08 Nov Magellan vulnerable to takeover as board hit with first strike

Source: Financial Review

By: Jonathan Shapiro

Magellan Financial shareholders have registered a large protest vote against the fund manager’s board, with the company’s new chairman, Andrew Formica, urging investors to focus on the company’s strong balance sheet and its plans for the future.

Mr Formica said he had listened to the feedback of shareholders after 58 per cent of investors voted against the remuneration report at the company’s annual meeting in Sydney on Wednesday. As more than 25 per cent of shareholders rejected the remuneration report, the Magellan board will face re-election if there is a similar outcome at next year’s annual general meeting.

“We accept and acknowledge that shareholders are disappointed with our remuneration framework and want to assure shareholders we have taken on your feedback,” he said.

Four directors, including Mr Formica, were elected to the board, while former Australian rugby union captain John Eales was re-elected by a narrow 62.4 per cent majority.

Magellan’s shareholders in attendance showed restraint, despite having endured another torrid year of staff departures, client redemptions and a further 20 per cent decline in the share price. That followed a 60 per cent fall last year. On Thursday, shares in Magellan traded 0.7 per cent higher at $6.97.

Mr Formica has been installed as a temporary chief executive after the departure of former Future Fund executive David George, and is leading the search for a replacement. Only 12 months ago, Mr George unveiled his plan to restore Magellan’s funds under management to $100 billion.

‘Can’t lose an asset twice’

The new chairman says Magellan’s strategy has not changed, although he distanced the company from that funds under management target. Earlier this week, Magellan reported $800 million of redemptions in October as assets slipped to $34.3 billion – well below the $118 billion peak reached in September 2021.

Mr Formica said the bulk of the client losses have been in the global fund as institutional clients pulled mandates.

“You can’t lose an asset twice,” he said, before adding that it would take time to win back the trust of investors and turn fund losses into gains.

“We’re going to need two or three years of sustained performance before we can really get strong engagement, particularly in that strategy.”

“It’s just an unfortunate situation where our business finds itself.”

Mr Formica, however, was keen to impress upon shareholders, some of whom were concerned about the firm’s financial viability and others the coveted dividend, that Magellan’s advantage was its strong balance sheet.

Magellan had $945 million of cash and investments, which at its current share price accounts for about 70 per cent of its $1.3 billion sharemarket valuation.

What to do with this capital, however, is a point of contention. Mr Formica has said he was open to acquisitions such as acquiring boutique funds or investment teams, but also admitted Magellan itself “may well be a target”.

Sandon Capital, an activist investor, has pushed for Magellan to return the bulk of that cash to shareholders. Sandon’s Gabriel Radzyminski said this excess capital made Magellan vulnerable to a takeover at a price that potentially distorted the “upside opportunity for shareholders”.

Mr Formica said he agreed with most of Sandon’s proposals. However, he argued that it was in the interests of Magellan to strike a balance between retaining and distributing its excess capital. “I’ve seen many in our industry move to what I would call a capital-light model … and then they’ve found themselves in a strategic conundrum where they’d like to make change to their business, and they don’t have the ability to do so.”