Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
‘We’ll only be trusted if we deserve to be trusted’: Magellan hunkers down
Magellan has gone to its investors with a profit beat, a potential share buyback, and a promise that it will no longer be distracted by dalliances outside its core funds management business.
Magellan came out swinging at its first results briefing since the surprise departure of Hamish Douglass, announcing an increased dividend, a potential share buyback plan, and a 1-for-8 issue of bonus options to shareholders and staff that can be exercised at $35 – likely to prove a key incentive to get performance back on track. The briefing also included a somewhat circuitous statement of purpose from new chief investment officer Chris Mackay.
“We’ll only be trusted if we deserve to be trusted,” Mackay said on Friday (February 18). “In some cases, we must deserve to be trusted to rebuild trust.”
It’s something of a testament to the fact that Mackay is not the showman that Douglass was; that his role is instead about returning Magellan to its strengths, which have always been in funds management, rather than acting as a central decision maker and distribution powerhouse combined.
And in line with that, Magellan has no plans to make any new investments through Magellan Capital Partners (MCP) – which was responsible for the backing of investment bank Barrenjoey, clearing house Finclear, and fast food company Guzman Y Gomez – as it hunkers down to focus on its core asset management business. That will present a boon for all those investors and analysts who questioned what exactly the investments had to do with Magellan’s core strength.
“Asset management is a wonderful business; if we do it right, if we have trust, if we have partnerships, if we have the highest quality people, it really works,” Mackay said. “We’ve got opportunities that we’d never dreamt would come our way.”
But Mackay wasn’t going to spell out Magellan’s long-term vision for that asset management business, though everything he and co-portfolio manager Nikki Thomas said over the last two weeks points to few – if any – changes being made.
“The fundamental, proven investment discipline works, and it’s unchanged since inception… It delivers strong, consistent results to clients, importantly with downside protection,” Mackay said. “It minimises the risk of permanent capital loss across market cycles, and helps clients maintain quality investments during volatility and noise.”
“Markets have hardly started cleaning out the rubbish that started floating up in recent years and which accelerated post-Covid. That is a risk, but a real opportunity for deep Magellan analysis and process.”
Later, Mackay made the bold call that Magellan was unlikely to cut fees despite rampant speculation from analysts that it would be forced to, and that while there had been fund outflows and that he anticipated more, even departing clients “wanted the door to remain open.” Meanwhile, Douglass “appears to be recovering” and Magellan is working on “thoughtful structures” for his return to the fold.
Magellan reported gross revenue of more than A$367 million for the 2021 calendar year, including A$350 million of base management fees and A$11.5 million in performance fees: most of the performance fees came via the group’s global listed infrastructure fund with more than A$10 million paid by retail investors.
Institutional investors comprise just over two-thirds of total Magellan assets under management (now about A$87.5billion) but only 38 per cent of fee revenue.
The loss of the A$23 billion mandate from UK advisory firm, St James Place, in December would knock about A$30 million off forecast net profits for Magellan in the first half of this year, according to a results presentation. Average base fund fees edged up 0.01 per cent year-on-year to 0.62 per cent, according to the presentation.
Magellan has vowed to “[sharpen] investment processes to improve investment performance” as well as embark on a “significant engagement across our institutional client base globally”. The manager also plans to step up its retail charm offensive including an Australian adviser national roadshow in March.
FuturePay – Magellan’s foray into the retirement product space, spearheaded by portfolio manager Paddy McCrudden and former CEO Brett Cairns – also received the backing of Mackay and interim CEO Kirsten Morton, who said they had no plans to do away with the years of work that have gone into it.
“I expect that we’ll get even further behind it; it works, it is doing its job really well, and there’s a lot of professional interest,” Mackay said. “It takes time for something, even though it is relatively simple though has a degree of complexity, for brokers, financial planners, and investors to understand that it meets their needs.”
Magellan shares soared some 15 per cent on the results.
