Magellan urges calm after dive following loss of mandate from UK’s St James’s Place

Magellan chairman Hamish Douglass has dismissed criticism of the fund manager’s performance and highlighted its financial strength after the loss of its biggest investment mandate.

Magellan chairman and co-founder Hamish Douglass is being tested once again after losing a key mandate. Picture: Hollie Adams/

Magellan Financial chairman Hamish Douglass has dismissed criticism of the fund manager’s performance and highlighted its financial strength after the loss of its biggest investment mandate.

Magellan shares dived 33 per cent to a five-year low of $19.70, their worst day on record, after the company confirmed the loss of the mandate, which represented about 12 per cent of annual revenues and was expected to have a 6 per cent negative impact on fiscal 2022 revenues. The share price collapse on Monday wiped around $1.8bn from the company’s market capitalisation.

In an internal memo, Mr Douglass expressed his disappointment with the decision by UK fund manager St James’s Place to end the mandate, which was a “very important milestone in the development of Magellan” and had “contributed to the outstanding business we have today”.

“We are obviously disappointed and will miss the interaction with SJP and their great network of advisers,” Mr Douglass said. “As is the case with all clients, we have to respect their decision.”

Mr Douglass said Magellan’s global equity strategy had underperformed over the past 12 months, but that he had “great confidence that our team and process will stand the test of time”.

“Notwithstanding our prudent approach, it is natural for the media and investors to compare us to the market-standard global equity benchmark, the MSCI World,” he added.

“Given our global strategy owns 20-40 stocks and the MSCI covers 1600 stocks it isn’t surprising that there will be material performance deviations from time to time … it does tend to underperform in very strong markets, such as over the last 12 months.

“The risks in current markets are very elevated and time will tell if our prudent approach will continue to serve our clients well.”

The SJP mandate, which was “at risk” in recent months after SJP pulled some other global equities mandates, was worth over $23bn and had been expected to contribute about $86.5m to group revenue this financial year, according to Macquarie equities analyst Brendan Carrig.

But Mr Douglass told staff that even with the loss of SJP, Magellan had a “very strong business that was very well diversified”.

Moreover, its biggest client relationship now represented just 3 per cent of its revenues, and it had over 150 institutional relationships around the world and relationships with thousands of financial advisers in Australia and New Zealand.

“Our business is financially extremely strong, with no debt, significant financial assets and we enjoy very strong margins and cashflows,” Mr Douglass said.

“Our employees and our clients are our highest priority and our privileged financial position allows us to continue to invest, support, reward, and innovate. This will not change.”

“We have been closed to new institutional mandates for many years and this will enable us to reopen our global strategy to the institutional market in the years ahead,” Mr Douglass added. “This will of course take some time.

“Our quality and low-volatility global strategy is very well understood in the institutional market and we are confident of attracting new client relationships in the years ahead.”

A spokesman for St James’s Place said the British fund manager had appointed State Street Global Advisors as replacement manager, effective Monday, after it gave notice to Magellan on Friday. “We regularly review fund managers across the portfolio and our model allows us to change manager at short notice if we deem it appropriate to do so,” SJP said in a statement.

“Our investment management approach gives us the freedom to choose from the best managers in the global investment market in order that we continue to build a world class investment ­proposition for our clients.”

The loss of the SJP mandate came less than a fortnight after the shock departure of former Magellan chief executive Brett Cairns for personal reasons and a statement from Mr Douglass and his former wife Alexandra that they had separated some months ago.

Ongoing poor performance, the sudden departure of Magellan’s chief executive and developments in Hamish Douglass’s personal life “have all likely played a part in SJP’s decision to terminate the mandate”, Macquarie’s Mr Carrig said.

While the exact quantum of the SJP mandate wasn’t disclosed, he estimated it was worth $23.3bn, assuming SJP fees were in line with the 37 basis point average of the entire institutional business. That would leave about $63bn of institutional funds under management and $30bn of retail money.

At the current tax rate of about 23 per cent, that SJP mandate loss also implied a $66.5m reduction to Magellan’s net profit after tax, or about 15 per cent, based on Macquarie’s numbers.

The institutional component of Magellan’s funds under management was “most at risk in the near term”, while its $10bn in Australian equities and $20bn in infrastructure was less at risk, said Mr Carrig, who put his “outperform” rating and $38.50 target price on review.

He said Magellan’s retail pricing “remains elevated at about 123 basis points with outflows from this channel likely to persist for some time in the absence of improved performance, which could result in revisions to MFG’s pricing”.

The collapse in Magellan’s share price comes after a steady decline over the past 20 months amid a sub-par investment performance and fund outflows from the flagship Global Equities Fund.

However, Magellan’s flagship global fund has met its 9 per cent performance target over nearly all time periods since inception in July 2007.

And for the 10 years to October 2020, Magellan’s pre-fee performance was more than 5 per cent per annum above its benchmark, putting it in the top 7 per cent of all global equity strategies in the eVestment universe of 851 strategies globally.

Locally, on a net-of-fees basis, the strategy was comfortably in the top 5 per cent of its Morningstar peer group of 295 funds over the same period.

Magellan also boasts a strong balance sheet, with $876.4m of net tangible assets and no borrowings as of June 2021.

But its funds have missed their benchmarks since the start of the Covid-19 pandemic in early 2020.

London Stock Exchange-listed SJP was Magellan’s biggest corporate client across three mandates, representing 25 per cent of its institutional managed funds and about 18 per cent of all funds under management at the company.