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

Well, ladies and gentlemen, good afternoon. On behalf of the company, welcome to the Magellan Financial Group results presentation for the year ended 30 June 2021. 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; and Hamish Douglass, Magellan's Chairman and Chief Investment Officer. Please note that there will be a Q&A session at the end of the presentation. If you have joined the presentation via the webinar, you may ask a question by typing it into the Q&A icon. If you have dialed in Please note that today's presentation is being recorded, and a replay will be available on Magellan's website. We may also have a media in attendance today. And with that, I would like to now welcome Brett to take you through the presentation. Thanks, Brett.

Well, thanks, Sarah, and thank you, everyone, for joining us, wherever you are. Firstly, I'd like to say I hope that everyone is dealing with either stay at home, lockdown, curfew, well, the many other variations that are around us now appearing. Well, obviously, we hope that this will pass soon, and we get back to some part of normal life as soon as we can. So best wishes to everyone who are listening on the call. What I'd like to do is just start with a highlight that's actually not on the bullet point here. It's notwithstanding the vagaries of the virus. We do believe we achieved a great deal last year. If you read the annual report, there was a very busy amount that I was commenting on in the Chairman's Letter that got -- that was achieved. And we do feel very, very good about a lot of the initiatives that have been undertaken, which are clearly going to take some time to flourish. But we do think we've achieved a great deal over the year. In terms of the numbers. The key metric, of course, is our funds under management. And as you can see on the slide, it grew by 9% to just under $104 billion averaged across the full financial year. That led to a 7% increase in management and service fees and also profit before tax and performances in our funds management business, which grew 10% to $526.6 million. And of course, performance fees do move around as we've seen from period to period this year, as we've been saying for some time. Many of those initiatives I spoke about that we did, particularly the global fund restructure resulted in some strategic one-off costs. And then when they're taken into account, our statutory net profit was down 33% to $265.2 million. When you adjust out those strategic initiatives that are outlined in the annual report, the adjusted net profit before associates was up 4% to $454.5 million, reflecting the increase in fund but also the decrease in the performance fees. If you include the associates, our share of the associates profit and losses, the adjusted profit decreased by 6% to just over -- just under $413 million. Our total dividend for the year was down 2%, remembering we pay both ongoing and performance fees dividend. The ongoing dividend has increased the performance fee, as I said, has moved around and is down in the year, resulting in an overall down 2% of the overall dividend, $1.141 is paid as the final dividend in total, 75% franked. So with that, what I thought we would do is similar to what we did in February. Kirsten will run through some of the numbers. She will hand back to me, I'll talk about the business and business overview. And then Hamish will join us and talk about particularly the global equity strategy and performance and how we're seeing those characteristics. So with that, Kirsten, I'll hand over to you.

