George out at Magellan as Formica flexes

It didn’t take long for the axe to fall, after chief executive David George lost the confidence of the market.

Former Magellan chief executive David George. John Feder/The Australian.

It didn’t take long for the axe to fall. Just two months after industry veteran Andrew Formica was appointed non-executive chairman of embattled fund manager Magellan Financial Group, the chief executive David George has been shown the door.

Mr George had been bought in just 17 months ago to try and fix the massive fund outflows Magellan has experienced since co-founder and once-revered stock picker Hamish Douglass left under controversial personal circumstances.

Mr George was lured across from the government’s Future Fund last year, with a base salary of $1.8m per annum and a sign-on bonus of $600,000. His previous roles included being a consultant at Mercer.

Activist Investor Gabriel Radzyminski from Sandon Capital said his departure, announced with immediate effect on Wednesday, was “unfortunately a necessary one,” because he had failed to deliver.

“David just didn’t have the confidence of the market,” said Mr Radzyminski. “We are regrettably pleased with the changes they’ve made. Look at the share price and performance of the business since he took over. His strategy was not resonating, it was not working.”

Indeed it wasn’t. Magellan had been a $100bn-plus fund manager under the guise of the seemingly Warren Buffett-style investor Mr Douglass, before starting a downward spiral to $61.3bn by the time Mr George was appointed, and FUM of only $35bn by the end of September.

Net profit halved under his watch and the share price has fallen about 60 per cent.

Having never run a listed funds management firm before, Mr Formica said that Mr George lacked the “expertise or experience” in discussing and engaging with founders of such firms to bring them across to Magellan.

“David and I agreed that for his ambitions and what he’d like to do, and versus what we’re looking to do, we would think of them being different,” said Mr Formica. “Given the nature of where the next few years are going to be, David wasn’t going to be leading (Magellan) all the way through it, so it is better to deal with it now.”

Mr Formica will step in as executive chairman while a replacement is found. With his raft of experience in funds management — Mr Formica was at Jupiter Fund Management and Janus Henderson Group in London before returning to Australia — it was always doubtful he would remain at arms length as the firm haemorrhaged FUM.

When asked by The Australian in August how he would avoid stepping in as an executive chairman, Mr Formica said he “understands and respects the difference between management and the board.”

Clearly he quickly found the issues being raised by investors and the firm’s key investment personnel were not being heard. Instead of touting a return to the $100bn FUM that Mr George had once talked up, the chairman’s first big step has been to try to retain staff.

On Wednesday, Magellan announced it would repay $7.7m of outstanding employee share purchase plan loans issued to investment personnel during the firm’s heady days.

Most of these ESPP loans will be repaid by September 2025, and will be offset by a cut to previously announced staff retention payments of $1.3m.

“That’s been something that has been affecting morale,” Mr Formica said. “That’s been a big issue that the business has been grappling with for the last sort of 12 to 18 months. So it’s good to have that out of the way so that our staff are focused.”

The FUM outflows at Magellan accelerated earlier this year when John Sevior, from its Australian equities unit Airlie Funds Management, decided to leave the firm that he co-founded and sold to Magellan back in 2018.

Mr Radzyminski said his firm had its “ear to the ground” and that these new staff retention initiatives were an important step.

“We think that was critical because funds management is a people business,” he said. “We think it’s important that they have proper incentives, and certainly no disincentives for their people.”

Next up, Mr Radzyminski said Mr Formica needed to prioritise regaining trust with “long-suffering” investors by improving capital management through the likes of a share buyback and by turning performance around.

“We would like to see on-market buybacks not to raise the price but simply to buy back and cancel shares that are materially undervalued. We’d like to see returns of capital with the funds management investments.”

Included in his wish list is that units in the Magellan funds be distributed to shareholders, who can decide what to do with them.

“They’ve got a very, very bloated balance sheet. They’ve got capital on the balance sheet far in excess of their operational needs,” Mr Radzyminski said.

It’s likely that shareholders may question the Magellan board’s decision to hire Mr George in the first place, at the annual general meeting on November 8, with then-chairman Hamish McLennan saying at the time that he had an “outstanding investment management pedigree,” and his appointment unanimously supported by directors.

Mr Formica will be paid $1.35m including superannuation for the period he remains as executive Chairman. He may also be eligible for additional payments of as much as $1.96m from Magellan, money that he would have received from Jupiter as part of his resignation agreement, if his former employer Jupiter determines he has breached his so called ‘gardening leave” agreement by taking on an executive role.

After a new chief executive is found he will revert to being a non-executive chair.

But veteran funds manager Geoff Wilson pointed out that Mr Formica has strong support in the market.

“Andrew Formica is a proven investment professional who has successfully managed global fund management businesses,” Mr Wilson said. “We are very fortunate he has returned to Australia and is a perfect person to support Magellan at this time.”

When the 52-year old Mr Formica resigned suddenly from the CEO role at the £55.3bn ($105.65bn) Jupiter Fund Management during Covid, he said he wanted to be able to spend some time on the beach.

As summer approaches, it seems he is more likely to be stuck in the office.

Andrew Formica, photographed at Magellan’s offices in Sydney. Britta Campion / The Australian