Barrenjoey costs hurt Magellan’s profit performance

Funds manager Magellan Financial’s annual profit has been hit by Barrenjoey costs, amid a ‘challenging’ year for global equities.

Magellan Financial, chaired by Hamish Douglass, has reported a 33 per cent drop in annaul net profit, hurt by costs related to the Barrenjoey investment banking start-up. Picture: Britta Campion / The Australian​

Global funds manager Magellan Financial suffered a fall in annual profit as a “challenging” year for its global equity strategy lowered performance fees and costs rose.

Despite solid growth in funds under management, net profit dived 33 per cent to $265.2m for the year to June 30.

Magellan shares fell more than 10 per cent to a three-month low close at $46.20 after the company reported its full-year results on Tuesday.

Underlying profit after tax fell 6 per cent to $412.7m amid direct investments by Magellan Capital Partners and Magellan’s new products and strategies including its stake in the Barrenjoey investment banking start-up.

Magellan has a 40 per cent stake in Barrenjoey, which has appointed a string of high-profile bankers following staff raids from rival firms over the past year.

Co-founder, chairman and chief investment officer, Hamish Douglass, said the results reflect the “start-up losses and costs, but not the potential long term financial benefits”, of both the new fund initiatives and investments.

Reported profits included transaction costs of $220.2 million or $154.1 million after tax.

That includes spending on strategic initiatives like the Magellan Global Fund Partnership Offer and options issue, the restructure of the Magellan Global Fund and the launch of Magellan FuturePay, as well as a share of after-tax losses of $41.8m from investments in Barrenjoey, GYG and FinClear.

“This is predominantly attributed to Barrenjoey which is currently incurring large start-up costs as their executives build out the team, onboard clients and set up the required infrastructure,” he said.

But these costs were anticipated, and that the company was confident both in the prospects for each of these investments and that they will strengthen the company over time.

“At Magellan, we do not focus on short term earnings or performance and that will not be changing,” Mr Douglass said.

Magellan’s pretax profit excluding performance fees rose 10 per cent to $526.6m.

Revenue rose 3 per cent to $715m with average funds under management rising 9 per cent to $103.7bn. Management fees rose 8 per cent to $631.4m as average funds under management rose 9 per cent to $103.7bn.

Performance fees dropped 63 per cent to $30.1m as reported earlier by the company.

Magellan will pay a final dividend of $1.14 a share, 75 per cent franked, giving a total of $2.11 for the 2021 financial year.

That includes $1.026 from normal operations and 11.5 cents a share from performance fees.

The group also said a dividend reinvestment plan discounted at 1.5 per cent will be offered.

Mr Douglass said in some respects it has been a challenging year.

“While Magellan’s Airlie Australian Equities and Infrastructure Equities strategies have had a stellar year, our Global Equities strategy – for which I have responsibility - has had a more difficult year, measured by relative performance versus the market over the past 12 months.”

“This is in part due to our caution leading into the announcement of the vaccine result in early November 2020 and the defensive nature of the Global Equity strategy,” he said.

The Magellan Global Fund returned nearly 11 per cent versus 27.5 per cent for its benchmark.

Since inception in 2007, the Magellan Global Fund has returned 11.9 per cent versus 7.7 per cent for the benchmark, but in the past five years it has slightly underperformed the benchmark.

Mr Douglass said that because the portfolio was nothing like that of the overall market, “you should therefore expect our portfolio to sometimes materially outperform or underperform.”

“Our investment style means we would generally expect in the short term to outperform falling global equity markets if there is a material market downturn and underperform a very strong equity market rally,” he said.

“We believe our skill is judging where the earnings of a business will be in three, five and 10 years and not how a company’s share price will perform relative to the equity market in the short term.”

A “maximum risk cap” for the portfolio of 80 per cent of the combined volatility and stock ‘downside risk’ compared with the world equity market has “shown its worth over time.”

“Unsurprisingly, this risk cap has been a significant constraint on the strategy over the past year when higher-risk cyclical stocks boomed on news of successful vaccine trial results,” he said.

“We believe our conservative approach of capping risk and investing in a concentrated portfolio of high-quality companies that have been purchased at attractive prices is prudent and is likely to continue to deliver superior returns with lower risk over time.”

For the current financial year, Magellan forecast its funds management segment expenses to be in the range of $125-130m, largely due to deferred bonuses as deferred remuneration arrangements are reset, and some salary increases, driven by expected modest new hires and increases in salaries.

Two months ago Magellan launched its long-awaited income strategy for retirees, FuturePay.

The product offers monthly distributions with a starting yield of 4.3 per cent.