Thank you very much, Brett, and welcome, everybody. The group's adjusted revenue for the year ended 30 June 2021 was $699.1 million. Whilst total adjusted revenue is largely steady compared with the prior year, our funds management business continues to perform strongly. And our core revenue being management and service fees increased 7% to $635.4 million. That was driven by a 9% uplift in average funds under management during the year to $103.7 billion. The other 2 items in revenue on Page 4 are other revenue and performance fees and these quite often vary. Other revenue typically comprises distributions we earn on investments in our funds, realized and unrealized gains and losses on those investments, foreign exchange movements and also advisory income on our U.S. business, Frontier Group. Given the stronger equity markets in 2021 compared to '20, other revenue has increased 65% or $13.3 million, and that's mainly due to unrealized gains on investments held in our fund investments portfolio. As Brett mentioned, crystallized performance fees in the current year were $30.1 million, with $12.4 million earned in the first half of the year and $17.7 million earned in the second half. Performance fees are down this year. But as we always mentioned, these fees are lumpy and they do have the potential to fluctuate significantly period to period. During the 2021 year, we made investments in the external businesses at Barrenjoey, FinClear and Guzman y Gomez. And Brett will talk to those later. We refer to those investments as associates and the accounting rules require us to recognize our share of their net profit and loss in our group's net profit. So for comparability year-on-year, we are now reporting the group's net profit, both inclusive and exclusive of the results from those business investments. So for the year ended 30 June 2021, as shown on Page 4, the group's adjusted net profit after tax and before the results of associates was $454.4 million, up 4% compared to last year. Our share of the net profit and losses after tax from those businesses in the year was $41.8 million loss. So after deducting that result, the group's adjusted net profit after tax was $412.7 million for the year ended 30 June 2021. And by way of a reminder, adjusted net profit is the group's statutory net profit, excluding certain items. And these items are shown as individual line items on Page 4 of the slide and they comprise 3 adjustments in the current year. The first, $154.1 million cost relating to one-off strategic transaction costs. By far, the largest cost here related to the global equities restructure undertaken in December. And really, that was mainly due to an accounting treatment requiring us to recognize upfront the full cost of the bonus options. That's regardless of whether they were exercised. Brett is going to talk more on that later. Other strategic costs included here include the 6-monthly funding costs for the DRP discount into closed-ended Magellan funds and a small cost relating to the commitment provided by MFG to Magellan FuturePay. A further breakdown of those costs are in the table on Page 54 of the financial statements. The second adjustment is a noncash item of $4.5 million, which relates to the amortization costs on intangibles for the Airlie and the Frontier businesses that we acquired in prior years. And finally, the $11.2 million relates to an unrealized gain net of tax in the shares and units held by the fund's investment portfolio. As we record market movements for those equities directly in the P&L, we consider it's meaningful to remove that unrealized market volatility from our revenue, whether or not that's a gain or a loss. Please just note that those adjustments I just mentioned are all after-tax amounts. Now if those adjustments were not made, our statutory net profit after tax for the year would be $265.2 million, down 33%. But as outlined above, items like the large one-off options expense, which, in effect, is a paper transaction, underpins why we continue to feel that adjusted net profit provides meaningful performance information of our business as well as comparability year-on-year. Finally, diluted earnings per share was $1.446 per share, and adjusted diluted earnings per share was $2.25 per share. Both are lower compared to 2020 due to the lower statutory and adjusted net profit this year. Turning to tax and dividends on Page 5. Our effective tax rate, and I should just highlight, sorry, that that's the group's effective tax rate for the year to 30 June 2021 was 21.4%. This is lower than the group tax rate of 30% -- sorry, the corporate tax rate, I should say, of 30% as it reflects the benefits of our offshore banking unit license. In simple terms, the group's effective tax rate ultimately depends on the mix of overseas and domestic income and expenses, which do fluctuate year-to-year. A point to note on the OBU. As you may be aware, the OBU regime is expected to be abolished. For Magellan, this will remove the concessional 10% tax rate that we apply to some revenues and expenses. And instead, all revenues and expenses will be taxed at 30%. However, this change will not impact the group in FY '22 or FY '23. It will take effect in FY '24 from 1 July 2023. That means that higher income tax is expected to be paid. And consequently, it will reduce the group's after-tax earnings. However, on the flip side, it will increase franking credits available to shareholders. So the level of franking attached to dividends is likely to increase. The directors have declared a dividend for the 6 months to 30 June 2021 of $1.141 per share. comprising a final dividend of $1.026 and a performance fee dividend for the year of $0.115 per share, bringing total dividends for the year ended 30 June 2021 to $2.112 per share. Just confirming that the dividend announced today continues to reflect Magellan's dividend policy, which is to pay out 90% to 95% of net profit after tax of the Funds Management business, excluding amortization expense, costs related to strategic transaction initiatives and crystallized performance fees. And with respect to the performance fee dividend, 90% to 95% of net crystallized performance fees after tax. As Brett mentioned, the dividend will be franked at 75%. Today, we've also announced a dividend reinvestment plan to allow shareholders to reinvest their dividends at a 1.5% discount to the market price. A DRP will apply to the dividend announced today. And if shareholders wish to elect the DRP, elections are required by 7 September. The introduction of the DRP provides the group with an efficient way to retain a modest amount of capital and to ensure we have a strong balance sheet and provide us with ample liquidity whilst maintaining our dividend policy of paying out 90% to 95% of our Funds Management business. We are targeting to retain 20% to 30% of dividends on an annual basis for the next few years. And if participation is by shareholders results in a take-up level below that, directors will consider having a DRP partially underwritten. Expenses, moving to Page 6 on the slide. There are just a couple of comments I'd like to make about expenses. As we've previously discussed, we view the costs associated with strategic initiatives, including the options which if exercised generate FUM as investments and not day-to-day operating expenses. We, therefore, exclude expenses relating to our strategic initiatives from the funds management results when calculating dividends to shareholders. Consistent with prior years, our main operating expense, aside from tax, of course, is employee expenses. They continue to account for about 60% of our total expenses. I think it's worthwhile to just draw to your attention the fact that employee expenses were actually $3.4 million lower in FY '21 compared to FY '20. And that's due mainly to the remuneration decisions the group took in FY '20 in response to COVID and then included no deferral of bonuses, which typically would have been paid in expense in FY '21. Our funds management expenses for the year ended 30 June 2021 was $106.9 million. That was below our guidance of $110 million to $115 million. And that was mainly due to lower travel costs and in-person marketing events, obviously, due to COVID-related restrictions, along with some lower fund administration costs due to some cost saving initiatives we undertook. Our cost-to-income ratio remains very attractive at 16.9%. In fact, this is actually the best result in the past 5 years, coming steadily down from 26.3% in 2017. And the only reason I highlight that is it just really shows that the key driver of profitability of the business is the movement of funds under management, not expense movements. Finally, for the coming 2022 financial year, we expect our funds management expenses to be in the range of $125 million to $130 million. The increase in expenses is largely driven by bringing into account deferred bonuses as our deferred remuneration arrangements are reset following the COVID change, along with some salary increases driven by modest hiring and salary reviews and also higher fund administration costs which is a function of higher FUM. As I mentioned before, the FY '21 FUM -- funds management expenses are actually lower than expected and that magnifies that increase. And with that, I will now hand back to Brett.

