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

Ladies and gentlemen, good morning. And on behalf of Magellan, I'd like to welcome you today to Magellan's half year results for the period ending 31 December 2021. I'm Sarah Thorne, and I manage the Investor Relations function here at Magellan. Today, Magellan's results will be presented by Hamish McLennan, Magellan's Chairman; Chris MacKay, Portfolio Manager; and Kirsten Morton, Magellan's interim CEO. Craig Wright, Head of Magellan Capital and Advisory, will also join for Q&A at the end of the presentation. 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 Hamish to take you through the presentation. Thanks, Hamish.

Welcome, everyone, and I'm very honored to be here today presenting as Magellan's Chairman. It's been a challenging period for the company, part of which has been Hamish Douglass' medical leave of absence, and we wish him all the very best and the speedy recovery and also thank him for the great effort and work in helping us deliver these outstanding results today. What we want to take you through today is where our focus lies looking ahead, and that is strengthened governance and accountability across the business, a reaffirmed focus on our core Funds Management business, and as part of this, avoiding complexity and further sharpening our investment process to improve investment performance. Let me remind you, we have a very robust business. We have a highly experienced, long-standing and prudent investment team, a strong balance sheet with no debt, strong margins and operating cash flow, which allows us to continue to support and invest in the business. Today, you'll hear from Chris MacKay, who overseas the portfolio management of Magellan's global equity strategies, who will provide an update on the Funds Management business and the investment strategy. Chris is the Co-Founder of Magellan, serving as Magellan's inaugural Chief Investment Officer from inception in 2006 to 2012, and he was Chairman until 2013. Since 2013, Chris has been serving as Managing Director and Portfolio Manager of ASX-listed MFF Capital Investments and is a highly respected and experienced global equity portfolio manager. Welcome, Chris, and thank you for all your efforts. For those who may not be aware, Chris has always shared an office with us here at Magellan. And as part of the services agreement we have with MFF, Chris has had access to Magellan's investment research and has had a consistent and active engagement with our investment team for a number of years. Magellan is very fortunate to have Chris step in, in his role to work alongside Magellan deeply experienced global equities portfolio management team and the broader investment team. Following Chris, our interim CEO, Kirsten Morton, will take you through the group's financial results for the 6 months to the 31st of December 2021 and our key priorities for the business going forward. Before I hand over to Chris and Kirsten, I want to take this opportunity to provide shareholders an update on what has been happening at Magellan at a Board and management level and also provide an update on the capital management initiatives we announced today. From a Board perspective, we have strengthened our independence and governance. This has started with my appointment as independent Nonexecutive Chairman of the group. I previously served our shareholders' as Deputy Chairman. Robert Fraser has now been appointed to this role and continues to serve as Independent Non-Executive Chairman of Magellan Asset Management, our core business. As a further step to strengthen our oversight, the Board is looking to add an additional independent nonexecutive director. We will update shareholders once we've made this appointment. In regard to management, our interim CEO, Kirsten Morton, is doing an outstanding job. Kirsten stepped in as interim CEO, having been with Magellan for over 8 years in the role of Chief Financial Officer. Kirsten has a deep understanding of the business and has posted excellent relationships and trust with staff during her time at Magellan. Importantly, our core business operations are stable and operating effectively and profitably. The addition of Kirsten to senior management adds further depth of experience and support to Kirsten as interim CEO. The Board will take the necessary time to make the right choice in appointing the next CEO. We look forward to updating shareholders when this appointment is made. I've been a director of Magellan since 2016, and I have the greatest confidence in the team to take the business forward. Thank you to all Magellan's staff, clients and shareholders for your ongoing support of the business. Now turning to the capital management initiatives that we have announced today. We believe these proposed initiatives will be highly attractive to shareholders and balance capital efficiency, delivering solid dividends and attractive returns to shareholders. Today, we announced the intention to progress with the bonus issue of options to Magellan shareholders on a 1-for-8 basis. It is intended the options will be issued at an exercise price of $35 per option exercisable at any time up until expiry over a 5-year term. It is intended the options will be listed on the ASX. A prospectus for these options will be available to shareholders in March 2022. In addition, we intend to progress with an issuance of approximately 10 million options to Magellan's staff for the same exercise price and term. This intended issuance will be part of a broader staff retention and engagement project program that we're currently working through. The Board is also considering an on-market share buyback program, and we will update shareholders on that in due course. Today, we confirm our dividend policy payout of 90% to 95% of profit after tax from our Funds Management business. We are suspending the DRP in light of the new capital management initiatives. Kirsten will be in touch on Magellan Capital Partners later in the presentation, but as part of our capital management initiatives, we don't have any plans to make further investments in Magellan Capital Partners business. We believe the combination of these capital management initiatives will be highly attractive to shareholders and reflect our focus on our core Funds Management business. With that, I'd like to hand over to Chris to take you -- for him to take you through the Funds Management update. Thank you.

