Magellan Financial Group Limited (MFG) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning. And on behalf of the company, welcome to the Magellan Financial Group results presentation for the half year ended 31 December 2020. I'm Sarah Thorne, and I manage the Investor Relations function at Magellan. Today, the company's results will be presented by Brett Cairns, Magellan's CEO; and Kirsten Morton, Magellan's CFO. Hamish Douglass, Magellan's Chairman and Chief Investment Officer, will join the Q&A at the end of the presentation. Please note, we will host a Q&A session at the end of the presentation. [Operator Instructions] Please note that today's presentation is being recorded, and a replay will be available on Magellan's website. We may also have media in attendance today. Thank you, and I would now like to welcome Brett to take you through the presentation. Thanks, Brett.

Well, thanks, Sarah, and welcome, everyone, to our interim results presentation. Let me quickly run through the interim highlights. Our average funds under management corresponding period to corresponding period is up -- was up 9% to just under $101 billion. Management and services fees as a result of that grew 8% to $311.4 million. And that drove profit before tax and performance fees, which, of course, move around from period to period in the Funds Management business, of an 8% increase to $256.2 million. Net profit after tax -- reported net profit after tax was up 3% to $202 million -- just over $202 million. And our adjusted net profit after tax, which we adjust for such things as strategic investment costs, unrealized gains, amortization, et cetera, was down slightly 2% to $230.1 million. The interim dividend was up 5%, which reflected the growth in the Funds Management business to $0.971 per share, again, 75% franked as previous periods. Today, Kirsten is going to talk about the group results, then I'll come back and discuss the Funds Management business and an overview of the business. And before throwing to questions, I'm going to ask Hamish to talk about markets given it's been, obviously, a very interesting period over the last little while, what he's seeing in markets and indeed, how the global equity strategy has been positioned for that. So with that, let me hand over to Kirsten.

Thank you, Brett, and good morning, everyone. The group has delivered solid financial results for the 6 months to 31 December 2020. The group's statutory net profit after tax, as Brett mentioned, was up 3% to $202.3 million compared to the prior half year. That increase was mainly due to the 9% increase in our average funds under management, and that resulted in an 8% increase in our core revenue, being management and services fees. As we've mentioned in the past, performances fees, by their nature, will be lumpy and have the potential to fluctuate significantly period to period. In the current half year, the group earned performance fees of $12.4 million compared with $41.7 million of the prior half year. During the period, Magellan made 2 investments in external businesses, Barrenjoey and FinClear. These were held in the group's principal investments, and Brett will discuss those later in the presentation. But for now, for accounting purposes, the group classifies these as equity-accounted investments and records them as a separate line in the P&L, its share of the net profit from those businesses. For the 6 months to 31 December 2020, this was $6.1 million net loss. The group's adjusted net profit after tax for the half year was $213.1 million, which was down 2% compared to the prior half year. And by way of a reminder, adjusted net profit is the group's statutory net profit excluding certain items. These items are shown on Page 4 of the slides. As of the December 2020 half year, it comprised of 3 adjustments: Firstly, a noncash item of $2.3 million, which related to the amortization expense on intangibles from the Airlie and Frontier businesses we acquired in prior years; a $5.6 million adjustment, which related to the unrealized losses net of tax in shares and units held by the principal investments portfolio. And as we record market movements in those equities directly in the P&L, we consider it meaningful to remove the unrealized market volatility from our revenue, whether they be gains or losses; and a $2.9 million adjustment, which relates to the one-off strategic transaction costs. This year, these related to the 6 monthly funding costs with the DRP discount into closed-ended Magellan funds and some costs relating to the restructure of the global equity retail funds that we completed in December. Brett will talk more on that transaction later. We continue to feel that adjusted net profit provides a meaningful performance information of our business as well as comparability year-on-year or half year on half. Finally, diluted earnings per share increased slightly to $1.106 per share compared to December 2019, and adjusted diluted earnings per share was $1.164 per share, which reflects a 3% decline, broadly in line with the group's adjusted net profit for the current half year. Turning to tax and dividends on Page 5 of the slides. Our effective tax rate for the half year ended 31 December 2020 was 22.2%, and this is lower than the corporate tax rate of 30% as it reflects the benefits of our offshore banking unit license. As has been the case in prior years, in simple terms, the group's effective tax rate ultimately depends on our mix of the offshore and domestic income and expenses, and that fluctuates year-to-year or half year to half year. As mentioned earlier by Brett, the directors have declared an interim dividend of 17 -- of $0.971 for the half year ended 31 December 2020. The dividend announced today reflects Magellan's dividend policy, which is to pay out between 90% to 95% of net profit after tax of the Funds Management business excluding the amortization expense and the costs related to strategic initiatives, and it excludes the crystallized performance fees at the half year. The dividend will be franked at 75%. As previously flagged, given our payout ratio and the interplay with our status of -- as an offshore banking unit, dividends are likely to be partially franked. Our policy continues to be paying -- continues to be to pay dividends promptly, and the dividend announced today will be paid to shareholders on the 25th of February. On expenses on Page 6 of the slides. There are just a couple of comments I'd like to make about expenses. Our main operating expense, aside from tax, is employee expenses, and that continues to account for about 60% of our expenses. Employee expenses were down 5% half-on-half, and that's mainly as a result of the remuneration decisions that we took last year due to COVID and which we communicated in our annual results, those decisions being bringing forward unpaid deferred bonus payments and no partial deferral bonus period for the 2020 bonuses. Our average number of employees remains quite stable at 132 at 31 December 2020 compared with 128 at 30 June 2020. Half of the group's remaining expenses are variable in nature, either moving in line with changes in FUM or being a function of the number of investors we have in our funds. The other half of nonemployee expenses, we would describe as fixed in nature such as the IT or occupancy-type costs. As we've previously mentioned, we view costs associated with strategic initiatives such as partnership benefits in our closed-ended funds as investments and not day-to-day operating expenses. And so therefore, as I've mentioned earlier, we exclude those expenses relating to those strategic initiatives from our Funds Management results when calculating the dividends to shareholders. Our cost-to-income ratio for the half year ended 31 December 2020 is 16.8%, which is a further improvement on 30 June 2020. Given this strong ratio, it's important to stress that the key driver of the profitability of our business is the movement of funds under management, not expense movements. And finally, we expect our Funds Management total expenses for the 2021 financial year to be in the range of $110 million to $115 million but towards the lower end. And with that, I will now hand back to Brett to provide a business update.

