Magellan Financial Group risks further outflows

Barrenjoey co-executive chairman Matthew Grounds, left, pictured in 2016 with Magellan founder Hamish Douglass. Picture Renee Nowytarger

Magellan Financial Group’s key risk now is that more of its customers head for the door like St James’s Place last year following the news that Hamish Douglass is stepping down as chairman and taking medical leave of absence.

And as the drama surrounding the fund manager plays out, no doubt the management at Barrenjoey Capital Partners will be watching closely.

Magellan owns 40 per cent of Barrenjoey after buying the stake in the business with cash and scrip in 2020, and the key relationship had been between Hamish Douglass and Matthew Grounds – the pair went to university together and have been close friends.

While Magellan co-founder Chris Mackay, who was Mr Grounds’ predecessor at UBS when he was head of Australia and New Zealand, is also thought to have a strong relationship, it will be interesting to see whether he is prepared to offer any further financial assistance to Barrenjoey should it ever need it in the future.

No doubt, Mr Grounds would have been back in contact with Mr Mackay in recent times given he was tipped to take on the running of Magellan and his position would be important.

The decision by Magellan to commit funds to the investment banking start-up was controversial, and committing further funds is unlikely to gain investor support if Barrenjoey were to ever go cap-in-hand.

Even if it were to offer assistance, when Barrenjoey took Magellan’s scrip, it was about $56 and now it is $16.51 so it would have to issue a lot more shares.

Magellan contributed about $90m of cash towards the launch of Barrenjoey and about 1.2 million Magellan shares, which in September 2020 would have been worth about $66m and have since been sold by Barrenjoey.

British bank Barclays owns 10 per cent of Barrenjoey and the remainder is owned by staff, with the two together seeding the business with $200m of capital.

Meanwhile, the announcement of Mr Douglass stepping down as chairman and taking leave from his role as chief investment officer comes only days after disappointing news about Facebook, with its parent company, Meta Platforms, one of Magellan’s largest holdings revealed in the September quarter.

Meta Platforms revealed larger-than-expected earnings declines last week and a weaker-than-expected outlook, sending its shares 26 per cent lower, as it flagged the potential loss of $US10bn in sales due to Apple’s new ad-privacy policy.

Many customers may have committed to Magellan based on the leadership of Mr Douglass, and with him no longer there, they may choose to put their money elsewhere.

Last year, Mr Douglass spent a considerable time in England with St James’s Place, and some wonder whether he knew some time before the company announced it that St James’s Place was likely to take its business elsewhere, although Magellan denies this was the case. St James’s Place was responsible for about 12 per cent of Magellan’s revenue. The news of its move away from the Australian listed investment manager caused Magellan’s shares to crash from $29 to $19.