value of the company materially exceeds MFGs assessment of intrinsic value Risk controls for example, significant share price appreciation, resulting in a position being trimmed MFG expects the Fund to outperform in markets where there is uncertainty or a flight to quality, and underperform in more speculative markets. Overall, while Douglass direct portfolio management experience is less than that of Lonsec assessed peers, Lonsec believes that his investment banking experience is relevant. In addition, Lonsec considers the framework within which Douglass makes portfolio buy and sell decisions to be well defined and logical. Accountability Lonsec views the level of accountability in the MFG process to be high, despite the level of control exerted by the IC. While the six member IC is responsible for the decision regarding inclusion of the firms approved list, stocks are championed by individual analysts, and portfolio stock selection decisions are the responsibility of the designated portfolio manager, in this case Douglass. Risk Limits Lonsec notes that the Fund is one of the most concentrated, unconstrained investment managers within the Lonsec global equities universe. Sector, stock and geographical weights are purely a result of bottom-up, stock selection an approach Lonsec views as being in line with the absolute return, fundamental value style of portfolio management. Risk Management MFG considers risk to be the probability that a company fails to provide returns in excess of the cost of capital and the inappropriate re-investment of capital, not the volatility of its share price. As such, risk management is seen as a function of underlying company research, stock selection and portfolio construction. Macro factor risks and stock correlations are also considered at the time of portfolio construction. Despite the measures in place, the effect of poor stock selection can have a material effect on performance relative to the benchmark due to the small number of portfolio holdings and the absence of sector constraints.
5

Portfolio Construction

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Magellan Global Equity Fund

Currency Management
Currency as an Asset Class & Hedging Magellan does not treat currency as a separate asset class. Portfolios are therefore typically unhedged. Magellan is also considering offering a fully hedged version of the Fund.

Gearing
The Fund may borrow against all or part of its investment portfolio provided that, at the time any new borrowing is entered into, the aggregate of those new borrowings and any pre-existing borrowings must not exceed 20% of the gross asset value of the Fund. It should be noted that the Fund will only gear in extreme cases, for example, to meet large redemption requests.

Performance Fees
MFG charges a performance fee of 10.1% of the Funds excess return above the MSCI World Index Total Return (Net Dividends) (measured in US dollars and converted to Australian dollars.) To earn this performance fee, the Fund must outperform the Australian 10 Year Bond Yield on day one of the performance period. This performance fee is also subject to a high water mark. Regardless of the Funds performance, no performance fee will be payable if the closing market value of each unit at the end of the performance period is below the closing market value at any period over the preceding three years; and a performance fee has been paid in any of these periods (performance periods are six months long). In October 2007, MFG implemented a performance fee structure change (to that described above). Under the revised method of performance fee calculation, the fee is calculated as 10.1% of the Funds excess return over the index, previously the calculation was 10.1% of the Funds net return. Lonsec considers the revised performance fee structure to represent a material improvement, and to MFGs credit, given the realisation that the previous structure represented one of the more expensive fee arrangements, the Funds dual benchmark now represents one of the better structures seen by Lonsec.

Lonsec Limited ABN 56 061 751 102 AFSL No. 246842 Participant of ASX Group This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document

Magellan Global Equity Fund

Quantitative Representative Performance Analysis Annualised after-fee % Returns as at 31 January 2008
1 Year Fund* Performance (% pa) Standard Deviation (% pa) Excess Returns (% pa) Outperformance Ratio (%) Worst Drawdown (%) Time to Recovery Sharpe Ratio Information Ratio Tracking Error Peer Group -12.9 12.8 0.7 49.4 -15.6 0.0 -1.6 -0.2 4.5 Fund* 2Years Peer Group -0.4 12.0 0.4 49.1 -15.9 0.2 -0.6 -0.2 3.9 Fund* 3 Years Peer Group 5.8 11.4 0.0 47.1 -15.8 0.3 0.0 -0.2 3.3 Fund* 5 Years Peer Group 6.8 10.7 0.1 49.0 -16.1 0.3 0.1 -0.1 3.3

*Fund: Magellan Global Fund. Peer Group: Average among Lonsec rated global equity manager universe Benchmark: MSCI World Ex Aust Acc Ind Gross Div A$

Given the July 2007 inception date of the Fund, performance analysis over any meaningful time period is not possible. Performance for the Fund for the six month period ending 31 January 2008 was -2.9% versus -9.4% for the benchmark and -9.6% for the Lonsec assessed Global Equity peer group. While the absolute return for the Fund for this time period is negative, the Fund has performed well relative to the benchmark and peers. It should also be noted that these returns are obviously of a short-term nature, and that Lonsec prefers to assess performance over a longer-term track record before drawing any conclusions from performance analysis.

Glossary Absolute Return Excess Return Standard Deviation Tracking Error Sharpe Ratio Information Ratio Worst Drawdown Time to Recovery Top line actual return, after fees Return in excess of the benchmark return Volatility of monthly Absolute Returns Volatility of monthly Excess Returns against the benchmark (the Standard Deviation of monthly Excess Returns) Absolute reward for absolute risk taken (outperformance of the risk free return (Bank Bills) / Standard Deviation) Relative reward for relative risk taken (Excess Returns / Tracking Error) The worst cumulative loss (peak to trough) experienced over the period assessed The number of months taken to recover the Worst Drawdown

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Magellan Global Equity Fund

Analyst Disclosure & Certification Analyst remuneration is not linked to the rating outcome. The Analyst(s) may hold the products(s) referred to in this document, but Lonsec considers such holdings not to be sufficiently material to compromise the rating or advice. Analyst(s) holdings may change during the life of this document. The Analyst(s) certify that the views expressed in this document accurately reflect their personal, professional opinion about the financial product(s) to which this document refers.
Date Prepared: March 2008 Analyst: Bronwen Moncrieff Release Authorised by: Richard Everingham

IMPORTANT NOTICE: The following relate to this document published by Lonsec Limited ABN 56 061 751 102 ("Lonsec") and should be read before making any investment decision about the product(s). Disclosure at the date of publication: Lonsec receive a fee from the fund Manager for rating the product(s) using comprehensive and objective criteria. Lonsecs fee is not linked to the rating outcome. Costs incurred during the rating process of international funds, including travel and accommodation expenses are paid for by the fund Manager to enable on-site reviews. Lonsec does not hold the product(s) referred to in this document. Lonsecs representatives and/or their associates may hold the product(s) referred to in this document, but detail of these holdings are not known to the Analyst(s). Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to General Advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (financial circumstances) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. If our General Advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each financial product before making any decision about whether to acquire a product. Lonsecs rating process relies upon the participation of the fund manager. Should the fund manager no longer be an active participant in Lonsec rating process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the Fund(s). Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, employees and agents disclaim all liability for any error or inaccuracy in, or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

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