Magellan Financial’s profit slumps but investors buy into turnaround story

Magellan’s results show it is still feeling the pain of the departure of Hamish Douglass but shareholders appear to have taken a leap of faith with new CEO David George.

Magellan Financial Group’s first half net profit fell by two-thirds with chief executive David George declining to provide full-year guidance even as the company kept a five-year strategy to get funds under management back to $100bn by 2027.

First-half net profit after tax fell 67 per cent to $83.8m, with continued fund outflows with the former stock market darling’s revenue down by half to $199.4m and basic earnings per share decreasing 57 per cent to 45.6 cents.

However, Magellan shares rose 60c or 6.4 per cent to $10.05 after the company said it was now ready to move forward from its revolving door of investment staff, via a refocus on investment strategies.

Funds under management now sit at $46.2bn, less than half the $95.5bn it had at the end of December 2021, but the company remains committed to $100bn by 2027.

Mr George said the company now had the right team to execute its plans.

“There has been changes, that’s certainly true, but it’s been a deliberate and sort of thoughtful change. The financial results are reflective of the past and I think they’ll improve over time, but we’re doing a really strong job of executing on creating opportunities,” he said.

The company was hammered after the controversial departure of founder Hamish Douglass, a brief intervention by fellow founder Chris Mackay, and the loss of key investment staff.

On a one-year basis, the Magellan Global Fund, Magellan Infrastructure Fund, and Airlie Australian Share Fund all underperformed their benchmark indices.

Its high conviction fund “performance has not been as good as we would have hoped,” Mr George admitted, and investment dollars continue to walk out the door.

While the markets are particularly turbulent at the moment, investors have been walking away from Magellan funds because of their underperformance against the likes of lower-fee charging index funds.

The company said the decrease in FUM was driven by investment losses of about $700m, net outflows of $14.9bn and cash distributions of approximately $400m.

“Net outflows have predominantly been driven by client outflows in the Global Equities business, in part due to the recent relative underperformance of the strategy,” Magellan said in its financial statement.

In late December, ratings and research company Lonsec downgraded Magellan’s infrastructure and high conviction funds, warning about staff turnover and ongoing underperformance.

Ratings are an important tool to bring in new funds and retain existing dollars because financial advisers use them when recommending investment products to clients.

Mr George said the company has “great existing opportunities,” in its infrastructure fund and Airlie Funds Management and also in terms of new product development.

“In terms of creating avenues for growth for Magellan, I think we’ve done all the right things from creating the conditions for better performance perspective and in global and we’re getting on with it.”

The company has gained the backing of UBS, which this week upgraded Magellan stock to a “buy”. UBS said the result was in line with consensus but did note a number of items on its balance sheet had been taken below the line, such as staff share purchase loans and options, and $2.4m in strategic costs.

UBS said the company’s balance sheet remained strong and pointed to the likelihood of

Magellan will relaunch its low cost Core Series by June 23, and the development of a new Airlie smaller companies fund.

Mr George was asked during the results about investor speculation over whether Airlie star stock pickers John Sevior and Matt Williams – whose lock-in contracts have expired – would remain and he replied he expected the relationship to “continue for a long time”. He would not be drawn on what it may cost to retain them.

Given Airlie accounts for about a quarter of FUM this would be important for Magellan.

Mr George also hosed down speculation that its 36 per cent economic interest in start-up investment bank Barrenjoey Capital may be on the block, describing Magellan as a long-term investor.

Barrenjoey and Magellan’s other associate investment – a 16 per cent interest in FinClear – delivered a post-tax loss of $8.1m to Magellan during the half year.

“Magellan’s share of Barrenjoey’s after-tax earnings were negative for the period after establishment costs,” Magellan said in its financial documents. “These establishment costs comprise technology and operational deployment costs and staff acquisition costs and are expected to decline materially in the next financial year.”

Magellan will pay an interim dividend of 46.9 cents per share, less than half the 110.1 cents per share in the previous corresponding period, but with increased franking from the 2022 payment.

Mr George said the company is considering both organic and non-organic expansion and is in a position to pounce on new teams or companies because it has no debt.