Thank you, Hamish. That's got a ring to it. I've said that last time I was here. Anyway, I'm Chris. I'm delighted to be working for and with Kirsten. Kirsten is Superb, you'll get to know well over the coming years. I'm delighted to be working with and for our simply amazing teams of professionals. Magellan craves excellence. Magellan truly develops deep relationships based on excellence. Magellan truly cares. Having said that, we will only be trusted if we deserve to be trusted. In some cases, we must deserve to be trusted to rebuild trust. Importantly, doors remain open. It's good news so far. Hamish appears to be recovering. We're already working on thoughtful structures for him to come back safely to focus on investment, to reconnect with global clients and deliver what investors need. The outpouring of feeling from professionals all around the world and many others here and elsewhere has simply been heartwarming. Time and again, over the past 2 weeks, as major professional investors around the world have kept the doors open to Magellan or even where they've redeemed, they stay in touch. The professionals have recognized that Magellan and Hamish are globally unique as professional asset managers. I will touch on that a while later. The most important word in teams and in adaptive processes is end. The Magellan Global strategy, which has been led by Hamish's uniquely combines valuable macro, global and regional insights and perspectives with realtime updates, well ahead of economists and central banks often on what major companies are actually doing with inventories, supply chain, wage costs and pricing power. And time and again, wonderful globally advantaged companies with demonstrable sustained profitable growth and unique concurrent focus on downside protection and focus on what is in the price. Until last week, I sincerely believe that every smart, sophisticated investor did this as part of their framework setting and processes. Simply amazing. That is not the case. Think Dunning-Kruger effect on my part. Thus, we have part of the answer why is Magellan's global investing unique and valuable. This continues in Hamish's absence and includes Arvid Streimann, one of the 2 other joint portfolio managers. He has world-class macro insights. He is softly spoken with wisdom. And so I strongly recommend you listen when he speaks. Magellan is also much more. Today's announcements materially reduced complexity, provides strategic clarity, increased focus and accountability and a crucial first step in trust for our investor clients, financial planners and intermediaries as well as professional investor clients around the world for our teams and for our shareholders. Shareholders are also Magellan partners, and we should never forget that. Partnerships matter. Frank and all of his teams have been firmly relationship-based from day 1, and they are skilled and care deeply. All Magellan cares, but we will work to broaden and deepen partnerships for the long term based on trust. Our operations are already world-class, and Kirsten is professionalizing us further. Thank you, Kirsten. Magellan is typified by people like Dom Giuliano, leadership judgment, ESG smart. Gerald Stack leads our market-leading $20 billion infrastructure business with a very strong team around him. John Sevior, Matt Williams and Emma Fisher lead Airlie, the best Australian Fund Manager as they deliver results through cycles. Results-driven, relationship-focused, understated, but the highest quality, each of them and many more right throughout our teams. Funds Management is an important vital business in societies. Today is important for Magellan and for all of our stakeholders, but it is one important day and not the day to spill out in full our longer-term vision in Funds Management. It is advanced from our original opportunities and vision, inward inquiries are coming from some who understand Magellan's unique culture and potential. This is a real end, but let's deliver results and trust. If you look on the slide, there's obviously some key points being made here. The fundamental proven investment discipline works, and it's unchanged since inception. There's obviously modest moderation to some of the processes. It delivers strong, consistent investment results for clients, importantly, with downside protection. It minimizes the risk of permanent capital loss across market cycles. It helps clients maintain quality investments during volatility and noise. This leads to the second why. Why have a world-class targeted top decile investment management group. First is answered by the world around us. We have built and protected wealth, and we're uniquely placed to continue. Inflation erodes cash every day. Ben McVicar and Ofer love toll roads and infrastructure. They have pricing power. Pricing power matters to protect and enhance wealth. Government stupid ideological decisions damage, debt and spending gets ever closer to the real pressure points. Geopolitical pressures are the highest in decades. Magellan's clients need portfolio growth via the best sustainably advantaged companies in the world. Duration, downside protection and macroeconomic expertise built also from the realtime real-world activities from the biggest world companies everywhere. In the current environment, we have pushed on a Jeff Bezos open door and added tighter focus on what's in the price, as I mentioned. Performance and accountability are front and center, and that is bolded in this slide. This matters for our clients and advisers. As going forward, index funds, cash, other investment firms likely will fail to provide the full package of answers. Academic underpinning of our processes and investment philosophy comes via groups like Santa Fe, Complex Systems, Professor West, Scale. Wider top-class Magellan type companies continue to grow and succeed and not revert to the mean. Of course, I marvel at Alphabet's USD 91 billion after-tax operating cash flow. Think about that as a young company. It's a huge number. But I'm even more excited that we were the first important international institution via Nikki Thomas, our returning portfolio manager to recognize the Yum! Brands systems and amazing consumer growth in China. And Hamish, many years ago, was far ahead in spelling out the growth potential of the $30-odd Microsoft. Of course, it's $300 now. Both are still in our portfolios to the day. Markets have hardly started cleaning out the rubbish that floated up in recent years, and that accelerated post-COVID. That is a risk but real opportunities for deep Magellan analysis and process. We have this huge team, as you know. I do want to touch -- sorry, I do want to touch upon the potential of the MFG Core Series, ESG sustainable and FuturePay. We'll talk about that in coming months. I also recognize, of course, the MGF discount. That's an important issue. We are looking at it. And of course, we've increased the fund buyback to represent 30% of volumes. That, of course, is a benefit to existing and continuing unitholders. With that, I'll hand over to Kirsten, please.