Well, thanks, Kirsten. What I'd like to do is talk about the Funds Management business, and then I'll give a bit of an update on -- to the resilience and diversification initiatives that we've undertaken that we discussed a little bit last time at last half. But starting with the Funds Management business. As Kirsten mentioned, the key driver of the Funds Management business, of course, is funds under management. That grew 9%, which drove an 8% increase in management fees. There's a slight mix change in that. It's -- a lot of this is rounding. And also, it's a very slight mix change. So our average base management fee was 61 basis points rounded to those 2 decimal points for the half, down from 62. Performance fees, as Kirsten mentioned, fluctuate quite significantly from period to period. So in a comparative sense, from last 6 months to 31 December, it's down 74%. But I would note that it's -- these -- comparing 6 months on 6 months performance fees is a little fraught because they do move around quite a lot. We've made a point of saying that these performance fees are very, very lumpy. And indeed, comparing 6 months on 6 months is quite difficult to do. I would note that a number of our funds are above their high watermarks. Generally, we're very happy with the Funds Management business. There's a statistic in the bottom box here. The average FX over the period has increased 6%. Just to give some sense as to the impact of foreign exchange on our business, about 85% of our funds under management is exposed to currency movements. 15% is obviously either in Australian dollars or hedged back to the Australian dollar. Of that 85%, if you like, 61% of FUM is exposed to the U.S. dollar. On a constant currency basis, just to put this in context, our revenues on a constant currency basis would be $12 million higher, which would have meant an average -- an increase in management fees of about 12%. The -- as Kirsten mentioned, the funds management, we believe, is operating very, very efficiently with a cost-to-income ratio now under 17%. That obviously will move around somewhat, but it's under 17% currently. And indeed, our number of employees has been modest in growth. Our business is highly scaled. It's highly scalable. But at some various points, we do look to employ people as resources dictate, and so I would imagine that the growth in employees will reflect that and be modest over the coming periods. If I can go to the next slide, please. Just quickly on our flows. This is just comparing the half to -- in 2020 to this current half. You can see here from institutional flows, again, they move around somewhat from period to period. We had a good period last year -- this half, I should say, with inflows of about $2.3 billion. We have around 135 institutional clients, which we have great relationships across the board with those institutional clients, and they're much valued. We've also obviously got a retail business. This half, there's about $1.4 billion. It was net inflow compared to the $2.4 billion in the corresponding half last year. That corresponding half last year had about $900 million included in that in the IPO of the Magellan High Conviction Trust. So all up for the net -- 6 months, the net inflows were about $3.7 billion, which we're very pleased with. If you go to the next slide, please, [ Ange ]. Looking at that across product and looking -- breaking that out with flows and -- in performance in terms of FUM, Global Equities had net inflows of about $1.7 billion, with overall net investment performance over that 6 months being flat. Australian equities, as you can see here, grew $1.1 billion through investment performance, and Global Listed Infrastructure, likewise, has attracted great flows, $2.1 billion to now at the end of December having $18.2 billion of funds under management. If I could perhaps turn to the business resilience and a diversity update. Really, what I'd like to do here is just to talk about some of the initiatives that we've been looking at. And one of the things that we were discussing last time is building some resilience into -- or extra resilience or layering resilience into our business. And we've been looking at this in a number of different ways, one of which, of course, we've been on a journey now for some time in broadening our retail fund base around that. And the Active ETF, which is now, what, 6 years old, has been -- was the first step in broadening that fund base. And I would just like to report that as that has worked -- as we've built on that, we've tried at various points to flatten out the investor experience, remove friction and indeed get that experience to be more simplified. It's a lot of work involved in doing. It's very hard to simplify these things, particularly once they're established. But we sort of swallowed hard and looked to -- and we did undertake a restructure of our global equities retail funds, which was completed in December last year. It was a very big event to try and get those 3 global equities funds into a single trust, but it is now up and going in that. And now the result is that we have one global equities fund, a retail fund, which has 2 unit classes. And one of those unit classes is a closed-ended unit class such that the fund itself will not issue units directly and closed class units or redeem them. But of course, they are transferable and tradable under the ASX listing rules. And the other class of units is an open class of units, where the fund itself will actually issue units and redeem units directly with the fund at the net asset value in an off -- as it says here, in an off-market access sense. But it's also tradable under the AQUA Rules on the ASX as we established with the Active ETF. And so what that's meant is that this now will be -- after a lot of work, has simplified our global equities offering down into a single fund with 2 unit classes that have different characteristics, one being an open-ended class and one being a closed class -- closed-ended class. The open-ended class has some additional functionality that was unavailable when we had 2 different funds, and that is moving from essentially the -- what we've called the issuer-sponsored part of the registry base. You can now move that into a HIN or essentially onto a broker account without actually triggering a tax event. You don't have to sell one unit of one fund to buy another. And indeed, already, and this has only just been up and going for the last month or so, some 400 unitholders have elected to move from what is essentially an SRN holding to a HIN holding. We also believe that by bringing these 2 unit classes together over a single strategy, there is potential for the closed class -- closed-ended class units to have a more efficient trading environment given that the -- now the basis risk between those 2 classes is essentially 0. And over time, we believe that, that will help aid in that secondary trading of those closed class units. That's really meant that over time, we've extended our process of, hopefully, simplifying over time and removing friction, which will then allow us to attract a broader range of investors into our retail funds, which, in turn, will help build resilience into our overall retail business. Next slide, please, [ Ange ]. As part of that, we've also, as many of you once -- will know, we've undertaken a partnership offer. We've done a number of partnership offers over the last few years. So following the restructure, we are now currently offering those eligible unitholders in the Magellan Global Fund on a $1-for-$4 basis that they can put -- purchase new units in the global fund closed class units. And we will then, as part of a partnership -- of benefit, give them 7.5% of that subscription value in new units. And those closed class units themselves will also carry an additional attached option, which will be an option for 3 years that allows the holder of that option to purchase a unit at again