Magellan funds drained of $50 billion over 12 months

Leadership turmoil and a lack of institutional investor confidence have taken their toll on Magellan Financial Group (ASX: MFG) as funds under management (FUM) were cut in half in 2022 down to $45.3 billion.

The company, embroiled in controversy since the lead-up to the departure of its talismanic co-founder Hamish Douglass in March and without respite even after his return as a consultant, has not reported a single period of net inflows to its FUM since FY21.

Over the 2022 calendar year the group's FUM fell by more than $50 billion. Whilst some of that can be attributed to depressed global markets, almost $35 billion can be attributed to net cash outflows.

Institutional investors were pulling out their funds to a greater degree with a 59 per cent reduction in institutional FUM, versus a 38 per cent fall for retail investors. 

This has changed Magellan's investor make-up dramatically. At the end of 2021 the group's funds for institutional investors were worth more than double that of their retail counterparts, but now they're just 28 per cent higher. 

In terms of where those funds are invested, the value of Magellan's global equities investments has fallen by more than two-thirds to $20.6 million, while the relative share of infrastructure and Australian investments has gone up.

The response from the share market today has been swift with MFG shares down more than 9 per cent at the time of writing at $8.81 each.

It is a state of affairs that falls well short of the $113.9 billion in FUM reported in FY21 - a year in which the company reported net cash inflows of $4.5 billion, closing at a share price that was around six times higher than what it is today.

In the lead-up to Douglass' exit, the market was also taken aback by the shock departure of then CEO Brett Cairns for personal reasons in December 2021. Around three months later, signs of Douglass' possible exit came into view when he announced a medical leave of absence.

In May 2022 the group recruited former Future Fund deputy CIO David George as its next CEO, starting in the role on 19 July and replacing Kirsten Morton who had held the fort in the interim. 

"Changes to Magellan’s leadership team and personnel, as well as relative underperformance in the Global Equities strategy, have impacted client confidence and contributed to a period of declining funds under management and profitability," George wrote in Magellan's annual report, just a few weeks into his tenure.

"Despite recent changes, Magellan’s goal of protecting and growing its clients’ wealth remains undiminished. My initial impressions are of a professional, energetic and committed team with a tremendous pride to deliver for our clients. I am looking forward to working with the team in service of this goal," he said at the time.

In FY22 itself the financial results were not as disastrous as the investment pull-back would suggest. Total revenue was down by 23 per cent at $553.5 million and net profit after tax (NPAT) was actually up 44 per cent at $383 million.

However, that statutory result was largely due to net unrealised fair value losses of more than $65 million relating to financial assets and liabilities, after tax. A more representative result of adjusted NPAT showed a 3 per cent decline to $399.7 million. Around 8.5 per cent of that profit figure can be attributed to gains from the sale of Mexican food chain Guzman y Gomez.

"Whilst our funds under management and financial results in the second half of the year reflect the challenges Magellan has faced, they also demonstrate the scale and resilience of our business," chairman Hamish McLennan said in the annual report.

"In a year of change and transformation for the company, our balance sheet has remained strong and our current levels of profitability provide an excellent platform from which to reinvest in the business and grow.

"There is, of course, much work to do in regaining the trust of our clients and shareholders but we are committed to rebuilding this trust and to returning value to Magellan's clients and shareholders."

McLennan noted the global equities strategy had underperformed relative to the market over the preceding 18 months, and that Magellan had to do better.

At the annual general meeting (AGM) in October the new CEO David George said the global equities strategy had "wavered", and that by appointing himself as chief investment officer (CIO) and Gerald Stack as deputy CIO, the organisation would be best placed to deliver investment performance to clients.

"My role as CIO is not as a portfolio manager, but rather I am there to think more broadly about where the world and our clients are evolving toward and shape our investment capability to address this," he said.

"I will aim to ensure effective, accountable, and well organised processes, drive excellence in portfolio construction and risk management, and empower our team of portfolio managers and research analysts by providing them with the right resourcing and tools and removing every distraction possible so they can give maximum focus to performance.

"Gerald, as Deputy CIO, will be focused on getting the team to work more efficiently, collaborate more and generate investment ideas faster and wider than previously."

He said he was pleased with progress on the portfolio side of the business, and that he was consolidating portfolio management responsibilities into the hands of the portfolio managers he believed have the e right combination of experience and capabilities such as in sustainability and environmental, social and governance (ESG).

George explained funds growth would be underpinned by Magellan's 35-member distribution and marketing team which collectively nurtures relationships with more than 80 institutional clients globally, and 9,000 advisers in the local retail space, with more than 500,000 direct and indirect investors.

At the AGM, he exclaimed his belief that Magellan would be a fund manager of global scale once more with more than $100 billion in FUM after five years.

"This will not be growth for the sake of growth. It will be considered growth, driven by creating long-term shareholder value. We have a strong balance sheet and capacity to execute this, while continuing with the existing on-market buyback programme and pay dividends," he said.

"This growth will also be more diversified, as we expand our range of capabilities, we will be less dependent on our global equities business.

"We will invest in our relationships to maintain our position as a partner of choice for the Australian wealth industry, maintaining and growing the well of commitment and support from our adviser partners."