Thanks, Kirsten. So what I'd like to do now is just quickly run through the business, and I'd like to start on the funds management segment, please. And as you can see on this chart, and Kirsten has talked to a few of these numbers. The key driver of our funds management, revenues and, therefore, profitability is obviously funds under management. The average funds under management grew 9% as it says towards the bottom of that slide. And I'd also like to highlight, and we did talk about this in the annual report, that was in the head -- in the face of some headwinds from the Australian dollar. Most of our FUM is unhedged to the various currencies, the U.S. dollar being the main currency. And so consequently, an appreciating Australian dollar is a headwind to revenue and, obviously, our funds under management measured in Australian dollars. Now that cuts both ways, of course. As the Australian dollar decreases, it's obviously a tailwind. So for this particular year, we saw a 9% increase in our average FUM despite an 11% increase of the average U.S. Australian FX right across that period. That drove the increase in management fees, as Kirsten has spoken about. That has been somewhat offset by the movement across periods of performance fees. We've been at pains to say over the years, performance fees are very, very lumpy and can move around quite a lot from period to period. As we've experienced this year, there's $50 million difference clearly there in performance fees from last year to this year. And Kirsten has also mentioned the employee expenses, which I won't dwell on. However, I would note that the current expenses that we're expecting this year really do reflect a couple of things that Kirsten mentioned about, which is really normalizing back from our deferred arrangements that were paid out in 2020 due to our response to the virus. And also the fact that our FUM is somewhat larger, which Kirsten touched on. Some of our expenses, a bit like how we charge are charged in basis points for FUM. And so that's a projection of where we think that those expenses will be given the level of FUM that we're seeing. The employee expenses as a total of -- percentage of total expenses, Kirsten mentioned 60 -- around 60%, it tends to travel around 60%. Although this year, it's a little wider than, around 65%. It's partially because the other expenses have come down. Kirsten mentioned, of course, lack of travel, marketing and these sorts of things, which have clearly been COVID affected. We don't see much change in the structure of that expense base. And indeed, the cost-to-income ratio is obviously very low at this point. We would see that drifting up a little bit, but not too much around what has previously been over the last few years as things normalize through that expense line and the deferrals. So overall, we're -- from a profitability point of view and a revenue point of view, we're very, very happy with the way the funds management business performed. We think it's performing efficiently. And as I said at the beginning, we -- and which I'll talk about in a moment, we're happy with the new initiatives that we've undertaken in that business. If I can have the next slide, please. Of course, our Funds Management business in terms of the funds under management are influenced by 2 key things. One is the performance of those funds and also inflows and outflows, which I'll come to. So if we look at the investment performance, this is a snapshot of a point in time, obviously, across the various strategies. I'll start at the bottom and in this case with Airlie. Airlie's had a spectacular year outperforming, and we're seeing that starting to translate into flows into the Australian -- Airlie Australian Share Fund. And you can see high conviction and infrastructure, which I won't dwell on. They've had obviously good returns. Infrastructure is obviously in a difficult period with various infrastructure assets being affected by COVID, but generally has been performing extremely well. And then the global fund, which Hamish will speak to, when viewed against obviously, broad market indices, does look like that it's lagged somewhat over and been a bit more difficult across the year, which Hamish has spoken about in his letter. But I would also say, and Hamish will pick this up, the global fund strategy and its objectives have always been around producing 9% across the cycle and also having a very strong commitment to downside protection, which has been achieved as well. So I'll let Hamish pick that up when he speaks. But for the first part, and then moving on to flows, and I won't dwell on this. These have been well telegraphed over the period. We had institutional flows of about $2.6 billion this financial year and about $2 billion -- a bit under $2 billion of net retail flows, which included those monies raised through the partnership offer in conjunction with the restructured global equities. And if you look at the next slide, when you pull that together, here, you can see across the 3 main strategies, the impact of both flows and investment performance. We've been saying for some time that it's likely, given the size of our FUM investment performance, will be the dominant factor in the movement of our FUM and that's occurred this year. It's 3:1 in terms of the net flows and taking our total FUM at the end of June to just under $114 billion, which I would note as of the end of July was 117 -- around $117 billion. If I go to the next slide, Angela, we'll go to the next slide, please. So lot to just spend very quickly, just discussing the restructure of the global equities retail funds, that was a major effort to simplify the number of funds that we had. It's a hallmark. Unfortunately, I'm trying to simplify things that it becomes quite labor-intensive and sometimes quite complicated to simplify things. But having got through that we do believe now we have a one trust, which has 2 classes of units. That trust is roughly about $18 billion in total of funds under management, split between a closed class unit, which is quoted on the ASX under Listing Rules. It's obviously and it's got the code, MGF. And then there's an open class unit, which is effectively the active ETF quoted under the AQUA Rules and can also be accessed off-market which is -- a lot of people call this the 1 unit structure, which allows people to both enter that unit class off-market and on-market and move seamlessly between those 2 access points. We believe whilst it did take some effort to get there, this has simplified our investment proposition and does, as I said, allow investors some greater flexibility in accessing our flagship strategy. In terms of the closed class units, we do think over time, and it will take a bit of time because also there are options involved here, which I'll discuss in a moment, that will lead to, we think, improved trading on the closed class units. It's not a panacea, but it does, we think, help provide an extra layer of demand as that basis risk, as I've spoken about before, is removed and now there's a clear choice between the open and closed class style of units for the underlying global equity strategy. And really, this was a combination, as it says at the bottom there, is a progression of the number of things that we're doing over the years, which started with that active ETF single-unit fund, et cetera. If I could move to the next slide. So the -- in conjunction with that, we undertook a partnership offer, which pleasingly raised $780 million from that. Investors, as part of that partnership were offered 7.5% benefit of extra units, which Magellan paid for, which was in the strategic initiatives and also 1 MFG option, which is -- was a 3-year option when it was issued to be able to exercise a closed class unit at a 7.5% discount to the net asset value. Separately, we also issued bonus options on same terms of those to all class unitholders of MFG options. The discount on those options will be funded by MFG, not the unitholders or the fund. And hence, Kirsten mention this, the accounting treatment of that effectively assumes the entire amount of those options are exercised upfront, if you like, and the 7.5% is paid. So we expensed all that upfront as it says there, $148 million of that. If that proves not to be the case, if those options aren't exercised, of course, that will be written back over time. The -- at the current unit process, as it says here, if all those options were exercised, that would represent another $2.1 billion of FUM in our closed class units. We -- and just lastly and before we move on. To fund those partnership benefits, we do have a corporate debt facility, and we also believe we've got sufficient cash resources within the business. Just turning to the recent fund initiatives. I won't spend too long on some of those, we've spoken about them before, but we're very pleased, obviously, to launch the core series, which is the core international, the core ESG and the core infrastructure fund, the infrastructure fund being around for some time as an institutional fund, a wholesale fund. We're very pleased to be able to launch those. They each have obviously a $0.50 -- 0.5% management fee, which we believe will be attractive to some people. We are seeing quite a lot of work done on these funds to -- from a research point of view, from an approved product list and APL point of view as it's working its way through the various things that need to be done for people to be able to consider investing in them, particularly in the adviser channel. And we've been very heartened by the feedback that we've had. Similarly, on the Magellan Sustainable Fund, we're very happy to be able to make that differentiated product available, again, on exchange via an active ETF, which can be both accessed through exchange and also direct off-market. And then lastly, which