27 Jun Magellan should return capital to win back investors: Sandon

Source: Financial Review

By: James Thomson

Activist investor Sandon Capital says Magellan should abandon its plan to rebuild funds under management to $100 billion, and instead focus on returning at least $300 million to shareholders as part of a broader push to restore investor faith.

Sandon argues that Magellan, which has suffered a share price plunge of almost 90 per cent to $8.61 since the stock peaked in February 2020, could be worth more than $15 a share, even if FUM grows only marginally from the $41.4 billion reported earlier this month.

Magellan’s FUM peaked at $116 billion in November 2021, as the company rode the pandemic boom in growth stocks under the leadership of co-founder and former chief investment officer Hamish Douglass.

But a series of missteps in the management of the group’s flagship global equities fund resulted in a prolonged period of poor performance and fund outflows. Mr Douglass’ departure from the company in February 2022 further eroded investor confidence.

Former Future Fund executive David George joined the group as chief executive in July 2022, but has so far failed to stem outflows. However, Sandon managing director Gabriel Radzyminski said there was still significant value in Magellan if it could focus on restoring the performance of its flagship global equity fund, find ways to cut costs, and prioritise the return of capital.

“What we’re really focused on here, and I think the market has missed, is: forget where the business was, what remains has the potential to be incredibly valuable. It is valuable. Therefore, what’s the priority? Let’s protect the crown jewels. Once we’ve protected them, then we can look at what to do next,” Mr Radzyminski said.

“What we’re suggesting is not groundbreaking, it’s not revolutionary, it’s actually common sense. This is a positive pitch that’s about highlighting the value and the opportunity that exists inside Magellan.”

Sandon, which is Magellan’s 13th largest shareholder with a stake just under 1 per cent, believes Magellan could return about $300 million from surplus cash and by redeeming some of the capital that Magellan has invested in its own funds.

While these investments were originally designed to align the interests of shareholders and the company, Mr Radzyminski said the market simply did not value these holdings as Magellan might hope.

“We get the need for alignment of interests. We just don’t think that alignment is best achieved by having such a large part of the company’s capital – shareholders’ capital – invested in those funds.”

Sandon, which has been part of successful activist campaigns at Iluka, City Chic, Fleetwood Corporation and A2B, believes further capital could eventually be returned to investors via the sale of Magellan’s stakes in investment bank Barrenjoey and financial technology group Finclear. All told, Sandon values Magellan’s cash pile, its investment in its own funds and its investments in Barrenjoey and Finclear at $1.1 billion.

But given Magellan’s market cap has plunged from $13.4 billion in February 2020 to just $1.4 billion, Sandon says that implies the funds management business is worth about $355 million. Sandon estimates the funds management business trades on an enterprise value-to-EBITDA ratio of 2 times, while its peer group (including GQG, Platinum and Regal) trades on an average multiple of 6.4 times.

Sandon is supportive of Mr George’s attempts to improve returns from Magellan’s flagship global equities fund. While it continues to lag the benchmark MSCI World Index on a three, five, seven and 10-year basis, it has delivered a return of 14 per cent over the 12 months to May, 0.9 per cent ahead of its benchmark.

“They’ve talked about what they’ve done to improve the operations of the global equity business and that’s already beginning to show green shoots. That’s something we strongly agree with,” Mr Radzyminski said. “What we think they really need to do is focus on capital management and costs.”

Mr George has previously said he would like to restore Magellan’s FUM to $100 billion within five years, by launching new strategies and acquiring investment teams. But Sandon believes the FUM target poses risks for shareholders for two reasons.

First, new product launches and acquisitions can be fraught, as Sandon says is demonstrated by its own growth initiatives. Funds under management at Airlie, which Magellan acquired in 2018, have fallen 30 per cent despite Airlie smashing its benchmark. Several Magellan product launches have been underwhelming, including the much-hyped FuturePay product, which launched in 2021 only to be shut a year later.

“We are very sceptical of acquisitions,” Mr Radzyminski said. “They’re always risky and most acquisitions in most industries tend not to add value. We’re not saying that you shouldn’t do them, but you’ve got to earn the right to do these things.”

Sandon is also concerned that chasing the $100 billion FUM target will justify Magellan growing its cost base when it should “undertake a root and branch review of capabilities and costs”. Magellan’s cost-to-income ratio is running at 47.4 per cent, while its historical average is 21.8 per cent and its peer average is 29.2 per cent.

Sandon does not believe Magellan needs to focus on growing inflows; its base case calls for an average FUM of $44.5 billion. With a cost-to-income ratio of 35 per cent and an EV/EBITDA multiple of 6 times, Sandon says Magellan could be worth $11.79 on its base case, $8 on its bear case, and $15.29 on its bull case.

Magellan’s history had shown that the primary driver of FUM growth has been investment performance, rather than inflows.

“If you understand where the majority of growth comes from in the industry, and where it has come from in your own experience, there’s a message in that. Investment performance is powerful. That’s not to say you don’t try to grow inflows. But our view is that the priority needs to be on stabilising the existing business. Then once you’ve done that, you effectively earn the right to do the next thing.”

Magellan declined to comment on Sandon’s pitch. Mr Radzyminski said his firm “had reasonable engagement, certainly with management”.

“But the view was that given where things landed, we felt it was important to highlight, more to the market, and perhaps remind shareholders, of the value that lies here.”