Magellan funds slashed by almost half in last financial year

The embattled investment manager’s new chief will have a difficult turnaround task ahead with outflows mounting up in the last financial year.

Magellan Financial’s new chief executive David George.

A collapse in institutional funds under management has propelled Magellan Financial to report $52.6bn in total outflows for the financial year.

After months of turmoil – and the departure of founders Hamish Douglass and Brett Cairns – the fund manager’s new chief executive, former Future Fund deputy CEO David George, will start at the company in just over a week.

In an investor update, Magellan said funds under management had fallen to $61.3bn, compared to $65bn in May. At the end of June 2020, funds under management stood at $113.9bn.

Part of that was due to market volatility and foreign exchange changes, but Magellan disclosed that $5.2bn in the last three months alone were from investors pulling money.

Magellan now has $22.2bn in retail funds under management and $39.1bn in institutional funds under management, it said.

Morningstar analyst Shaun Ler told The Weekend Australian that the institutional outflows were less severe than he had expected – and he did not model further large outflows.

“The retail flows on the other hand were more than I had expected,” said Mr Ler, adding that they were $500m more than Morningstar had anticipated for the quarter.

“Retail money contributes more than half of the revenue, and that retail money is a point to watch,” he said.

“Magellan has historically had a very strong following in the retail market. With their unsatisfactory track record and high fees, there will be financial advisers finding it tricky to justify Magellan as an investment.

“They need to meet the best interest requirements and these are very stringent. You need to perform well and you need to be cheap. If you are underperforming and you are expensive, things get difficult,” said Mr Ler.

Magellan shares dropped 2.4 per cent, or 30c, to $11.97. They had traded at $45.98 per share one year earlier, but a string of controversies – and poor returns – have led to significant outflows and a collapse in the company’s share price.

Mr Douglass went on leave in February, months after the departure of Dr Cairns, who abruptly quit as chief executive in December. The fund manager has not explained the reasons for Dr Cairns’ resignation.

Mr Douglass was replaced as chairman by Hamish McLennan and by a Magellan co-founder, Chris Mackay, as chief investment officer. But the departure of Mr Douglass resulted in significant disruption at Magellan, and led some influential ratings groups to place the company’s global equities strategies in review, indicating, indicating to financial advisers that no extra money should be placed into the funds.

In particular, there was significant speculation about Mr Douglass’ personal life ahead of his departure for medical reasons. Mr Douglass later clarified that he had separated from his wife “some months ago” but said that the pair remained “extremely close and united”.

The funds manager also lost its largest mandate, from British firm St James’s Place, in late December, sending shares lower.

Earlier this week, Magellan’s head of sales and distribution, Frank Casarotti, said he would retire from the company in December 2023. He joined the company from Colonial First State, where he was head of adviser distribution, in 2007.

Mr Casarotti is well-connected with the company’s key financial adviser base, and will be a loss, Morningstar’s Mr Ler said. “Magellan will need to beef-up its distribution team … from my past discussions with them, they are in the early stages of doing so and all eyes will be on what happens when George comes on board in a few weeks.”

Other analysts are also bearish on Magellan. Last month, UBS told clients that while many “negative catalysts” had played out over the last six months, there were still a number of factors presenting downside risk.

“Retail fee margins may be reviewed by the new CEO, where we estimate potentially lowering global equity retail fees from 135 (basis points) to 75bp would present a $120m/pa revenue risk,” wrote the investment bank’s analyst Shreyas Patel.

Magellan declined to comment.