is a little bit more recently, in early June, we launched FuturePay again, an active ETF in the sense that it can be accessed both on- and off-market. And it has obviously an applicability for those in retirement which I'll talk about in a sec. So just turning now to FuturePay. The goal here was to try and look to fill a void here where those that have retired and are looking for what to do with their savings to produce some form of income, really are stuck with quite a difficult challenge in trying to juggle the conflicting interest that exists. So with FuturePay, what we've tried to do is to develop a product where a lot of the characteristics and the risk management -- structural risk management techniques that are required to help offset some of these conflicting objectives are managed within that one product and have that as a list of liquid instrument, and that is FuturePay. And so the solution really that we've come up with is a managed fund that has a predictable monthly income that grows with inflation. Importantly, that's a fixed dollar amount, not a percentage. So -- and it's been going now the first unit -- the first distribution was $0.203 per unit in the fund. Inflation has since come out, that's now moved to $0.205 per unit, and that will increase each quarter. So it's a fixed dollar amount. And that's driven by a combination of portfolio, which leans on both our global equity strategy, our infrastructure strategy, which we believe gives great characteristics for supporting this type of investment and these type of payments. They are -- they do have historically exhibited quite low correlation and, therefore, quite low volatility when combined, which is quite important in this. And very importantly, we have introduced a reserving strategy and a reserving process that effectively takes some money and puts it aside in a mutualized trust which is there to help underpin those very important fixed distributions that investors are receiving. And that's an innovation, we believe, that has great utility for people as it helps offset the volatility needed -- that's assumed as you're investing in growth assets and allows that fixed dollar amount of income, as I said, to be paid with some great confidence. And we've also, as I've mentioned, made sure that this product is available both on exchange and daily via off-market to allow investors access to capital, which we also understand is a very valuable part for particularly retirees, who want the peace of mind that if they need their money, they can go and reach for it and they have access to that. The feedback we've had so far has been extremely positive. It's something of the order of 125, 130 unitholders in FuturePay already. Of course, the FUM is still small and growing. But I would say from a take-up point of view, it's been one of the faster take-ups of funds that we've done. The feedback, as I said, is positive around the characteristics that we're aiming to deliver. And also the process of running through research houses and approved products, this is lists, et cetera, as I've spoken about, is well underway. So we're very optimistic that FuturePay, over time, will find quite a relevant home amongst people's choices when they're considering their retirement income. Just an update on our principal investments, as you have seen in the annual report, we've just split these out so we can be a bit clear about how we're talking about these. We split them into our fund investments and also what we're calling Magellan Capital Partners, which is really the strategic investments that sit outside our Funds Management business. So I could turn to the Fund Investments, it's a slide many of you may have seen previously, I won't dwell on it too much. Our total investments in our funds alongside with our investors, essentially, and indeed some seed portfolios now total about $453 million. They're somewhat in the money. So there's about $45 million worth of tax that would be payable if we were to liquidate those today, leaving a net investment of around $407.5 million or just around $2.22 per share. The Board has set a pretax hurdle as we've said over many years now of around 10%. And as you can see on the right-hand side there, that's broadly been met over that period of time. In terms of Magellan Capital Partners. Again, reiterating what we've spoken about previously, we have loosely 4 key things that we wish to achieve in reviewing investments that may be made through Magellan Capital Partners. And first and foremost is that second bullet point and that #1 is that we don't want to distract from our Funds Management business. There's been some commentary around this. It's a key part of what we're doing here is not to get distracted from our Funds Management business, it is our core business. And so to be able to consider these investments, we don't want to have operational involvement by Magellan in these businesses. We will typically look to have oversight through a nonexecutive representation, but we really are searching for high-quality management teams such that we can leverage their skills and not distract our time from the Funds Management business. We're clearly looking for high-quality companies that have the potential or can grow meaningfully in their sector at scale. Ideally, if we can find it, we'd like to -- situations that can contribute to our intellectual capital of our business, even it might occur in a sort of somewhat of a tangential way. At times or it may be more directly applicable to what we're looking to do. And indeed, it would be ideal if they did provide us with some meaningful optionality that we could look at down the track and review as time goes on. And of course, #4, which is from a shareholder's point, very, very important. Of course, we want to achieve attractive returns and we're not shy in looking at achieving those attractive returns in terms of where we think pricing and outcome should be. So if I could turn to just the 3 that we've made, which many of you are aware of. I'll start with Barrenjoey Capital Partners, which, of course, we're a partner with the management there along with Barclays as it says there. We invested $156 million for a 40% non-dilutive economic stakes. And the non-dilutive is obviously very important in this context. The firm itself has started extremely strongly. It's hired around 250 people, which we consider to be extremely high quality. It's managed to, within a very aggressive time frame, to establish many, if not all, the key systems and processes that were acquired get through licensing and all the things that needed to be done to establish this firm. To the extent that the corporate finance and the cash equity businesses have been up and going, and there's been an array of work, which many -- a number of which have been in newspapers around M&A and capital markets activities. The research part of the business is up and going. It's covering more than 80 stocks. It should be over 100 by the time at year-end. And most pleasingly, as I said in the annual report, the partnership with Barclays is proving very beneficial for Barrenjoey's clients as looking for underwriting and financing solutions. Overall, we are delighted with the business. It's been in a very impressive build out. And it is without a shadow of doubt, building and developing ahead of our expectations. FinClear is a much smaller investment, a little bit more strategic in the sense that we're looking to leverage their connectivity and some of the work they've been doing across a number of things, particularly at the ASX around the DLT. That business on its own has continued to build and establish itself. It's managed to attract a number of new clients, some of which are there, Praemium, Superhero and Stake. But very importantly, in July this year, I think we completed the transaction to purchase Pershing Securities Australia, which is quite a large business on very attractive financial terms and it's allowed FinClear to expand its offering meaningfully across that. And the statistics here speak for themselves. The HIN platform, if you can think about it that way, has moved now from $7 billion to $130 billion across HINs that they operate with. And on a combined basis, they'll now have around 250 wholesale intermediary clients and 300 active end users. To us, this gives a great platform for us to consider many of the things that we've been thinking about in terms of reducing friction for investors as that connectivity of FinClear builds out, and we are excited to continue to work with them and looking forward to see where we can take that over time. And in Guzman y Gomez, which I won't spend too much time on, we invested $103 million for a 12% fully diluted share on that. Guzman's had a very strong year, beating where we thought it would be from a budget perspective by about 50% despite obviously all the vagaries of lockdowns and the interruptions of that. It has been interesting and it's been, I think, interesting from an investment learning point of view as well, the impact of things like COVID and on that and broadly on the business, particularly as it's driven many more people to try Guzman's product, particularly through drive-thrus, through the convenience, and that's resulted in more word-of-mouth network and more familiarity with the food which would not perhaps have been this case or not in the same time frame perhaps as COVID came around. So some interesting investment sort of lessons there and observations, frankly. And it's achieving it's -- most important, it's achieving its restaurant roll out targets, it's now up to 157. That's got a set program of restaurants that it's looking to roll out, which will expand its network and build a greater sales flow well over time. So with that, I might hand over to Hamish and we can clearly pick up questions in the Q&A. Hamish?

