Magellan rides out the storm with rise in profit

Magellan Financial Group is reaping the rewards of a strong investment performance in volatile markets

Magellan chairman Hamish Douglass and CEO Brett Cairns. Picture: Jane Dempster

Magellan Financial Group is reaping the rewards of a strong investment performance in volatile markets driving lucrative fee income and funds under management as it prepares new low-cost products for the next phase of growth.

The global fund manager co-founded by Hamish Douglass announced a net profit after tax of $396.2m for the year to June 30, a 5 per cent increase from $376.9m a year earlier.

Adjusted net profit rose 20 per cent to $438.3m from $364.2m a year earlier.

Magellan will pay a final dividend of 122c a share including a performance fee dividend of 30.4c a share. The full-year dividend rose to 214.9c from 184.2c a year earlier.

Funds under management rose 26 per cent to $97.2bn, boosting management and services fees by 25 per cent to $591.6m. Performance fees rose 3 per cent to $81m.

“Magellan has had a strong year and proved resilient in difficult market conditions,” CEO Brett Cairns said.

Amid extreme volatility after coronavirus struck, Magellan’s flagship Global Fund returned 9 per cent after fees, beating the MSCI World index in Australian dollars by 4.2 per cent.

Magellan’s share price closed up 2.5 per cent at $63.24 yesterday after hitting a six-month high.

The fund manager also proposed the launch of low-cost “MFG Core Series” funds that leverage Magellan’s investment philosophy and proprietary research to offer retail investors more diversified, lower cost portfolios of high quality companies. It plans to make the MFG Core Series and Magellan Sustainable Fund available to investors via exchange quoted open-ended funds by the year end.

Ord Minnett analyst Nicholas McGarrigle said the new funds might boost capacity by 50 to 100 per cent, depending on the amount of overlap in portfolio construction. Even a 30 to 45 per cent take-up implied $2.6bn to $3.9bn of incremental net inflow into closed-end units over the next three years. In his view, Magellan’s plan to offer these bonus issues only to closed-class units was “sensible”, as Magellan was paying a small price upfront to increase its perpetual capital.

“With the market in a somewhat precarious position, moving investors toward closed-end units also preserves funds under management through any potential market rout, as this tends to coincide with outflows, as seen for Magellan in March 2020 when it lost $303m of retail FUM despite performing well,” he added.

While mindful of the fact that the planned new investment strategies for retail investors via the MFG Core Series — including international, ESF and infrastructure funds — might cannibalise Magellan’s existing products “at the margin”, Mr Cairns said he believed most people invested in Magellan’s flagship global fund, for example, were prepared to pay a premium for the active management of a portfolio under the guidance of Hamish Douglass.

In regard to the potential impact of COVID-19 on Magellan’s engagement with investors, he noted retail inflows were very strong overall over the past year.

“We had some outflows in March when things were really wobbly, but it wasn’t very much at all — something like $300m from a book of around $3bn — and that rebounded very quickly.

“If you look at our active ETFs, in that sense, there are 55 new unit holders that turn up every day. That’s on average, and it March that only dropped to about 40, so it has been pretty resilient.”

Mr Cairns also said Magellan’s workforce transitioned smoothly to working from home during the pandemic where the majority of its staff remain, and he saw a durable shift to a higher proportion of staff working from home.

Magellan said its proposed retirement income product had been delayed by COVID-19.