at a 7.5% discount to the then NAV. And those options will be exercisable daily and will have a 3-year term and we expect will be also listed on the Australian stock -- on the ASX. The -- additionally to that, the existing unitholders and indeed the ex date for this bonus option is at, I think, on the 26th of February in a couple of weeks. But those closed class unitholders will also be issued a bonus option under the same terms as the options I've just described on that -- on a 1-for-2 basis. All those partnership benefits will be funded by Magellan, as we've done previously, not the global fund. So it won't impact the global fund or dilute anything within the global fund. And we will fund those from our existing financial resources and our corporate debt facility if required. And I would just note that the partnership offer closes on the 23rd of February, so fill your forms out. So notwithstanding building resilience by broadening and hopefully becoming -- allowing our funds to be more accessible through the mechanisms that we've talked about over the years and the restructure, we've also, of course, thought about other products in terms of building extra diversity and more resilience around the business. And we're very pleased late last year to announce the Core Series funds and indeed, the Magellan Sustainable Fund. We've had great feedback from both of those, particularly around the Core Series. It was deliberately a soft launch at the end of last year. There would be a more formal launch of the product towards the end of this quarter as the research houses are working through their analysis of this, but we have already had a significant inquiry from the adviser community. A number of these funds are now being launched onto platforms, and they're going through their approval processes. So there are 3 core funds. The differentiating factor here is that these are attractive management fee of 50 basis points and are leveraged off Magellan's research -- deep research and its capabilities that are managed in a more systematic way across each of the funds. And indeed, I think as we've mentioned previously, our core infrastructure fund has been up and going for the last 10 years and has produced extremely good results. So there are 3 funds now available. The Magellan Core International Fund, these are listed on Chi-X, and you can see the codes there, MCSG for the international fund. And it's also available, as we've talked about, in the open-class unit of the global fund. It's also available directly via the fund by a platform, and that's the APIR code that's quoted there. So I won't run through the codes. But it's the Magellan Core International Fund, the Magellan Core ESG Fund and as I mentioned, the Magellan Core Infrastructure Fund. These are now available to all retail investors. And as I said, we're very pleased with the reaction that's -- with the reception that those funds have received. The Magellan Sustainable Fund -- at the same time, Magellan Sustainable strategy has been available in a wholesale sense, in an institutional sense for some time, and that's gaining good traction and very good interest. We've also had interest from the retail community. So we've made that also available as an Active ETF, again, accessible via the Chi-X exchange or directly with the fund. Thirdly, as many will know, we've been working on a retirement income product or a product that could be used and -- for that retirement income problem. We continue to work with regulators on that. A lot of the timing, as I've said in the annual report -- in the half time report, a lot of this is out of our control in terms of the timing of regulators. One of the issues that I think is important is that we are attacking this problem in a slightly different way. And it's very important that we work with the regulators to make sure that we get this correct. I can understand, from a regulatory point of view, things are in terms of setting precedence and making sure that what we're seeking to do works within all the existing framework that has been set up. So there's been a lot of work being done on that. There are some key meetings due over the next month or 2 around that. From an internal perspective, we're very well organized. Once we flatten out and agree a number of these things with the regulators, we are very hopeful to launch soon thereafter. So stay tuned. If I could then move to our principal investments. Up until recently, of course, our principal investments, which we've had for -- since Magellan was really started, has been very much focused around what we're seeing in our internal principal investments, which are investments in our funds, of course. We do seed new strategies. We've seeded, for example, the Core Fund Series for a period of time. And they're largely business around the Funds Management business that provide capital to the overall Funds Management business. We have recently, and it's really due to a coincidence of timing, but we have recently made 3 external investments in our principal investment portfolio, external to the Funds Management business. And indeed, and I will discuss these in a moment, Hamish and I have seen a number of proposals over the years, and we've really not done anything within that because we've been concerned about meeting various -- a number of criteria, which I'll run through in a moment. But in considering these principal investments, we do think that there is some scope to both add extra layers of resilience to our business but also potentially pick up some intellectual capital. I'll come to that in a moment. So overall, the Board has set a pretax hurdle of 10% per annum over the business cycle across our principal investments, which, so far, we've met. So if we could go to the next slide. So the external principal investments, as I said, Hamish and I have, over the years, been approached both from a funds management point of view, but also from an external investment point of view. And we've really done not very much on that. Just recently, of course, we did make 3 investments, and the timing of those really was a coincidence of when those investments came to us. So I wouldn't read anything into the timing of those. Ideally, when considering some of these principal investments, we -- the idea of finding some investments and earning streams that are not necessarily linked to markets. The Funds Management business, by definition, is a derivative of markets. And so our earnings, obviously, are a function of markets. If it's possible to add some diversity around that without -- and I'll come to this in a moment, without creating distraction, it's something that we've looked to consider over time on that. But of course, we're very mindful of -- in making these investments that it doesn't upset the core business of the Funds Management business. And so to filter these things, we have 4 criteria that we try to think through. There's some nuances in each of those, of course. The first one, of course, is that we really don't need to partner up with some very high-quality management teams because we don't want an operational involvement in these businesses. Of course, we need to have some oversight, usually, if we can get it through a nonexecutive director representation. But we can't be in a position, we don't want to be in a position, we won't be in a position where we are distracted from our Funds Management business. And indeed, that hurdle, frankly, is a very big filter that's knocked out a lot of things that we've been presented to us. We just can't get there on that. Ideally, these need to be high-quality companies within the sector that have got great growth prospects and can build into meaningful scale and if -- or that contribute to our intellectual capital. And that can come in a number of different ways, of course, and it couldn't provide both diversification in terms of its relationship to its earning streams and it's relation, as I