Thanks, Chris, and good morning. I'm very pleased to be able to address you directly today. Firstly, I'd like to take you through the results, and then I'll follow through with a business update. Today, Magellan has delivered a record half year profit for the 6 months to 31 December 2021. Our statutory net profit after tax was up 24% to $251.6 million compared to the prior half year, which is a great result. The increase was mainly due to a 12% increase in our average funds under management, which resulted in a 13% increase in our core revenue being management and services fees. As we've mentioned in the past, performance fees by their nature are lumpy, and they do have the potential to fluctuate significantly period-over-period. That said, in the current half year, the group earned performance fees of $11.5 million from the infrastructure funds strong performance. Other revenue typically comprises distributions we earn on investments in our funds, realized and unrealized gains or losses on those investments, foreign exchange movements and advisory income of our U.S. business, Frontier Group. Our revenue has increased $10.9 million, mainly due to FX gains and some realized gains on investments held in our fund investment portfolio. Our share of profit from Magellan investments in Barrenjoey, Guzman y Gomez and FinClear was a $3 million profit for the 6 months to 31 December 2021. And that was a pleasing result, especially as Barrenjoey has been operating for me 18 months. We have been -- we have previously mentioned that our view is that adjusted net profit really provides a much more meaningful performance information of our business and also some comparability of results half-on-half. So if I turn to our adjusted net profit after tax for the half year, you can see it's $248.1 million, up 16% compared to the last half. And just by way of a reminder, adjusted net profit is the group's statutory net profit, excluding certain items. Those items are shown on Page 9 of the slides. And for the current half year, they comprise of 3 adjustments, a $6.1 million relating to a one-off strategic transaction costs, and that relates mainly to revaluing the Magellan Global Fund option liability. There's a noncash item of $2.3 million, which relates to the amortization expense of intangibles from the Airlie and Frontier business that we bought a few years ago. And finally, an $11.9 million unrealized capital gains in the shares and units in our fund investments portfolio. And as we record the market movements of those equities directly in the P&L, it's meaningful to remove the unrealized market volatility from our revenue. That's whether it's a gain or a loss. And please just note all those adjustments I just ran through are after-tax announced. Finally, diluted earnings per share increased 23% to $1.363 per share compared to the last half and adjusted diluted earnings per share was $1.164 per share, which is up 15% and in line with the increase in adjusted net profit. Turning to Page 10. Given the conclusion of our relationship with SJP late last year, I thought you might be interested to see the impact of our earnings for the 6 months to December 2021 as if SJP was not a client for that 6-month period, but please do note that this is just for information purposes only. So as you can see on the slide, there's a third dashed column on the chart, which shows FUM and earnings, excluding SJP for the 6 months to 31 December 2021. As you can see, it shows the profit of our core business, Funds Management, would have been down by a modest 1% half-on-half. That is really that Funds Management earnings in the current half would have been largely flat at $254.1 million compared with $256.2 million in the prior half. Now if you look to the far right side and -- the far right of that slide, on statutory net profit, even without SJP, it would have still been higher by 7% at $216 million. And as expected, there'd be no change in adjusted net profit, given we don't adjust for management fee revenues. So the key point is that we are not reliant on a single client. We have had some strong earnings from FUM growth, and it is important to remember that FUM growth comes from market movements as well as flows from clients and FX. Now let me step you through the financial strength of our business. which is shown on Page 11. It's quite simple. We have a strong balance sheet and strong liquidity. Our cash, our liquid investments in equities and funds and equity-accounted investments exceed $1 billion which is up 13% in the past 6 months. Now of that $1 billion, $291 million comprises