Well, thank you very much, Brett, and thank you very much, everyone, for joining us. So I'm going to focus a little bit on the global equity strategy. Obviously, it is a very material part of our current business. And I say that word, our current business. And I think it's, therefore, important for people to understand how our principal clients look at our global equity strategy and how they analyze the strategy and what we are seeking to do for our investors. To put the last year into context, which clearly we have underperformed the world MSCI index in the last 12 months, but there's much more to the viewpoint of how people see that. But before I just go into the global equity strategy, I would comment that we have been, over many years, laying many seeds and planting trees effectively to grow other parts of our business. We don't want to be solely a global equity business. We've obviously built one of the largest global equity businesses in the country, it's immensely profitable. But we already have, I would regard, the best infrastructure securities business in the country. And I think we're on our way of developing the best Australian equities business in the country as we start to build out the retail platform of that. I think what we've learned, other seeds we have put in the ground is around the core series, which is a lower cost series, our sustainable funds. And I'm very pleased that in the next few months, we are getting some of our first mandates institutionally with the sustainable funds. But that's still early days, but it's very much on track of what we're wanting to see. I'm personally incredibly excited about what FuturePay represents for the future. These are seeds that take time to grow, but FuturePay has the potential to be very meaningful for the business alongside infrastructure and alongside the Airlie business. And now we've launched Magellan Capital Partners with the 3 investments. Brett and I couldn't be more pleased with those investments. Although we're recording sort of noncash sort of start-up costs largely related to the sort of start-up nature of the Barrenjoey business, if it's a blank sheet of paper, we had 250 people join, believe it or not, to leave other organizations. Some people needed some form of comfort. So there are payments that were made to some people over time. And of course, we are there very conservatively accounting for some of the massive infrastructure start-up costs that they've had at Barrenjoey, Guzman y Gomez. The underlying restaurant economics at Guzman y Gomez are eye-watering and are just getting stronger. And we have an enormous amount of confidence in the Australian business. And they've got a seed being planted in the United States, which is very, very early days. And FinClear, I think -- I wish it was larger, but already these collective investments in our opinion, would already be meaningfully more valuable when we paid for them. Notwithstanding, we're recording an accounting noncash charge of $41 million. These investments have the potential to be meaningful to Magellan over time. But many of them are growth businesses in the early days. Magellan in its early days lost money. But you invest in great businesses with great people early on and you can get incredible financial returns, and we have an opportunity over time, particularly around Guzman y Gomez to deploy more capital over time. We have preemptive rights there. It's one of the reasons we're wanting to make sure we have ample liquidity on our balance sheet. We're very modestly wanting to retain a little bit more capital around the flexibility with the DRP. We think this is a very sensible way. Even underwriting at 25%, it's sort of 1% per annum in additional shares. But of course, on the other side of those additional shares, we're getting cash. And hopefully, that cash can be deployed and earn returns very materially above our cost of capital. And I think everywhere we've deployed capital so far, whether in partnership benefits, the out-of-the-box returns where we've invested in those partnership investments and our funds have been 20%. And actually, if you look at what's increased the funds under management with market performance and performance fees, the return is materially above 20% pretax per annum. And I think we're going to earn very attractive returns on each of FinClear, Barrenjoey and Guzman y Gomez. They're not diluting the returns in our Funds Management business, where the ROE in that business is just off the chart. It's just you can't incrementally deploy much more capital into that. So we're not diluting any return on capital in the Funds Management business. We're just deploying capital at very attractive rates. And let's see what happens over time, but I understand it's early days for people, and these are relatively small at the moment. So let's talk to the global equity strategy because this is what people are focused on it. It's rightly people focused. It's very important to the business at the moment. The core global equity strategy has 2 objectives for our clients. One is the minimization of the risk of a permanent capital loss. And what we've embedded into the strategy is a whole series of very unique downside protection measures and risk management processes. And the other side of the returns is we have set out to our clients to deliver them attractive risk-adjusted returns over the medium to long term. If you are an institutional client and you've got pension obligations or if you're a retail client, the only thing that matters to you in the end over time is the return you get on your capital. People do not retire on a relative basis. They retire on an absolute basis. And we have a strategy that looks nothing like the broad equity markets, but it is very focused on delivering at a retail level net of all fees 9% per annum over the long term in institutional because the fee structure is slightly different. We've set an objective of 10% per annum over the long term. So let's have a look at how we've gone over time over those objectives. The first one very critically is downside protection. The red bars is measured over time in any quarter where the markets have gone down. We measure how our strategy has performed over those 3 months compared to how the MSCI World Index has performed over those 3 months. And consistently over any time period when you've had a down market, we have captured about half of the market returns. So if the market is down 10%, on average, we've gone down 5%. And if you look at that and you measure that against global equity managers who are long-only, we are on the top 1% of any global equity manager measured over sort of 14 years, which is this series. And we've provided people with a little bit more granular information around this in terms of splitting out our upmarket and downmarket. We've captured nearly 100% of the upside over time and we have captured about 50% of the downside. And that sort of ratio when consultants and institutional investors analyze it, kind of takes their breath away because it's very, very hard to do to maintain most of the upside while putting in a very, very strong downside protection measure into the strategy. We tend to get most -- when the markets are really bad, if you look on this chart, this is where we get most of our excess returns. So on the down market where markets are down more than 5% on average, we've outperformed by 6.4% and our largest outperformance when a market was really bad was 15 percentage points. If you look at the up markets over time, any quarter where the markets have gone up, we've lagged by 0.2% or 0.1%. Where markets around the sort of index, we've kind of sort of performed in line with the index. But when the index has had a very, very strong quarterly return, that is when we've lagged a bit. And actually, our largest underperformance in the quarter was 10 percentage points when the markets were up very strongly, but our largest outperformance when the markets were down very strongly was 15 percentage points. So what's happened in the last year is not out of context with the other side of the tail of where we get our largest outperformance when markets are down. So we're just giving people a little bit more granular information, particularly analysts to understand the characteristics here. Now we'll move on to the absolute returns over time. And we've said this is at a retail level 9% per annum. We have delivered above our 9% per annum objective. We've delivered nearly 12% per annum. So if you had invested in a low-cost index fund since inception of our strategy, you would have $28,000. Your $10,000 would have grown into -- if you invested with Magellan, your $10,000 has grown to $48,000. And we would regard that having $20,000 more from investing in an index fund is statistically relevant. That is what active management is about. It's about over time, delivering excess returns. But we do have tails in our strategies in extreme up markets, we can underperform in the short term and quite meaningfully. And in extreme down markets, we've had a very, very strong record of outperforming. And actually, if you think about investor psychology, people are not that concerned if they're lagging a bit when they're all making a lot of money. What worries advisers and what worries clients is when everything goes red. And when normally everything goes red for investors on their sheets, we normally get an enormous amount of calls coming in from advisers and clients saying, thank God for Magellan, it's the only good thing we have to talk about in our strategy. It actually happened in March last year. Advisers were really over and over going, "Thank you again, Magellan, because you're making our jobs easier." We've had very, very few calls from -- when everybody is making money. It's a little disappointing. We're not making as much money with Magellan it's very deliberate what we do. Maybe we'll turn to the next slide because this is really when you get to how we perform against that MSCI benchmark index. Institutional clients and consultants really look at sort of returns on a 3-year basis, is a kind of magical benchmark they look at. And there's actually been 133 months of 3-year return. So you had to wait for the first 3 years of our strategy, we didn't have a 3-year return. After you clock up the first month of 3-year returns, and every month, you can get another data sense of 3-year returns. There's been 133 months, which you can observe a 3-year observation. Just looking what happens on the 30th of June is 1 month. If you look at every month over 12 months, you've then got 12 data points. And what we're showing you here is 3 columns, how our strategy has performed before fees. What is the institutional view, and this is the smallest institutional client who would pay 80 basis points. And then the third column is after all retail fees. And what I'm going to take you down to the bottom one relative to the benchmark. So if you look at our strategy and people going, "You've underperformed a lot this year." If you look at the 3-year rolling returns, those 133 months, how often our strategies outperformed the MSCI before the -- outperformed the MSCI over a 3-year period before fees, the strategy has outperformed the MSCI 133 months out of 133. So there's never been a month where on a 3-year basis, the strategies underperformed the MSCI index, including what's happened in the last year. And the average outperformance has been 6.1%. So when people look at those statistics and say, well, you've got -- you get half the downside risk, and you've got a 100% batting average before fees of beating the market on a 3-year basis, we don't get a lot of complaints from institutional clients. If you look at the next one at the institutional after 80 basis points of fees, now we have 130 months out of 133 after the max institutional fees. So 98% of the time, it's beating the index on a 3-year basis with an average return of 5.2% per annum. And actually, the average -- when we underperformed in those 3 months, the average underperformance was 0.5%. And if you look on a retail basis, obviously, the fees are higher, and we've got a performance fee there. We have outperformed the MSCI of 117 months or 88% of the time with an average excess return on a 3-year basis of 4.2% per annum. And in those months, those 13 periods in which the -- which we underperformed the MSCI, the average underperformance was 0.4%, almost nothing. I think the largest underperformance we've ever had on a 3-year basis was 1.5%. So I'm just trying to put some context that it's easy just to look about what's happened in the last 12 months and get yourself worked up. But that's not the conversation that our institutional or the consulting clients are having with us. If we underperformed materially when the markets went down, I'll be honest with you, we have a problem. It hasn't happened, but I'm not saying it won't happen. We have a problem. Did I get a few things wrong in the last 12 months? Yes, and I've written about that if you want to read the investor letter. So in no ways am I perfect here, I didn't put enough risk on before the vaccine results. Not that I could put an extreme amount because of our downside protection, but there's some things we could have done slightly better, and China has been a bit of a challenging place where we've got about -- we had about 10% of our strategy. It's less now directly in China related investments. But I will leave it there. There are some more statistics and analysis that really consultants and institutional clients look at for the global equity business. We wrote about this both in the global equity write up with more detail and also in the Chairman's Letter, just to put the context of our global equity business. But it is a business that is relatively mature. We closed it a number of years ago to institutional investors and we're in nearly every model account. We can't pick up really any more market share domestically. But our seeds are the place where we can grow funds under management, as Brett has talked about, in core sustainable early infrastructure, FuturePay. And I think there's a lot of value creation in Magellan Capital Partners ahead of us as well. So I may leave it there, Brett.

