Turnaround time at Magellan

The first article I wrote in 2023 was titled “Is the pessimism engulfing Magellan overdone?” Two years later, and with the benefit of hindsight, the answer to that question was probably ‘yes’ although the premise was reached a bit prematurely. At the time the share price was $8.73 having plunged from its high above $72 in February 2020. It continued to slide, reaching a low point of $6.22 in October 2023, a total fall of 91%.

Many investors (self included) were badly burnt during this fall from grace. The tendency is to then think ‘I will never touch that stock again.’ But this inbuilt bias may blind us to the potential future opportunities. The reality is the Magellan of today is a very different business to the Magellan of old.

Hamish Douglass used to shun turnarounds, preferring to invest in strongly performing business rather than take the risk of investing in a turnaround, which, as he put it, often fail to turn. Now the business he founded is in the midst of a turnaround with a whole new team at the helm.

The strategy at Magellan Financial (ASX:MFG) has undergone major changes, but it is still primarily a fund manager. So like all fund managers, revenue is driven by funds under management (FUM). Magellan’s FUM peaked at $116.4 billion in November 2021. Today it is $39.1 billion. But the good news is the trajectory has changed. FUM bottomed out at $34.3 billion in October 2023, the same month the share price bottomed, and has been steadily rising since. It has risen 11% in the last year.

The rise in FUM has been largely a result of positive performance. The exodus in funds has slowed right down but they are still experiencing net outflows rather than inflows.

Another big change has been the spread of FUM over different asset classes. Magellan was known primarily as a global equities manager. Today their largest asset class is Infrastructure Equities as shown in the table below and the breakdown is more balanced across the three asset classes.

Funds under management breakdown

There have also been big changes in the leadership team. The departures of CEO Brett Cairns and founder and Chief Investment Officer Hamish Douglass were major triggers in the downturn that started three years ago. David George was brought in from the Future Fund as CEO to try to stabilise and reset the business, but he too has now departed. Well known head of distribution Frank Cassaroti retired and long term CFO and COO Kristen Morton has announced her intention to leave at the end of the year. There have also been many changes on the board.

Andrew Formica who was previously CEO of Jupiter Asset Management and prior to that co-CEO of Janus Henderson Group plc, joined the board in July 2023. A month later he was elevated to the Chairman role and a further two months later became Executive Chairman, taking over the CEO role from David George. He has stated that in 2025 he is looking to recruit a new CEO and step back from that role.

A third major plank in the turnaround has been a shift in strategy. In 2021 the funds management operations contributed 93% of revenue and 165% of net profit before tax (NPBT). In FY24 this had reduced to 74% of revenue and 53% of NPBT.

Other revenue reached $99m compared to $277 million from funds management. It consists of interest and dividend income as well as realised and unrealised gains on investments. The bottom line was boosted by a $10.3m profit from associates compared to a $12.5m loss last year.

Magellan is no longer exclusively a funds management firm. The strategy to invest in affiliates was initially implemented by Hamish Douglass. Whilst it was criticised as being non-core, it is now starting to reap benefits and diversify earnings. The 36% economic interest in investment bank Barrenjoey is the main driver of the associates profit with total profit of $34.7 million at Barrenjoey and revenue growth of 40%. The diagram below shows the new business structure.

Source: Magellan, Results Presentation FY24, 15/8/24

The latest addition is a strategic investment in Vinva Investment Management where they purchased a 29.5% equity stake for $138.5m. Vinva has $22 billion in FUM with about 80% invested in Australian equities and the remainder in global equities focused on systematic strategies. Magellan will distribute Vinva’s products globally under a commercial fee sharing arrangement.

In FY24 Magellan’s revenue fell by 12% which was an improvement over the previous two years. Importantly, adjusted NPAT increased by 2% and statutory NPAT increased by 31%. Performance fees increased by 67% mostly driven by the global equities strategies. They generated a return on equity of 24.1%.

The balance sheet is still very strong and has provided them with the resilience to navigate the last few years. They have no debt and have $555m in capital. This includes cash and investments in their funds. The breakdown is shown below. They anticipate being able to reduce the size of the stability buffer as the business becomes more resilient. They have a high dividend payout ratio and an ongoing buyback scheme. The board are assessing strategic growth opportunities and actively reviewing capital management.

Source: Magellan, Results Presentation FY24, 15/8/24

The big unravelling that occurred at Magellan in 2022 was largely the result of key man risk. That is no longer a major concern with capability spread across teams of people. The share registry is also well spread with the founders no longer represented in the top holders. This is in contrast to fund manager GQG Partners (ASX:GQG) where 70% of the register is held by the CEO.

Whilst this article has largely struck an optimistic, turnaround tone, there are still many challenges remaining. The turmoil of the last few years has had a big impact on staff engagement. A recent staff survey showed that engagement had improved from 52% to 55%, but that is still very low.

Funds management businesses largely live and die on performance, and Magellan’s performance numbers, whilst improving, are still struggling to out perform their benchmarks consistently. With average performance comes fee pressure. The whole active funds management industry has been subject to fee pressure as they try to justify their higher fees compared to passive products. And lastly, regaining client trust. The last few years have been about rebuilding client trust and that is an ongoing process.

When we look at the Stockopedia rankings we see the turnaround story represented quantitatively.

Quality has remained high given the strong margins, profitability, cash flow and balance sheet. Value has drifted a little lower as the share price has rebounded. But the complete turnaround has been in Momentum which has gone from 9 two years ago to 99 now. Is the market trying to tell us something?

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