cash, and that's all free cash. We complement this by timely collection of management fees, and our current collection rate is around 20 days to realize our fee receivables into cash. That all results in our business having a very healthy cash flow from operating activities, being $238.5 million for the 6 months to 31 December 2021. And in addition, we have no debt and we have access to unused facilities of around $105 million, which just cements the strength of our liquidity. Now once taking into account the group's liabilities, our net tangible assets are strong at $992.8 million, a 13% rise in the past 6 months. It is worthwhile to remind you that the largest liability on our balance sheet totaled $165.2 million, and it really relates to a conservative accounting treatment of the Magellan Global Fund options. It's conservative because it assumes all the options will be exercised, which may not be the case. So what does that all mean through our interim dividend? The directors have declared an interim dividend for the half year ended 31 December 2021 of $1.101 per share, 13% higher than last year. Now the dividend announced today reflects Magellan's dividend policy, which is to pay out 90% to 95% of the net profit after-tax of the Funds Management business, excluding amortization expense, costs related to strategic initiatives and any crystallized performance fees at the half year. We'll continue to frank the dividend at 75% and we will also look to pay those dividends promptly, and the dividend announced today will be paid to shareholders on the 8th of March. The directors have also decided to sustain the dividend reinvestment plan for the foreseeable future as the group has no requirement for capital, given it has no plans to make further investments in that Magellan Capital Partners. On Page 13 of the slides, there's just a couple of comments I'd like to make about expenses. Consistent with prior years, our main operating expense aside from tax is employee expenses. Our average number of employees at 31 December 2021 is 139, which remains quite stable. It was 135 at June 2021. And employee expenses account for approximately 65% of total expenses, which remains approximately stable. Now our cost-to-income ratio for the half year is 17.4%. And if at 31 December 2021, you adjusted the results for SJP to exclude SJP, it would have been 19.6%. This result is exceptionally low. And when compared to industry standards, it really just highlights that there is significant buffer in our business to continue to invest in our business for the future. Finally, our total Funds Management expenses for 2022 financial year remains in line with our expense guidance of $125 million to $130 million, and that includes the employee retention initiatives, which we are currently working through and have announced today to our staff. Now let's turn to Slide 15, and let's discuss a little bit about our core business, our Funds Management business and the driver of our group's profitability and dividends. Funds Management revenue is up 15% to $367.1 million for the 6 months to 31 December 2021. And that relates mainly as I've covered before, 13% increase in management fees which is in line with the 12% growth in average fund and crystallized performance fees before tax of $11.5 million. Now expenses in the half year increased $10.7 million to $62.3 million, and that was largely due to remuneration decisions we took due to COVID in the prior year. We've also seen a small increase in the average base management fee to 62 basis points due to the change in the mix of the retail and the institutional clients. And based on our most recent FUM announcement on the 9th of February, funds under management were $87.1 billion and our base management fee run rate is 64 basis points. Our business does remain well balanced across both our retail and our institutional client bases. This Slide -- on Slide 16 -- if you're following the slide is based on our latest FUM at 9 February. And as you can see, FUM represents 33% of our total FUM whilst institutional FUM represents 67%. But then if you flip back, while our FUM basis -- well on a FUM basis, the retail is 33% of our business. If you look at the contribution to management fees earned, our retail business actually contributes to 62% of our management fee revenue. We also remain well diversified across our institutional clients. Again, based on our FUM at 9 February, we have 4 clients representing more than 2% of management and services fees revenues. Therefore, we are not reliant on any single client. And of our 30 institutional