Magellan management reshuffle and special dividend

Source: The Australian

By: Tansy Harcourt

Magellan Financial Group has revealed a surprise reshuffle including a new head of investments and a new chairman, after posting a worse-than-expected 52 per cent drop in full year profit to $182.7m on the back of continued fund outflows.

Shares in Magellan surged more than 16 per cent after the news that there would be new hands on deck at the firm, which has been in a downward spiral since the shock departure of founder and reputed equity-guru Hamish Douglass last year.

After the market closed on Thursday, Magellan announced that recently appointed board member Andrew Formica – who has significant fund manager experience – would become the new chairman and Hamish McLennan would step back to deputy.

On Friday the firm made also said chief executive and chief investment officer David George, who started at Magellan in the wake of Mr Douglass’s departure, would relinquishing his equity job and current deputy Gerald Stack has been promoted to head of investments.

Since that time its funds under management has slumped from $100bn-plus to $39.2bn by the end of July.

Mr George would not comment on whether he had driven the move, declaring it was a “live discussion” with the board that “makes sense.”

“It’s a good thing for me to have more time to focus on being the CEO and growing the business,” Mr George said.

While earnings were just short of expectations, the beleaguered fund manager also announced a special dividend of 30 cents per share – which had short sellers racing to cover positions – and delivered better than expected funds management operating costs of $121.3m and had net cash flow of $186.6m.

“These results show this is a quality high cash generative business and despite the perceptions it is still immensely valuable,” said Sandon Capital chief investment officer Gabriel Radzyminski.

Magellan and its active fund rivals have been struggling with tumultuous market conditions, a move by investors to lower paying passive funds and the cost of living crisis being exacerbated by rising interest rates.

Mr George, who has previously promised a return to the $100bn times, on Friday said that was still possible to achieve despite the continued slide in the opposite direction but admitted it may need to come through acquisitions of rival firms or teams.

“It’s always been a long-term strategy so we’ve got the first piece being making sure the current strategies are working, we started on the second leg which is looking where we can build our current capabilities in an organic way, so we’ve launched two strategies and relaunched the Core Series, and then other pieces that are in organic,” Mr George said.

“To get to $100bn that’s probably part of it.”

But that approach may not be in line with many investors’ expectations, with Mr Radzyminski noting the Magellan leadership team had not earned the right to spend shareholder capital on M&A activity, adding the special dividend was “welcome but frankly not enough”.

“You’ve got an untested management team wanting to do acquisitions and that is scary,” Mr Radzyminski said.

“We’d like to see them return capital to shareholders first, that’s what’s got the biggest delta. Come good on everything else that you’ve said you are going to do and then consider growth opportunities in the future.”

In addition to the special dividend, Magellan said it will pay a final dividend of 35.6c per share and a performance fee dividend of 4.2c per share, taking total ordinary dividends for the year to 86.7c per share, 85 per cent franked.

The company booked a loss from investment bank Barrenjoey – which it owns 36.4 per cent of – and also dropped its carrying value by $2m from the first half to $124m.

Magellan had valued the firm started by former UBS veterans Matthew Grounds and Guy Fowler at $150m when they made the first investment. Barrenjoey has a value of $820m for the whole company, according to analysts based off the buy-in price of Barclays last year.

On an EBITDA basis, Barrenjoey lost $26m for the year, which narrowed to $6m in the second half as it finished setting up its derivatives and prime finance units.

Barrenjoey CEO Brian Benari said he was “delighted” with how his investment bank had managed the slowing capital markets and reined in expenses while establishing its new units.

“Revenue is up in subdued market conditions, expenses are controlled, and we delivered an operating profit again.”

Newly anointed chairman Mr Formica has had significantly more industry experience than the outgoing chairman, having most recently been the chief executive officer of London-based Jupiter Fund Management. He left the £55.3 billion firm suddenly last year after two years in the role, declaring he would like to spend some time on the beach.

Before joining Jupiter he worked at Janus Henderson Group – formed through a merger of Janus and Henderson group – and left there after missing out on the top job of the newly combined group.

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