said, to markets, let's say, or, indeed, optionality in terms of what we may be able to partner with that business to do other things that could actually be beneficial to our overall business. And of course, lastly, and absolutely, the investment of the shareholders' funds needs to attract -- attractive financial returns on that. So if I could quickly go to the 3 businesses that we have actually invested in -- and I'll just take you through these briefly to give you an update. The first one, of course, which was announced back in September is Barrenjoey, which is an investment services company. We've partnered here -- or Barrenjoey has partnered here with Barclays. Our investment was $156 million for a 40% nondilutive economic stake. We have a 5% voting stake. We do not control this business. The business itself has begun extremely well, and they've managed to build a great deal of the key foundations in the infrastructure that it's required. We're very excited that David Gonski has agreed to become independent Chairman of Barrenjoey. Barrenjoey currently employs already 150 people. Despite some of the occasional press articles, it has assembled those people from a very wide range of institutions. Within that, there's great diversity already building within that business. And the quality of that staff is really first class. It's going to be an extremely high-quality group of people in that business. The advisory business within Barrenjoey was really up and going very, very quickly. After we announced it. They got the necessary licenses very quickly. It has already attracted a number of mandates and is very much along its way of building out a good portfolio of mandates very quickly. The markets business will go live progressively, and it will start next quarter. It's extraordinary that John Cincotta and his team have built these processes and can get up and going so quickly within that short time frame. It's very, very impressive. That will go -- that will start, as I said, next quarter. The client onboarding has already commenced in that regard in the equities business and other clients. That has commenced extremely smoothly from my observation of it. And from my understanding, the clients themselves are extremely supportive of the business and are looking to come on board with Barrenjoey. And the integration with Barclays in terms of the partnership with Barclays for access to that significant balance sheet, global distribution, those things are very well progressed, and that integration is a long way down the track. So overall, we're very, very excited and happy about the investment at Barrenjoey. It is moving along at warp speed. It is getting all the necessary foundational planks in place for what we believe is a very bright future and could develop, we think, into a very significant institution over time. If I could go on to the next one, which is FinClear. FinClear is obviously a much smaller business. We took a 16% stake, fully dilutive, for $20 million in FinClear. The business itself is a sort of an end-to-end technology business that provides trading functionality right through for financial advice, wealth firms or a stockbroker. It's well connected right through from contract production all the way through to clearing except -- along that process. That industry itself, to my eye, looks like it may undergo some consolidation over time. I would argue that FinClear is well positioned to participate in that. But more importantly, from our point of view, the relationship with FinClear and their ability to look to improve access and reduce friction for our investors over time and particularly around the way that the CHESS Replacement at the ASX may work its way through and what that means in terms of the distributed ledger and how that will work through, we think, is a very important step to continue to make our retail offerings more easily accessible and more broadly accessible. And so we're very excited to work with FinClear on that, and there's an interesting project that's being developed around that. And one thing that I think that's perhaps a little not well appreciated, FinClear is very much integrated into the retail equity business. In Australia, it basically touches half of all trades that are done each day. It's one of the -- it's a key engine in the production of contract notes, for example, at CommSec. It has about a $7 billion end hosted on the HIN platform, which has got great scope effectively to grow as well. And then lastly, if I could turn to Guzman y Gomez. I've here taken a couple of slides from Guzman y Gomez. They're quite enamored with yellow, so you can see the yellow. But Guzman y Gomez, for those that don't know, is a fast food restaurant chain. It's indeed probably Australia's fastest-growing restaurant -- fast food business at the moment. It's growing extremely fast. It serves Mexican food. It's -- as it says here, it's clean, authentic Mexican and made to order. I highly recommend their nachos. It's very nice. Since opening, Steve Marks, the founder, as it says down there, opened the first restaurant back on King Street in Newtown back in 2006. It's expanded now to about 148 restaurants. Most of those are in Australia. There are some in Singapore and Japan, and there's a few trial restaurants in the U.S.A. at the moment. The significant, we believe, significant white space, as it says here, for both domestic and particularly international over time growth for Guzman y Gomez, and they are, I believe, and as they say here, they are only just getting started within that. It's led by an extremely passionate and very experienced founder and CEO, Steve Marks, as I said, and he has a very great team around him and notably supported by the CFO and COO, Mike Hirschowitz, sorry. And it's an extremely focused business, and we're very proud to be associated with GYG. And unsurprisingly, as it says here, they won the restaurant of the year -- the multisite restaurant of the year for 2020. So if I could just quickly flip to the next slide to give you a feel for what this business looks like. Annualized sales, if you take the first sort of 7 months of this financial year and annualize them, runs at about $410 million globally, of which about roughly $390 million of that's in Australia. Very key statistics -- and I won't run through all these, but a very, very key statistic here is that like-for-like growth, so restaurants have been around for a year, like-for-like every year for the last financial year-to-date is growing at an enormous 27% per annum. It's 27%. It's quite extraordinary. And indeed, there's some evidence that's even accelerating of late. The restaurants themselves are operating very efficiently. As it says here, over 75 -- 70% of those restaurants are returning a 25% return on its investment. We -- there's a lot here, we believe, notwithstanding the great growth opportunity that we can also learn from Guzman y Gomez. We're obviously a long-standing investor in the QSR space. But we also note here, for example, their social reach. There's a lot we can actually learn in terms of those types of areas, particularly around retail engagement that we may be able to pick up for our own retail business. So lastly, if I could just quickly turn to what that means for our principal investments overall, and I won't run through this completely. But we've now sort of tried to bucket these with those internal principal investments and our external principal investments. As Kirsten said, they are equity accounted in that sense. And you can see the returns over 1, 3, 5 and since exception with that 10% over the long business cycle hurdle time frame in mind on the right there. So look, with that, I'm sure the folks have other questions, but I won't take up too much more time there. What I'd like to do now is hand to Hamish just to cover off some thoughts on markets and in particular, the global equity strategy over the last 6 months. So Hamish?