clients -- of our largest, I should say, sorry, 30 institutional clients, they represent 28% of our management and services fees. So you can see that there's a very long tail in our institutional client base. Now just touching on the Magellan Capital Partners before we wrap up. Magellan has made 3 financial investments, which is separate to our core Funds Management business, and they are not held for business synergies. These financial investments are independently managed. Magellan is not involved in their day-to-day business operations, but we remain very supportive of all 3 of those financial investments, and we have no plans to make any further investments going forward. Barrenjoey's management has represented it is performing ahead of their expectations. And as previously mentioned, it was profitable for the half year ended 31 December 2021. And Craig Wright, Head of Magellan's Capital & Advisory team provides strong oversight of these financial investments, which includes being Magellan's Board representative on the larger investments. I want to acknowledge the business has faced challenges in the last few months, and the culmination of those events may have impacted the trust you have in Magellan. I and all the team are focused and determined to return stability and simplicity to our business. And if you know me, it will be done right and it will be done as soon as possible. That is our future focus. So with that, let me just step you through our immediate priorities. Firstly, we are looking to the future with a laser focus on our core Funds Management business. Magellan is a strong business, and we have a wonderful platform for the future. As Chris mentioned, sharpening investment processes to improve investment performance is the major priority of our investment team. Our business has always been and continues to be obviously built on putting clients first, and this goes to investment performance but also client engagement. Our distribution team headed by Frank Casarotti, remains best-in-class and relationship-focused professionals through and through. Our team remains engaged with our client base and are focused on our -- both our client and unitholder needs. Our institutional team has had significant engagement across our global in-store client base and have scheduled face-to-face meetings with our clients across the U.K. and the U.S. next month. And over recent weeks, webinars and meetings have been held between research houses and our -- senior members of our investment team. Webinars have also been held between our financial adviser and broker network and our global equity portfolio managers. And we've had a number of boardroom briefings organized with senior investment team members nationwide. And in March, we start a national adviser and broker roadshow. Over a number of years, we have been showcasing to our clients the breadth and depth of our investment team. And you'll see that through our video series and Magellan Minutes now In The Know podcast. Finally, our 14-person client-facing distribution team maintained active outreach to our adviser and broker network, and we continue to have ongoing investor calls with direct clients. In addition to our clients, our staff are our key priority. We are a people business, and it's a key responsibility of mine and also Chris' role to nurture and retain our people and especially at this important time. The caliber and dedication of each individual at Magellan just makes it my absolute pleasure to care for them. Not only are we maintaining an active engagement program with staff, employee retention is also a key focus, which we will include amongst other initiatives and a retention bonus plan and the issue of unlisted bonus options to staff have been announced today, as I mentioned earlier. But importantly, we are in a strong position, and that allows us to continue to invest, support and reward our staff. Now before heading to Q&A, a couple of takeaways. Magellan has reported a record result for the half year and remains incredibly strong financial health, a robust balance sheet and strong cash flows. Our focus is on our core fund management business. Fundamental to this is our deeply experienced investment team that has delivered strong, consistent investment performance for clients since inception via a disciplined, proven and through-the-cycle investment process. And for shareholders, we believe the capital management initiatives announced today enhance value and should be attractive. And from Magellan, thank you for your ongoing support. Sarah, I'll hand back to you for Q&A.

