Magellan dividend cut after challenging year and outflows

Magellan new CEO David George has warned of a tough year ahead after a sub-par investment performance caused a massive outflow of funds under management.

New Magellan Financial chief executive David George has been labelled a superstar by the firm’s chairman.

Magellan Financial chief executive David George has warned of a tough year ahead after a sub-par investment performance caused a massive outflow of funds under management.

The global investment manager reported a 3 per cent fall in adjusted net profit after tax to $399.73m for the 2022 financial year, in line with estimates, but Magellan shares fell 8.5 per cent after hitting a three-week low of $13.65 amid disappointment with the funds management business.

Underlying earnings before interest, tax and amortisation for Magellan’s funds management business – excluding principal investments and Magellan Capital Partners – of $479.5m represented a 4 per cent “miss” of JP Morgan’s estimate and implied a “bigger miss” for the second half of about 10 per cent, according to analyst Julian Braganza.

Mr Braganza also noted that no cost guidance was provided for fiscal 2023 and it was unclear if Magellan was still focusing on investment in the business given pressures on its funds under management, there were significant losses in fund investment, and material outflows in funds had “meaningfully impacted profitability” in the second half and would also hit 2023 earnings.

A final dividend of 68.9c per share was declared versus 114.1c a year ago.

Magellan chairman Hamish McLennan said had been a “challenging” year.

However Magellan’s balance sheet remained strong, current levels of profitability “provide an excellent platform from which to reinvest in the business and grow” and Magellan was “committed” to rebuilding trust among clients and shareholders.

“Our number one priority is to deliver on our clients’ investment objectives, which in turn will provide the foundation for revenue growth and returns for shareholders over the long term,” Mr McLennan added.

“We recognise that our global equities strategy has underperformed relative to the market over the past 18 months and that we must do better.”

Chairman Hamish McLennan also acknowledged it has been a challenging year. Picture: Britta Campion

Magellan would “stay true to our investment philosophies and disciplined investment approach” but was “extremely focused on sharpening our investment processes to deliver the investment performance for which we are known,” he said.

Magellan shares fell 8.47 per cent on Wednesday, or $1.27, to close at $13.73.

Asked about the share plunge after the results, Mr McLennan said the fund manager was “focused on getting the building blocks right for the next phase”.

“I’m thrilled with David George and think he’s a superstar in the making,” he added.

Before the appointment of Mr George, Magellan said it wouldn’t make any further principal investments in its Magellan Capital Partners unit. It then sold its 11.6 per cent holding in Mexican fast food chain Guzman y Gomez, banking $140m. Magellan holds 16 per cent of Finclear and has a 36 per cent stake in Barrenjoey.

Barrenjoey delivered a “modest profit for the year” while Magellan Capital Partners overall contributed $8.4m.

Mr McLennan said Magellan remained “fully committed” to its stake in Barrenjoey. “We’re very happy with Barrenjoey and are there for the long term,” he said.

“Barclays recently put $75m in at a much higher valuation than our starting price, which demonstrates the long-term value and prospects of Barrenjoey.”

Mr McLennan said Magellan was “settling down nicely under David’s leadership”.

After building up its funds under management to a peak of $117bn in early 2020, Magellan has suffered a near halving of funds under management to some $60.2bn as of July.

In a tumultuous year, Magellan’s former chief executive Brett Cairns resigned, it lost its biggest investment mandate, St James’s Place, and its co-founder and former chairman and chief investment officer Hamish Douglass took a medical leave of absence and subsequently resigned, before being appointed as an investment consultant.

Mr Douglass was paid $8.09m in the 2022 financial year, including $2.5m in termination benefits. He is due to start his new consultancy role with Magellan in October.

Mr George said that while the outflows experienced in the second half would impact results in fiscal 2023, he was “very positive on the business”.

He was “acutely aware of the challenges” and “committed to improving investment returns” to restore “stability, confidence and shareholder value”.

“The strength of Magellan’s balance sheet provides us with significant headroom to invest in our business, to deliver for our clients and position ourselves for future growth,” he added.

Mr George said his priorities had been to “work with the investment team, supporting a relentless focus on efficiency, effectiveness, and excellence throughout our investment activity” and to “take time to listen to shareholders, clients and our team at Magellan, which I plan to continue to do.”