Well, thank you very much, Brett, and thank you, everyone, for joining. I'd just like to say a few comments just following up from Brett before I get into sort of markets and performance, particularly the global equity strategy. I know a number of analysts have questions on that regard, and I just want to address them upfront. I would say it's been an extraordinary 12 months and an extraordinary 6 months. So I'd really like to thank all our staff at Magellan. I think many people on the call have all had extraordinary lives as well as worked from home and everything else. But the last 6 months has actually been the busiest 6 months in Magellan's history, yet we've had people working from home. As Brett has outlined, we've restructured our main global equity fund. That was an enormous undertaking. We've launched the Core Series funds, the Sustainable Fund, continuous enormous work been going on in the retirement space. And I think we're getting very closer -- and all our internal work is done. We're dependent on the external factors at the moment, and we've embarked on the strategy in its early days of 3 principal investments. And it's very important we, ultimately, over time, as those earnings come through, get reflected in the share price. Part of the strategy is we want to equity account fees. We want clearly visible for the shareholders those earnings coming through. FinClear, I think, is much more of an intellectual capital play, an outstanding management team there, and that's really something, I think, Brett and his team is going to really leverage off the back of. And I think we've got some future innovations we can think about. But we're sort of a bit stumped by where the sort of the financial plumbing infrastructure is at, at the moment. And FinClear is right in the center of that with the stock exchange at the moment. But Barrenjoey and Guzman y Gomez are truly extraordinary opportunities. I don't think I've ever seen anything like it in my life what they built at Barrenjoey in such a short period of time. They put all the infrastructure and licenses and technology in place and then assembled just an extraordinary team of individuals. I think over the next 3 years, people may be surprised just what that team does. We're not running it. We're just so privileged to be associated with those individuals. And Guzman y Gomez, as Brett has said, the Australian opportunity is probably up to 500 stores. It may be 600 stores over time. We've had, in our due diligence, very detailed view of the next 3-year property plan. It's incredibly well developed. The store economics are breathtaking. As Brett said, the comps or the same-store sales since the 1st of July to date are running at 27%. But what's encouraging, the current comps, which is pre the pandemic, so pre pandemic to post pandemic, so you're not getting it in the dip, they're accelerating from those numbers. I'm not going to say exactly what they are. But I've been in this game for a long time, and I've looked at a lot of quick service restaurants around the world, including rollout opportunities, and I've never seen anything like this before in terms of what these stores are doing and what its market opportunity is. And I think we've got a lot to learn on the digital side. I think Barrenjoey, there's a lot we can do in staff training and graduate recruitment and other things before even thinking about other intellectual capital. So they really tick all our box, but it's modest at the moment. So kind of 3% of the value of Magellan. So I don't want people to overemphasize these things. But I would like to have a number of businesses in the future that each of our stakes, and this is -- it wouldn't be FinClear, would be worth $1 billion to Magellan. And we'll see what happens over time. But these are just wonderful businesses run by extraordinary people. We're in bilateral discussions. We were not in competition with anybody on any of these transactions. We did them on our terms, and we're just delighted to partner with those people. So it really has been an extraordinary 6 months and 12 months, and thank you so much to the Magellan team who's worked so hard on behalf of all the shareholders. Brett has asked me to -- and obviously, we've had some questions on this. And the performance, particularly of the global equity strategy, I think people ask for 2 questions. Is this going to lead to so many outflows because we've had a 3-month performance statistic that's been under the MSCI benchmark? And what does it mean for performance fees, so people who have short-term performance fees? First of all, I'd say is we're genuinely not concerned about the performance of our core global equity strategy over the past 6 months or even over the past 3 or 4 months. I've spoken to many of our large clients in the past 4 weeks, and I'll be very genuine. I have not come across a single client that has raised any concerns about how the strategy has performed through the pandemic and in particular, the relative performance during the last 3 or 4 months. The underperformance relative to the MSCI and over that sort of 3- or 4-month period has been driven by an unprecedented repricing risk. If you look at the scale of the repricing, particularly in November, it was a 1 in 50-year -- I think 1 in 47-year event. You have to go back to find a month that performed like that. What is very important here, when people think about what job we're being employed to do, and that is really deliver consistent returns above our -- sort of at or above our 10% return objective but very importantly, provide people downside protection because we're part of people's portfolios, and we're sitting in this downside protection portfolio. And during the extreme volatility we had in the earlier part of the year, we performed extremely strongly through the market drawdown. And actually, we were one of the few managers that managed to do that. And that was just a major stress test because it was such an unusual -- we've had a very consistent track record over time in outperforming when things go wrong, but this was a very unusual situation in markets. And really, we came through that incredibly strongly. And the amount of client positive feedback we had globally from institutions but even in the retail adviser base we've been told is, "You were the only guys who delivered for us when the things got bad." So I think people just have to put into context that the stress of our strategy was in the downside. It wasn't really on the upside event. And our downside protection measured over time is consistently in the top 1% of all global equity managers when you look at that statistics. So in the last 12 months, we had a major, major stress event, and we kind of came through it with flying colors when many other people didn't come through, through that period. The underlying performance of the strategy, if you think about it, remains right in line with the objectives we set. We don't have an objective on the strategy relative to the MSCI. That doesn't exist in our clients' sort of discussions on what we're setting out to do. It's 10% per annum through cycle. But having a -- which is gross of fees, as we stated. And we want much lower downside risk in adverse markets. That's what we set out to do. And if you look at the -- and the underlying performance and where nearly all our money is, is how we think about it, is U.S. dollar performance, which would be how we report nearly all our funds under management to institutional clients and to -- or you could look at the sort of hedged version of the Australian one. Obviously, there's been a very strongly rising Australian dollar that kind of masks what really our core clients are seeing when they look at the strategy. In the 12 months to December, our return in U.S. dollars was 11.2%. The 2-year return was 20.1%, and the 5-year return was 13.7%. So earnings running in December, what a disaster and all our clients are going, "We're pretty happy with this, with the absolute performance and particularly with the downside performance that we saw through last years." Our clients understand that -- actually, if you really understand our strategy, there was little what we could have done what happened in November and December. Our strategy always holds because of this downside protection by its construction. 