Magellan boss Hamish Douglass risks losing more key staff, mandates and funds

Make or break time for Magellan boss Hamish Douglass. Picture: Britta Campion

The next six weeks will prove a crucial period for embattled funds house Magellan Financial Group, as executive chairman Hamish Douglass seeks to stem outflows and steady the ship.

But it’s a mammoth task and Magellan risks losing further key staff, more mandates and funds from retail investors who are losing faith, given poor performance and botched communications around the abrupt exit early last month of CEO Brett Cairns.

A funds under management update out on Friday provided a glimpse of the fallout.

For the December quarter, Magellan said total funds under management totalled almost $95.5bn, down from $113.3bn three months earlier.

The announcement, lodged with the ASX on Friday, said excluding the termination of the St James’s Place institutional mandate of $23bn Magellan saw net outflows of $1.09bn from retail investors and institutional outflows of $459m. Those institutional outflows comprised of $256m from Magellan’s global equities strategy and $215m from infrastructure equities. The Australian equities strategy saw an inflow of $12m.

Magellan then reports its first-half earnings on February 17.

The company – at the very least – needs to increase engagement and communication with key stakeholders given the flailing fund performance, CEO’s departure and the loss of the St James’s Place mandate, which accounted for about 12 per cent of Magellan’s annual revenue.

A video lodged with the ASX on December 23 in which Douglass fielded questions from his own strategy executive – in a sanitised environment – doesn’t cut it.

Douglass needs to front investors and analysts and respond to the hard questions.

Regulators and investors should also be asking some tough questions around whether Magellan met its continuous disclosure obligations, around the loss of the St James’s Place mandate.

The timing of the trading halt a tad before 2.30pm on December 17 does not marry up with the time difference in the UK, unless the wealth management group provided ­notification of the mandate termination from its Asian offices.

St James’s Place has offices in Hong Kong, China and Singapore.

The CEO search is also under way, with finance boss Kirsten Morton there in an interim cap­acity.

There’s no shortage of spotfires for Douglass and the board to manage.

It’s odd that in the video lodged with the ASX that Douglass down­played the CEO role, noting it was a role he used to occupy as well as chief investment officer. He said Cairns in the CEO role had “no impact or no involvement” in the investment activity as he downplayed the departure.

That commentary doesn’t bode well for the next CEO stepping into the hot seat, as Magellan considers internal and external candidates.

As suggested by my colleague Eric Johnston, the board and Douglass need to end his dual role as executive chairman and chief investment officer in order to restore confidence and better governance.

As a fund management firm itself, Magellan should be at the forefront of governance and investor engagement.

The damaging rout in global technology stocks this week, given expectations the US Federal Reserve will raise interest rates at a faster clip than expected, creates another headache for Magellan.

Besides performance, fees are the other sore point for investors. Higher relative fee structures can be stomached when managers are performing but the focus becomes laser like when the tables turn.

Morningstar analysts are among those who have called out Magellan’s fee structure, despite retaining optimism in the firm’s global fund.

“The cost is expensive at 1.35 per cent per annum plus 10 per cent performance fee (with dual hurdle of the MSCI World NR AUD and Australian government 10-year bond yield), though recent underperformance needs to be recovered to reach the performance fee high water mark. Overall, while Magellan investors aren’t accustomed to bouts of underperformance, we remain confident they will be well rewarded over the longer journey,” analyst Chris Tate said.

In November, Tate downgraded Magellan Global from a four-star quantitative rating to three stars, which means it sits in the middle of the pack in terms of ­medium-term relative risk-adjusted returns.

Morningstar still has a “gold” rating on Magellan’s global fund but its analysis notes risks associated with the parent entity.

“The confluence of business ­issues is an unwelcome distraction, particularly given recent performance challenges. We will be undertaking a comprehensive parent review as part of our annual review of the investment strategies in the first quarter 2022.”

Shrinking Pool

A phased reduction to zero, by the end of this year, in the banks’ Committed Liquidity Facility is on track.

Since 2015, deposit-taking institutions bound by the Basel III liquidity standards have had to hold high-quality liquid assets sufficient to withstand 30 days of stress, under a liquidity coverage ratio (LCR) requirement.

The Reserve Bank and prudential regulator first announced plans for the facility in 2010, which was then subject to consultation in subsequent years. It was put in place to counter a limited supply of government securities in Australia at the time, but it is now being unwound.

APRA wants banks to hold ­alternative sufficient levels of unencumbered high-quality liquid assets so the facility – which acted as a backstop for bank funding – is not required.

On Thursday, the Australian Prudential Regulation Authority said the planned reduction in the Committed Liquidity Facility had occurred on January 1. The latest decline saw the CLF reduced to about $102bn, from $140bn in September last year.

The regulator last year flagged equal reductions in the CLF in January, on April 30, August 31 and December 31 this year, but said banks could reduce their CLF early if they deemed they had ­“sufficient surplus funding and liquidity”.

“APRA expects to provide a further update on the size of the aggregate CLF in May 2022 following the second scheduled reduction mentioned above,” said Peter Diamond, APRA’s banking division general manager in a ­letter dispatched to banks on Thursday.

Shares in Magellan are down more than 1 per cent to $20.13 at 10.57am AEDT after its funds update.