Magellan earnings surprise investors: options, buyback flagged

The fund manager has smashed expectations for its interim profit, while flagging a bonus issue of options to shareholders and a possible buyback.

Chairman Hamish McLennan with acting CEO Kirsten Morton at the firm’s offices in Sydney on Friday. Picture: Britta Campion / The Australian

Shares in Magellan Financial surged after easily surpassing expectations for its interim profit and dividend, while also flagging a bonus issue of options to shareholders and a share buyback.

The global fund manager reported net profit after tax for the six months to December 31 of $251.6m, up 24 per cent on last year.

Operating profit rose 16 per cent to $248.1m, exceeding Visible Alpha’s consensus estimate by 9.1 per cent. An interim dividend of 110.1c per share also beat a consensus estimate of 109c. The shares soared 19 per cent to a five-week high of $21.70, their best rise in two years.

Magellan also announced a one-for-eight bonus issue of ­options to shareholders with an exercise price of $35 and a five-year term exercisable at any time until expiry.

Magellan plans to issue 10 million unlisted options to staff and the board is considering an on-market share buyback.

“It’s absolutely a (staff) retention tool, which shareholders will be able to participate in,” Magellan chair Hamish McLennan said.

“It’s just an acknowledgment that talent is really important to us. We want to manage their careers over the long term and share in the upside of any value that we create.”

The $35 price was chosen because “we felt there was enough stretch from where we are at. At the moment it’s achievable … we felt that was fair for everyone including shareholders”, he said.

Magellan’s share price hit a record high of $74.91 in February 2020 as the pandemic hit. It lost 78 per cent of its market value in the next two years, hitting a seven-year low of $16.14 this month.

Its recent troubles include the loss of its former chief executive Brett Cairns for personal reasons, the loss of its biggest investment mandate, St James’s Place, and a decision by its co-founder, chief investment officer and former chair Hamish Douglass to take medical leave.

This followed a sustained period of sub-par returns during the post-Covid bull market. Since inception in 2007, the Magellan Global Fund has returned 11.7 per cent per annum versus 8 per cent for its benchmark MSCI World Net Total Return Index in Australian dollars.

But it has lagged the benchmark by 1.1 per cent per annum in the past five years.

The fund has also underperformed by 4.8 per cent per annum in the past three years. In the past year, it lagged by 10.1 per cent, failing to keep pace with the bull market which saw the index return a stunning 26.9 per cent.

Acting CEO Kirsten Morton said Magellan would not lower fees to retain retail investors.

“We believe our fees are a reflection of the quality of our team and we have conviction in our long-term strategy – we have an outstanding track record of delivering value for our investors,” she said. “And one of the key take­aways, as part of our focus on our core asset management business, is that we will have a sharp focus on improving our investment performance.”

Mr Mackay echoed those comments, saying: “If you’re in crappy products and index funds, when the market downturns – as it will inevitably in time – or you’re in cash when there’s a lot of inflation, you will not be helping your retirement savings.”

Ms Morton said Magellan had a “world-leading cost-to-income ratio” and “would have headroom” to invest in its business.

According to Mr McLennan, Magellan’s core business operations were “stable and operating very effectively and profitably” and the addition of co-founder Chris Mackay to management “adds further depth of experience and support to the interim CEO”.

“He co-authored with Hamish (Douglass) the overall strategy for the group, so he’s happy with the structure and the portfolio. There might be some tweaking, but he’s very content with the general direction. We manage these portfolios for the long term.”

Asked what steps Magellan was taking to address any future institutional outflows of funds under management, Mr McLennan said: “We expect there to be some FUM outflows, just to be ­realistic, but I think the most important thing from a lot of the conversations that we’ve had – and Chris’s attitude toward the portfolio as it stands … it’s steady as she goes.

“We’re managing our client’s money over the long term – there might be some tweaks – but we’re certainly going to stay the course.”

On Magellan’s 40 per cent stake in Barrenjoey, Mr McLennan said the investment bank was “trading profitably” and “we are really delighted with the progress that they’re making”.

Asked about the kind of investments Magellan would make to grow its business, Mr McLennan said: “We love the asset management business … we are refocusing on the core … MCP (Magellan Capital Partners).

“This is about refocusing on what we do best, which is asset management.”

Asked about “key man risk” after the temporary departure of Mr Douglass, he said. “Hamish was front and centre with Magellan, but what stands behind Hamish is a deep bench of high quality investment professionals.

“The fact that (chief investment officer) Chris Mackay was able to step in so quickly to that role shows the depth of talent that we have, as does Nikki Thomas rejoining us, alongside such well-known investment professionals like John Sevior, Gerald Stack and Dom Giuliano.”

The board would appoint a CEO when appropriate, after concluding its process, he added.

As for how a share buyback would be funded, given that Magellan has a policy of paying out 90-95 per cent of its profit as dividends, Mr McLennan said: “We’re very cash-accretive, so there’ll be cash available for the buyback, and the buyback plans are about to be undertaken.”