50% of the portfolio approximately in defensive assets and cash. And the defensive assets are largely sort of consumer staples and utility-type investments in cash. That asset class, if you look at any of the bench -- any of the sort of subindices of consumer staples and utilities, they underperformed the market by 10 percentage points through November and December. That of its own by the construction of a downside protection, and we're always running less risks to markets, nearly contributed to all the underperformance. So if you -- anyone who really understands a strategy look at this and going, "You actually didn't underperform really at all," because it's just the design of what we have bought. And it's really a timing issue because these defensive assets that -- when you had the rotation, people talked about there was a rotation out of growth and into value, it's the biggest load of cr** I've ever heard. There was not a rotation out of that into -- growth out of value. Growth has continued to do very well, actually. There was -- it was a risk on trade. It was the end of the pandemic. And what people did, it was a rotation out of defensive assets, and they wanted to put on economic exposure. Some of that was growth assets, like travel-related growth just went through the roof. Some of it was commodity related and some of the bankings that would be regarded as value stocks. But it was an economic trade. It wasn't a rotation out of growth into value. And in terms of the underperformance of the defensive side of the book, we regard that just as a timing issue. Actually, the defensive side of the book is actually pretty deep value at the moment. And I think many analysts, I think -- and realistically, I think people have -- don't really understand what the strategy does unlike our clients, and people then focus on the MSCI. And we get wild swings because our portfolio actually looks nothing like the benchmark. We're in 25 stocks in very, very beginning -- the MSCI has 1,600 companies. We -- over time, we would like to beat it over sort of 70 periods. But in the short term, we -- ours is not constructed anything like that benchmark at all, and we get wild swings. We've been 20% above the benchmark, and we've been 10% below the benchmark at different points in time. And just to highlight this, at the end of October, on a 12-month basis, we were 7.7 percentage points above the benchmark. And at the end of December, we were then 75% under the benchmark. So if you look at the -- it depends when you want to look at the picture, and discrete points of time can just be super misleading to really how people perceive what the strategy has done over time. And what people are buying is downside protection and consistency over time. And you need to understand that their clients, when they build these portfolios, they have different styles and managers. So our strategy really delivered for them when the chips were down, and other styles of strategy have delivered for them in the last 3 or 4 months. And clients want to have those different types of things in their portfolios. If we had underperformed the market during the market downturn, that's when you should be asking the questions. And I can't speak on behalf of clients, but I'm really seeing no evidence at all that we have a sort of client outflow risk sitting in our strategy at the moment. We're told we've been consistently one of the most consistent deliverers for clients within their -- in their portfolios. And it's performing right in line with the styles when they deconstructed. So I'm generally not losing sleep over this issue. If you asked me in October, you would have asked a different question in December. And I'm generally relaxed because I'm speaking to so many clients, as our team is. If anything, there's more friction around our clients around the restructure at the moment just because of how the platforms and all the plumbing when we're trying to do a corporate action. That's on sort of advisers' mind. The performance is not a material issue. Brett has asked on markets. I don't want to spend a lot of time on markets. I'm happy to take a question. I didn't start with that because I didn't want to obfuscate that discussion on performance here. On markets, what I would say is a lot of the economic repricing has been repriced. There is very, very little margin for error. It's very clear that we've got stimulus in the world from the monetary authorities and the governments at a level that is beyond comprehension and should be very supportive of economic growth, particularly in the United States in the fourth quarter and maybe the first half of next year, and we could get some very, very strong numbers. And the market's backing that. And of course, China is in pretty good shape at the moment, and we're seeing that in commodity prices as well. But what I'd say, there is very, very little margin for error at the moment. I would say in the scientific risk on the mutations of this virus, there is very, very little error for risk at the moment, and the mutation risk is very real here. The -- and we haven't seen it to date. And if you understand the science and you speak to people, the event we've seen in South Africa was something that was predicted to impact efficacy of these vaccines as in stopping -- people can still get infected, but we thought that they would hold. But there have been some very important lab experiments that have been done that shows that this virus is very susceptible for an escape mutant to happen that would evade the current vaccines. And if that was happening, depending on its nature, we could see some real volatility in markets moving forward. So we're maintaining a fairly -- we're fairly fully invested, but we're pretty cautiously invested at the moment because this could go in any direction at any time, and we're not through it at the moment. But people think that where -- the vaccines are going to hold up, and we'll just recode them and everything else. If only it was that simple. It's a very, very complex issue. Our clients clearly understand where we're positioned. We're not swinging for the fences. We're just not betting on the monetary stimulus. Other people are doing that, and that's absolutely fine. We're trying to read all the scientific risk as well, and this escape mutant risk is will -- nobody knows what the answer is to it. But it's real, it's in the viewfinder, and there's a number of different scenarios how that could play out. Some of them are fairly mild to the extremely ugly from a financial point of view, and we'll just see what happens. And I'm not predicting it's going to be seriously ugly. But if something turns against us in a mutation in this virus, our portfolio is pretty well positioned. And I think if it just continues without it, I'm pretty comfortable with the portfolio's positioning at the moment. Actually, the reporting season, which has just commenced again, has -- across the board has been incredibly strong across our portfolio. And the last thing I'd mention, and people are asking this, and Brett mentioned the very things, people in the short term get focused on performance fees. All I would say is the High Conviction Fund, and it's only -- we're only 6 weeks into this 6-month period. It's in the money strongly at the moment. But that could reverse, so I'm not making a prediction there. And the global equity strategy is above its high watermark. So we -- you could move and we could have very large performance fees very quickly or we may have no performance fees. But it's not like we're chasing a high watermark here, and the currency has been a very significant headwind in terms of where we have those A dollar funds, obviously. That doesn't affect us in our U.S. mandates where we may have performance fees-type arrangement. So if the strategy outperforms in the next 6 months, and I have no idea whether that's going to be the case, we could have a large performance fee. And if it doesn't, we may not have anything. But we've got no hurdles to earning performance fees in the next 6 months. But I can't make a prediction whether it will happen or not. I've got no idea what markets will do in the next 4.5 months ahead of us, too, in this period. But -- and they are lumpy, and you're seeing that. We have $40-odd million down to $12 million and who knows? But they -- and they can change. We've seen performance fees ritually go up and down by $20 million in a day of markets moving around. And that's just how sensitive our business is to performance fees. That our strategy can outperform the market by 2% in a day, and it can just -- and it balloons in terms of the performance fees. And that's the type of differential we have to markets. And then you can lose it in the next few days. So it's lumpy. It's volatile. But it's part of the business, and that's what it is. So Brett and Sarah, I may just leave those sort of comments here. I'm happy to take other questions. But why don't we hand it to you and Sarah, Brett, to sort of coordinate questions we have from the audience?

