‘We need to know more’: Nearly $2bn wiped off Magellan shares as contract loss sparks alarm

Investors have wiped $1.8 billion off fund manager Magellan’s market value after its largest client, UK-based St James’s Place, pulled its investment mandate from the firm after a fortnight of mounting investor pressure and leadership instability.

Magellan shares fell by 33 per cent on Monday to close below $20 per share, its lowest point in more than five years, after it was forced to disclose St James’s Place (SJP) had terminated the investment mandate estimated to be worth more than $18 billion.

SJP opted to replace the global equities mandate with international investment giant, State Street Global Advisors, which oversees more than $4 trillion globally and specialises in low-cost strategies.

Magellan has lost one of its major institutional clients. Credit: Janie Barrett

After requesting a trading halt on Friday, Magellan released a statement on Monday morning claiming the SJP mandate accounts for around 12 per cent of its annual revenue and will have an impact of around 6 per cent for the financial year ending June 30, 2022.

“Magellan would like to thank SJP for its partnership and support over many years,” the statement authorised by the board said.

The disclosure caps a volatile period for Magellan, the ASX-listed fund manager with more than 140 employees, beginning with the sudden resignation of chief executive Brett Cairns two weeks ago. Magellan founder Hamish Douglass was subsequently forced to disclose he had separated from his wife after speculation personal issues had caused problems for the company. The couple jointly own a material stake in Magellan, fuelling investor fears of a liquidity event amid divorce proceedings.

Morningstar analyst Shaun Ler is preparing to downgrade his valuation of Magellan, fearing the lost mandate could cause other clients to review their contracts. “The main concern is not the SJP, it is what does this mean for the other institutional mandates? That’s still uncertain.”

Mr Ler said the SJP mandate loss came as a surprise because Magellan had reassured the market that clients had not raised concerns despite ongoing under-performance in the flagship global equities fund. Mr Douglass told The Age and Sydney Morning Herald earlier this month clients had not questioned the fund’s returns during a three-month overseas work trip to the UK, Europe and US, and were instead focused on long-term performance. “As such, it comes as a surprise. I’m surprised. I was hoping for more transparency from the Magellan team,” Mr Ler said.

SJP recently put Magellan on notice after poor performance with its global equities fund and spokesman publicly confirmed the termination, after notifying Magellan last Friday.

“We regularly review fund managers across the portfolio and our model allows us to change manager at short notice if we deem it appropriate to do so,” the spokesman said.

“Our investment management approach gives us the freedom to choose from the best managers in the global investment market in order that we continue to build a world class investment proposition for our clients.”

ECP Asset Management chief investment officer Manny Pohl, who has owned stock in Magellan since inception, said investors should have been provided with more information.

“Having the CEO leave when he did, then a massive loss of contract. There’s something going on. That’s what concerns me,” Dr Pohl said. “If someone leaves immediately, it suggests there has been a massive disagreement that couldn’t be resolved. To me, there’s a cloud that says we need to know more about what’s going on because of the sequence of events that have occurred.”

Confidentiality agreements around Mr Cairns’ departure were not a good enough reason to deflect accountability, Dr Pohl said. “Companies that are listed, you need to tell shareholders what is going on.”

Magellan has not provided any information about why SJP terminated the longstanding contract. A Macquarie note indicated Mr Cairns’ departure, Mr Douglass’ personal problems and underperformance all likely played a role. Dr Pohl said Magellan’s pricing could be a factor, although added the fund’s counter-cyclical investment strategy had increasingly raised concerns.

“Hamish has always hung his hat on the fact he outperforms in down markets,” he said. “The problem is the underperformance this time around has just been too long.”

Mr Ler said the SJP mandate loss opened up other opportunities to take on new clients and the fund’s investment team was still strong, adding the market had already priced in a “doomsday scenario” and “armageddon” that had caused the stock to become significantly under-priced.

Magellan shares closed at $19.70 per share.