Okay. Thanks, Hamish. Sarah, are you going to orchestrate the questions?

Yes. Thank you, Hamish, Brett and Kirsten, for a very comprehensive presentation, and you've actually answered a lot of the questions that have come through. But we will go to Q&A. [Operator Instructions] So I suppose I'll just pick up, Hamish, where you used to talk about performance. The first question comes from Elizabeth Miliatis. And just with regard to flows, with flow shifting from inflows in the March quarter to outflows in the June quarter. How have conversations with clients changed over the last 6 months? And how are we positioned for flows in conversations tracking over the last month or so?

Yes. Look, we have to put it in context here. What we don't show people is our -- we only show people net flows. We don't show what we got on a gross inflow basis and a gross outflow basis to get you net flows. So we always have outflows because people are redeeming money every single day just for their own expenses and other periods out of their -- particularly when they're in time, but institutional clients do that for fees and other reasons that they're always taking up a little bit of money. So if we just have a slight slowdown in the gross inflows in a month, we can certainly have a net outflow, but nothing has really changed in the outflow side of the equation. It's really that the inflows may have slowed down and we don't give people that breakdown. But in the context of our business of now $117 billion of funds under management, it's almost immeasurable whether we have $100 million inflow or $100 million outflow. It's just such a small element of the business. Our global equity business, we had substantial inflows last year in the global equity business. We are getting to a maturity point on the institutional side of that because we've been closed for a number of years to any new clients. It's actually been a number of years like that. So we're not accepting any new clients into the global equity strategy. There's some existing clients who have -- who did have some reserve capacity. And most of them have used that up there. The retail business, as I say, there's very limited opportunity outside the direct retail business. But in the advised business, we're kind of in every model portfolio. We're kind of on all bases there. We're not seeing any substantial movement in terms of people redeeming money. But as I say, very small changes in that inflow number can turn the net thing into outflows because there's always outflows. What I'm very pleased to see now is we're starting to see the very early seeds in sustainable with a few mandates in the next quarter likely to be seeded there. I'm very encouraged what we're hearing from the consultants and others on FuturePay, but that's going to take time. Airlie is really now getting to the point of the snowball with the snowflakes in retail land -- are starting to land. And the infrastructure business on an inflows business continues to be very consistent. But in the context of our business, a few hundred million dollars is absolutely nothing. A 1% market movement that literally happens daily is now $1.7 billion. So what we see every day just up and down, a little fluctuations is in the billions, where people are getting caught up into flows in something that's a fraction of 1% here. So -- but I'm very happy, the global equity business is much more mature. But I'm very happy with the seeds that have been built up over many years, which is going to take more time for Airlie and FuturePay and core and sustainable to start to mature. Obviously, infrastructure is much more mature, but it continues to gain market share.