Thanks, Hamish. We'll now move to a few Q&A. [Operator Instructions] First question on the phone. This one is from [ Jennifer McConaghy ].

Could you instruct how to unmute, please, Sarah?

Sure. [Operator Instructions] Okay, we'll move on to another question. So joining us by phone ending in 5549. [Operator Instructions]

It's Brendan Carrig from Macquarie here. Can you hear me?

Yes, Brendan.

Okay. Just 2 questions from me. Just the first on expenses. So obviously, the guidance for Funds Management implies about a $60 million second half expense. Just wondering if you can give any comment maybe on the run rate that we could potentially expect for FY '22. So is the second half a bit more of a normalized expense rate that we should be thinking about going forward?

I'll take that. Look, I think the range for 2022 will be somewhat above the current range. I'm not sure you could quite extrapolate the second half to that. It'll depend on a number of factors within that. One of the big, and Kirsten talked about this, was some of the resetting of some of the deferrals that we had in our bonus payments that we did last year as part of the sort of COVID part of the remuneration changes that we made. Those deferrals will start to build up. So those expenses will start to -- you'll see those in the next year, but that will be a gradual increase on that. There's no planned real increase in other expenses. Marketing may increase somewhat, although, I'd say, and Hamish can jump in here, a lot of what we've learned through this COVID period in terms of using these types of formats means a lot of that cost will probably permanently come down. It'll depend on -- somewhat on travel as well when that starts to open up. You'll notice our travel budget has clearly come down quite significantly. So a few variables like that, that we need to creep in. But yes, I would argue that the range, perhaps, next year will be somewhat higher.

