Magellan plan for $1bn float’s dividend stuns investors

Magellan’s plan to introduce mandatory dividend reinvestment for its new float has surprised investors.

Magellan CEO Hamish Douglass. Picture: James Croucher.

An unprecedented move by Magellan Financial Group to introduce a mandatory dividend reinvestment program has caught investors by surprise as the countdown for what may be the biggest ASX float in years — the $1 billion-plus listing of the Magellan Global Trust — accelerates.

Under the terms of the float now being circulated in the market, once cash distributions exceed 4 per cent all extra distribution income received by investors is to be mandated into the trust’s DRP scheme.

Separately, investor funds going into the DRP on this mandated basis will not qualify for the DRP discount, which is set at 5 per cent.

Mirroring the portfolio of the $US9.2bn ($11.6bn) Magellan Global Fund, Magellan chief executive Hamish Douglass launched the planned listed investment trust earlier this month.

The new fund will invest in 15-35 global companies with a mandate that allows it to manage its currency exposure and hold up to 50 per cent of the portfolio in cash.

Pencilled as one of the biggest ventures the local fund management sector has yet seen, the Magellan Global Trust has no upper limit to the amount of funds it may raise: the minimum raising is set at $250 million.

The fund has received a strong initial welcome as the Magellan Group offers to cover a range of fees often passed on to the retail investor — including the funding of the DRP. Magellan also received praise for its provision of loyalty units to the value of 6.25 per cent of the units investors receive in the offer.

However, advisers are now making clients aware of the ­particular terms of the float, which is expected to be underpinned by a priority offer to existing Magellan clients that closes on September 29.

Other issues advisers are rushing to explain to an estimated 300,000 Magellan clients and the wider public are that:

● The “loyalty units” to be distributed to existing Magellan customers are not to be released until next year — though the float is on October 18; and

● A performance fee has been included for the trust. The fund will take 10 per cent of returns over a set benchmark (the benchmark is the higher of either MSCI index or the Australian 10-year bond yield). If the 10-year Australian bond yield is to be used the performance fees could kick in at exceptionally low levels — the 10-year bond yield is at only 2.64 per cent.

Craig Wright, head of governance and advisory at Magellan, said yesterday the mandated DRP plan was designed to even out investment returns for investors in the trust. The delay in offering the loyalty units until January 15 next year was to control trading on the units during the early weeks of the listing.

He said the company had not put an upper limit on the fund as it tried to create economies of scale. “If you raise more than $1bn we have come to see that you get good liquidity in a product ... we are not interested in doing small raising,” Mr Wright explained.

Magellan must also convince investors in the new trust that it can recapture its investment performance of recent times. Its existing flagship global fund has only managed to match its benchmark MSCI index over the past five years and in the 12 months to June it has underperformed, bringing in 9.8 per cent while the MSCI managed 10.6 per cent.

There are also concerns the Global Trust’s DRP terms — apart from limiting cash distributions to investors — could actually mandate the growth of long-term funds under management at Magellan.

However, the wider mechanics of the raising have been broadly supported by advisers with many suggesting it may determine the future shape of fund manager IPOs in Australia.