Morningstar joins Lonsec and Zenith on placing Magellan funds on watch

Morningstar has joined Lonsec and Zenith on placing multiple funds of former fund darling Magellan on ratings watch.

Morningstar has joined Lonsec and Zenith in placing multiple funds run by Magellan Financial on ratings watch, after the company said co-founder Chris Mackay would no longer run the global equities strategy and several investment staff also exited.

All three ratings companies – the most used by investment advisers – had previously warned that Magellan required stability at an investment team level.

On Monday, Magellan chief executive David George said he would take on the role of chief investment officer with Gerald Stack, portfolio manager of the Magellan Infrastructure Fund, to become deputy CIO.

Magellan’s global equities strategy will be managed by Arvid Streimann and Nikki Thomas, while Elisa Di Marco was appointed portfolio manager of the Magellan Core International strategy, replacing Vihari Ross.

“These are material changes that we need to investigate,” Lonsec’s research head, Peter Green, told The Australian.

“We look at the investment team, the process, the business size, we do it on the evidence.”

Magellan has been dealing with dramatic fund outflows since co-founder Hamish Douglass left in a swirl of controversy, going from a $100bn fund manager to one with half that under management at last count in September.

“Mackay’s continued involvement was a core pillar in our rating thesis, providing some stability in an otherwise turbulent time for Magellan,” wrote Morningstar analyst Chris Tate in a report. “As a result of this responsibility reshuffle, the strategy will be placed under review while we undertake a full review of it in the coming weeks, and will factor the leadership changes into our updated view in the near term.”

Despite Magellan underperforming on a one, three, five and ten year basis – and now the departure of both key men in Mr Douglass and Mr Mackay – none of the three major rating companies have recommended taking money out of Magellan funds yet.

With a poor ten-year performance and another key man departure, it’s “a miracle” Magellan’s funds have not been downgraded a sell yet by the research houses, said one unnamed fund manager.

If the ratings companies did downgrade the Magellan funds to “investment grade” or the equivalent, it would have direct consequences for fund flows because financial advisers belong to dealer groups and if a rating drops below a certain level, investment requires additional sign-off.

The “fund watch” rating by Lonsec, means the ratings company does not recommend new investment into the Magellan High Conviction Trust.

“Lonsec considers the announcement to represent a material change to the leadership of the investment team and will seek to meet with the go-forward team and have the rating resolved as soon as practicable thereafter,” said Lonsec in their latest report.

Magellan’s staff changes this week saw the firm make 10 of its employees redundant, including senior portfolio managers and investment-related employees.

In August, when asked by The Australian as to why Magellan’s funds were not under review given their underperformance to benchmark, both Lonsec and Morningstar said their companies looked at flow directions and the skill and breadth of the fund team.

In a report earlier this year, Zenith pointed to the then $70bn of funds under management and questioned whether the company could effectively trade its equity positions at that size. “Excessive levels of funds under management can inhibit a manager’s ability to trade portfolio positions effectively and therefore limit outperformance potential,” Zenith said in that report. Funds under management now stand at $50bn.

On Wednesday, Lonsec said that the Magellan Global Fund and High Conviction Trust, were all on watch. Morningstar on Wednesday separately put the Magellan Global Fund, which was already on a bronze rating, on watch. Earlier this month, it downgraded three Magellan infrastructure funds to silver, from gold.

Magellan shares closed 3.2 per cent, or 36c, lower on Wednesday at $10.82. They are down 43 per cent since December 31.