Yes. But I would say that our business is always seasonal. The second half expenses are always more than the first. And it's just a number of sponsorships and a number of asset fees and a number of when we're doing consulting arrangements and things, they tend to be second half-loaded. Kirsten, I don't know if you'll comment. But there's always -- the second half will always be a little bit higher than the first half just because of the nature or the way sort of contracts and things fall for us.

Okay, that's clear. And then just one other one. Just obviously, you can't really guide to the equity kind of profits given the early stages of the business. But I'd just be interested maybe in some more holistic comments around sort of the medium-term expectations for the likes of, say, Barrenjoey. And is there an expectation of -- or at least, what's the rough time line that you're thinking that maybe that business would be moving towards breakeven and then profitability?

Look, I think we -- look, we're not going to get into that. We don't want to discuss that, I think, at this stage. Barrenjoey is building its business. It's obviously a business plan. But look, that's -- it's commercial and confidence, frankly. So look, we'll report as things evolve there. Clearly, as I said in the presentation, built many of the foundational work on that. There is still some more work to do. But they're very advanced, if I can put it that way. In terms of onboarding clients and client activity, we believe both in the equity business and clearly, already in the advisory business will likely turn up very quickly. But in terms of profitability and those sorts of things, look, it's too early, and it's not appropriate for us to talk about at the moment.

Moving on to the next question coming from a phone number ending in 1687. [Operator Instructions]

Jenny Hau from Morgan Stanley. I had a question about the principal investments. I'll break it into 2 limbs. So firstly, who has been making the recent investments in the Principal Investments division? And secondly, do you think that you'll invest in a dedicated team as this division grows?

The group that's been doing a lot of the work in terms of analyzing the Principal Investments -- and I must say the amount of work is around -- what we've done is not as expensive as you would think in terms of resources. So it has worked in -- with what we've currently got, but I'll come to the resources in a moment. Our governance and advisory group have done a great deal of due diligence work and a lot of the analysis work. Ultimately, Hamish and I make decisions around this. That team reports to me. Hamish, of course, has an interest in this in terms of -- both from a strategy and an overview of the business from a Chairman's perspective. Businesses such as Guzman in terms of the QSR space, Hamish and I, but particularly Hamish, has been staring at the quick service restaurant space for a very long time. So he has a very, very good handle on what that business looks like and what to look for within that business. So we both looked at that. In terms of resourcing, over time, we may put some structure in that. It depends on where that gets to in terms of the size of what we'd be able to do. But importantly, as I said in this, and Hamish made the same point, operationally, we don't and we will not want to be involved in this business or be in these businesses. We're looking for high-quality management. And obviously, we want to have oversight of what our investment and the business is doing. So we will build those resources over time, but it'll depend on the number of opportunities that come. But currently, at the moment, the way it's set up is it's manageable within the executives probably on my time and particularly governance and advisory and Craig Wright who runs that team. Hamish, I don't know whether you want to chip in on that.

Yes. I think it's a very good question. I think we have to put it in context what we're doing. This isn't a private equity strategy, where we've got operating sort of control of these businesses. So it's very, very different from a private equity approach here. There's 2 things. There's one of the due diligence of going into these investments. It tends to be when you're really in at a pretty short period. The whole Guzman y Gomez from start to finish was 3 weeks. From the first conversation to the public announcement, I think it was about 3 weeks, Brett, that process. Talk -- obviously, there was some intense due diligence that was done by Craig and his team. And obviously, Brett and I had quite a few conversations and things just during that process. It didn't take up an enormous amount of time, but -- and it's a space that we know and I know particularly extremely well. The Barrenjoey one was more about getting people together. We didn't actually put the business together. It was kind of a blank sheet, but there was agreement and -- to put some money in. So the due diligence side, there was nothing to due diligence. It was more about the people on that one. And FinClear was very, very small and very straightforward. So if you split what we have to do, there's 2 things. It's due diligence on new opportunities. And to be frank with you -- and I don't want to be held to this. I would be happy that over time, we end up with 10 investments. This isn't going to be a 100-investment strategy. We don't want to have lots and lots of small things. We'd like to have a few things that could be -- could compound over time into something that's meaningful in a few investments. Do we have to map that? No, it's completely opportunistic. So we don't know what those futures will be. We may not get to 10 or we may get to 10. We'll see what happens. But when they come up, there is a short period. It could be a number of months. Guzman was extraordinary in how short it was, a number of months with Craig and his team. It's well resourced. We do due diligence on those, and then there would be a Board paper and a consideration. And the information would be given to Brett and I, and we debate it and so forth. So the due diligence is kind of one-off. It's going to last for a few months. We've got a sort of internal investment banking team, which is really Craig's group, that looks after that. He's very well equipped to do that. Then on the second part, as you build that, it's the monitoring side of things. We have Board members but formalizing that monitoring side. And I'd say, when we get more of them -- if you put somebody fully in charge of the monitoring, frankly, there's not much to do at the moment. It wouldn't be a full-time job. But if you build out 10 of these things and just the reporting and the reporting we put to our Board and the monitoring that would go with that, yes, absolutely, we would put that -- we will put that structure in place, but we'll put it in place at the right team. But from our investment -- from the investment team and sort of asset management, outside of myself that is fairly limited at a high level, but Brett's really taking that -- the heavy lifting with Craig here, no one on our asset management side is involved with these sort of -- with these principal investments. But as it builds -- as -- if we get more investments and for the monitoring, if we need a full-time person to oversee that, we will put that in place. It's just not today because it's not a full-time job at the moment.

Great. We will now move to the phone number ending in 1 -- 4257. [Operator Instructions]