Great. Well, we'll move on to the second part of Elizabeth's question, which is also commonly asked. Brett, it's probably on for you, "Can you please provide some color on the pathway to profitability of the businesses in Magellan Capital Partners, either asset by asset or collectively? Should we assume larger losses in the short term as Barrenjoey builds out?"

Look, the main losses, as we've said in the report, and Hamish mentioned, I think I mentioned as well, were really our share of what Barrenjoey has been investing to build that business. Look, the business itself is tracking, as I said, ahead of expectations. And there's obviously a gale force wind at the moment from market conditions. So you're going to sort of take those into account how long it will be in place. But it is tracking towards -- getting towards breakeven sooner than what we anticipated. So there are, and Hamish mentioned, there are a number of still start-up costs, the few sign-on bonuses and these sorts of things, which I did mention have been conservatively accounted. They've been amortized on a straight-line basis. So some of those are already in those losses that have been reported. So I -- look, markets can move, things can change. But we're very, very pleased with the way Barrenjoey, in particular, has come together. It has a great opportunity subject to markets to get to profitability quicker than what we thought, and it may not be that far ahead depending on where markets get to. There, obviously, some start-up costs are still to be absorbed through that, which will turn up in our accounts as our share of that as it works through. But over the next few years, we're very confident and our confidence is growing that Barrenjoey will be a very profitable and meaningful business. Hamish, I'm not sure you want to add something?

Yes, I'll just add a very few things. We've invested a little shy of $300 million into these businesses, which is kind of 3% of our market cap. Obviously, we're recording this $41 million of sort of largely start-up losses related to Barrenjoey, but there is a little bit in there we're not breaking it exactly out. I would say, if you take a 3- to 5-year view that these businesses are going to be meaningfully profitable. The next 12 months is a little hard to exactly predict the revenues. We're very happy where it's up to on Barrenjoey. We've probably got a greater sight on the costs of Barrenjoey in the next 12 months. But the revenues in the Investment Bank is your larger large transaction, you can have $20 million or $30 million of revenue in a single transaction at Barrenjoey. The equities business is developing incredibly well. I think they're going to end up having one of the leading equity businesses in a fairly short period of time and be very profitable in their equity business, their M&A business, which is really a client relationship business. They've already done 2 of the largest IPOs this year and done some of the largest M&A transactions, including the very innovative bid for Boral for the Seven Group, which is a real tribute. They've been acting on the sale of the Telstra Towers business. So they are -- we're very, very happy where it's up to. If I took a 3-year view, I'm very confident about the profitability and 5 years into the future. And given what we paid for a non-diluted interest in Barrenjoey, I'm pretty confident if we were to sell that, which we have no intention of doing it, we would probably get meaningfully higher. People are amazed how on earth did you get that stake in that business with that price. It was a start-up, there was a lot of risk with it. But where it's up to, I would say FinClear is worth meaningfully more than we've paid for post the Pershing deal. And I think the Guzman stake is worth meaningfully more than we've probably paid for it because of what's happening in the economics of the restaurants and the confidence now on the roll out particularly in Australia. So whilst we recorded losses, our viewpoint on when we're looking at it and when we're tracking things at the moment is we're already ahead. And if I look out 3 to 5 years, I think you're going to start to see material profitability start to come through from those investments 3 to 5 years from now. But it's a nature of investing in sort of growth in sort of start-up businesses that you have losses in the first few days. But importantly, the losses won't affect shareholders' dividends in any way. They're non cash to us. And the dividends are 90% to 95% of the Funds Management business and the cash flow out of that business. If these businesses will record a loss, we don't have to write a check. We've written a check for these investments and the value of the investments have gone up. And these losses, we haven't written a check for $41 million to anybody. So we wrote a check for $270-odd million for these investments. Our view is that, that is worth more than $270 million, and we've recorded an accounting loss that we haven't -- we didn't pay for that loss. But ultimately, the dividends are coming out of the Funds Management business. It's in great shape. These businesses in 3 to 5 years, I think you're going to look back and you're going to say they look pretty smart investments. How do these guys get these investments. I would probably like to have owned more than FinClear and more than Guzman y Gomez. It's kind of what we could get at the time. We obviously got a larger stake in Barrenjoey. But it's ahead of our expectations. And I wouldn't get caught up with these early-stage accounting entries. It's about the value creation here, and it won't affect people's dividend flow at all from the Funds Management business. Obviously, if we start to record real dividends out of these businesses, we'll have to think about what we want to do with those dividends in the future. But let's not get ahead of ourselves here. But Brett, we're very happy with the progress, really, really happy.

Yes, I couldn't agree more. And I just want to echo the accounting lesson that you go there. I tried to write it out in the annual report as well, equity accounting often is not straightforward. If we weren't equity accounting, for example, Barrenjoey, for example, those losses wouldn't appeared in ours. We would have just had the value of our investment and we had to make a decision as we've done this time around whether or not it's impaired or not, and we don't believe it's impaired by any stretch. And we would just see the value of our investment in the accounts. It's the fact that they've got this equity accounting treatment that the requirement is that we show our share of the profits and losses that rolls into our accounts. Effectively, it becomes apparent in that sense. But as you said, we can't lose more than we've invested, Hamish, in these losses. So we're -- look, we -- to me, as I look across that, as I was trying to say with even the other businesses outside of Barrenjoey, FinClear is clearly more connected now through the purchase of Pershing. And there's a great deal that can be done there, and we're very excited by that. So I think it's -- I agree with you, it's early days, but it is moving directionally in the way that we anticipated and hoped, frankly.

All right. Thank you, Brett and Hamish. And just a follow-up question on Magellan Capital Partners from Russell Gill. And we've previously stated a 10% return hurdle for our principal investments. Now we've split out fund investments in Magellan Capital Partners. Are we still applying a more than 10% return hurdle to the Magellan Capital Partners? Or is this being slightly differently?

We actually applied a material -- materially higher return hurdle when we made each of those investments. I don't want to get it exactly, but it was -- each of the internal rate of return assumptions was materially higher than 10% per annum when we made those investments.

Okay. Thank you. And moving on to the DRP, we did announce the DRP today and the intention to retain about 25% to 30% of the dividend. Do we have plans for the use of these funds?

Well, I think I mentioned, we do have all those options outstanding. We've got a debt facility. We don't like using debt. Whether they get exercised or not, we will have to see. But we don't want to ever get caught where we don't have the flexibility. If people exercise the options, we'll be delighted. We're going to get more than a 20% return on that capital over time. So it would be a very value accretive thing. So having the flexibility there. Obviously, it's backed by a liquidity facility at the moment. But also particularly in relation to Guzman y Gomez, it is likely over time that shareholders may want liquidity. There's other shareholders and staff and things in that business. We want to make sure we're in a position that should that happen at periods in the time, that we just have the financial flexibility to exercise any preemptive rights we may have there. And frankly, Brett and Craig runs Magellan Capital Partners. Craig Wright and Brett, they're being shown opportunities all the time. And some of them small, some are larger. I'm not predicting we're going to do anything in the near term. But it's nice to have flexibility. And we had flexibility and we could make those reinvestments because we had a very strong balance sheet from a very small placement we did a number of years ago, both the partnership benefits and those all got funded out of cash flow and that. And I think we're just wanting to retain some modest flexibility in our balance sheet. Optionality in terms of financial flexibility is very valuable. Often you get the best opportunities when things are most difficult. And you don't to -- you want to be from acting from a position of strength. And we've always wanted to do that. And we think it's very prudent. Shareholders who just want to take the cash dividends, paying out 90% to 95% can get the cash dividends and people who want to reinvest dividends will get that option as well there. Brett, I'm not sure if you've got any more comments. But in the context, if we underwrite at 25%, it's kind of 1% per annum. It's -- but on the back of even issuing more shares, don't forget we're getting cash. So we're increasing the asset backing of Magellan. And if we invest that sensibly, hopefully, we can create some real shareholder value with that retention. We only want to retain dollars where we have a high degree of confidence that we can create more shareholder value from that dollar retained.

Yes. I mean, you've hit on everything. To me, the one thing I think I've learned over time, there is, and you've touched on it, some great value for the flexibility and the optionality that being ready, if you like, and having that flexibility with a strong balance sheet gives you. We've had this for a long period of time across Magellan and providing that strong balance sheet with that flexibility and optionality around how we do deal with things like strategic initiatives or some of these other things possibly appear over time, I think, is highly valuable. I mean, I just say, for a relatively small amount of reinvestment of that dividend. It does, we believe, give us meaningful optionality to consider things. So, yes.

Moving on to the next question from Alan Markham. Brett, you've mentioned in your presentation the options that we've issued at the 7.5% discount to net asset value. And we've touched on this in the past, but can we just talk about the economics behind the options discount of 7.5%, which Magellan is paying for and the time that it will take for us to earn a return on that payment?

Yes. Well, the options themselves are effectively American style options, you can exercise them any day, if you like. And they're not a fixed price option, they're a percentage of the net asset value. So in a sense, whatever the net asset value of the closed class unit is at that time, multiply it by 92.5%, and that's what you pay for that unit. The difference, that 7.5% Magellan will pay for that rather than the fund itself diluting existing members. And that's the option cost, if you like, from Magellan's point of view. All those options, and there is -- I can't remember the exact numbers now, $1 billion something of them on issue. Effectively each attract that 7.5% discount from an accounting perspective. We've had to upfront that expense. So that expense has actually occurred. And that's what's in that strategic initiative line of $148 million after tax, I think it was from memory. But of course, we've not paid that. That's accounted for that now. So over time, if all those options are issued, then roughly, depending on where markets get to, that would be the ultimate cost of that. And what we would get in return, of course, as with other partnership benefits that we've done is the management fee on those new FUM -- new funds that are invested, which is currently $1.35 -- 1.35% plus the performance fee. So the mass of -- and Hamish talked about this previously with the mass essentially is 1.35%, divided by 7.5%. That's our investment. That's the return on that, which grows or has the potential to grow over time with market movements and also possible performance fees.

Yes. And Brett, just a simple math of that for us is 1.35% on 7.5% is slightly over 18%. Yes, so we made an initial return, excluding any performance fee of 18%. At market performance, we actually get fees on any increase in funds. So if over time, which we would expect average funds -- those funds, which we pay for effectively raise over time. And effectively, another way of looking at it at these options is we are buying closed-end funds under management for a multiple of 5.5x. You cannot go and buy funds under management at 5.5x. So this is very, very accretive. We think it's very nice for the shareholders that they can get in a 7.5% discount to the daily net asset value. So it's -- that's what we call a partnership benefit. And if they do the cost to us, we get a very attractive return on our capital. So we would love all the options to be exercised, but at the end of the -- it's up to the individual unitholders, whether they exercise them over the next 3 years or not. We expect they won't all be exercised by the way. That's the nature of it. Although the accountants assume that they all will be, but even though we think that's very unlikely.

Thanks, Hamish. We might just move to a question on the line. [Operator Instructions] Okay. We're having some issues there. So we'll just move on to another caller. [Operator Instructions]

So I just got a few questions here, just for some extra context and maybe a little bit of help. But I just wanted to explore a bit more about that share of loss from associates. I fully understand that a lot of it's got to do with those start-up costs with Barrenjoey and the like. But just given some of your comments, Brett, it sounds to me like you'd be sort of considering that, that for FY '22, it sounds like that loss will be greatly reduced. If not, we might see a maiden profit there for the FY '22 year. I'm just trying to get a bit more context on what that sort of line looks like for FY '22 this year of associates there, please?

Yes. Look, I don't want to give a projection on that, frankly. I guess what I'm saying is that the business itself is well positioned. Obviously, markets are quite favorable on that. There are still -- so there's really 2 parts of this, it's the operating business itself and there's, of course, the remainder of the sign-ons and various other bonuses that need to come through. Look, it's likely that, that loss -- that will result in a loss again. I think at the Barrenjoey side of that, I don't want to put a level on it versus...