Well, thank you very much, Kirsten, Chris and Hamish for that presentation. We will now move to Q&A. [Operator Instructions] We will start with some questions that have come through on the webinar. Firstly on the capital management initiatives. This question comes from Ed Henning. Can you explain how we will be pursuing the buyback if you proceed raising debt or selling assets given we've got a 90% to 95% payout ratio.

Kirsten, could you answer that, please?

In terms of how are we arranging the buyback, obviously, we'll be having the capital in the business. So Chris, I don't know if you want to add anything?

Yes. I'm going. We're very cash accretive. So there will be cash available and so the buyback plans are about to be undertaken there.

Okay. And perhaps a follow-up question for that the rationale for doing the intention to undertake the 1-for-8 bonus issue at the same time as undertaking potentially a buyback?

Yes, go ahead.

It's a benefit clearly to shareholders. We previously had success with similar structures. Shareholders which I guess on one. I haven't done the best in the recent past. We thought that the exercise price of $35 was an appropriate balance if the share price is back at $35, the Board and management will have done a very decent job in some restoration of value. We hope that the options are of ongoing value to shareholders. The strike at 1-for-8 is relatively nondilutive for those that don't take up at that time, but if we're in the money, obviously, expect a high take-up. Equally as important is the approximately 10 million options to staff on a 1-for-8 basis that's intended to demonstrate confidence, there are particular features. Obviously, they're unlisted, whereas the 1-for-8 shareholder bonus issue is they will be listed. There will also be the capacity down the track for staff members who at that time don't want to put their hand in their pocket for currently employed -- then currently employed staff to have their options bought back. So overall, a very interesting and attractive package. The buyback, obviously, if we're buying back shares at a lower price than the strike price, that's obviously accretive. Let's not go into further. Let's see where we get to with the review of capital management for the buyback.

Thank you, Chris. So we'll move on to the next question that's been raised by a couple of different people. We obviously put about FUM announcement last Friday with some outflows. Can you touch on how client conversations have been going over the past few weeks and what we are doing to address any future outflows?

So I'll start. Chris and I and Kirsten have had numerous conversations. Generally speaking, most have been supportive, very interested to see how Hamish is going. I want to understand how the team is performing and holding out. And I've been very encouraged by the outreaches that we've had. In terms of fund outflows, we expect there'll be some fund outflows just to be realistic. But I think the most important thing from a lot of the conversations that we've had been around Chris' attitude towards the portfolio as it stands, no major issues if you listened to the webinar last week with Chris and Nikki Thomas and Arvid. It's steady as she goes. We're managing our clients' money over the long term. There might be some tweaks in the future, but we're certainly going to stay the course. But Chris, you might want to add to that question as well?

Yes. Not a lot. I covered it in absolute detail, probably excruciating detail in the -- in my intro commentary. I'll reiterate that the most sophisticated global professional investors regard Magellan as unique, and they have a very keen appreciation for Hamish Douglass' specific abilities and talent and have a strong level of caring. And so even in cases where, because of mandate terms have been forced to redeem, they want the door to remain open. I covered in detail the rationale behind why Magellan is such a strong component of portfolios around the world. Retail, we can deal with separately.

Thank you. Again, another question that's come up by multiple people. Just on our cost-income ratio and margins moving forward. And how do we expect to manage this if we continue to see outflows.

Kirsten?

Yes, sure. Look, it's a world-leading cost-income ratio. And I think that we will have sufficient headroom to be able to invest in our business. Certainly, any -- certainly, we need to invest and it can't come at the cost of our future. So...

Yes. And just adding to that, to Kirsten's -- we are strongly profitable, we have a very robust balance sheet. So we will obviously be managing our costs appropriately as time goes on, but a lot of our businesses are ring-fenced like Airlie, and you look at infrastructure with Gerald. So the reality is we feel very confident in the ongoing nature of the business, and we will focus on staff retention and just making sure that everyone is catered for in that regard.

And Hamish and Kirsten. This question comes from Julian Braganza at JPMorgan. In terms of future margin pressure, are we expecting to cut fees? Or are we expecting to have any further pressure on our margins?

Perhaps I'd -- sorry, Chris.

No on fees. We offer a world-class product, we also, as I mentioned in my comments, the core series is an attractive product for people who are fee sensitive. If the major financial professionals around the world recognize the quality of the product, we have to communicate and then perform so that people more generally understand it. If you're in cra*** products and index funds, when the market downturns as it will inevitably in time or if you are in cash, when there is a lot of inflation, you will not be helping your retirement savings. Magellan offers a mix of factors which help address both issue.

And we also have Magellan Core Series.

Core Series, sorry, I missed -- I did try to mention that.

A solution for clients that are more fee sensitive.

Yes.

Okay. Thank you. Moving on to a different topic. This question comes from Andrei Stadnik from Morgan Stanley. We mentioned to continue to support and invest in the business, but we've made no further investments in Magellan Capital Partners. What are investments for future growth are we considering making?

We love the asset management business. So as we've said today, we're refocusing on the core. MCP, those investments we're very happy with, we're just not going to add to those at all. And this is all about refocusing on what we do best, which is asset management.

Thank you, Hamish, And I'll just ask a follow-up question from Jacob Blackwell. Is the pause of Magellan Capital Partners investing indefinite? Or will we return after Funds Management has been threshold?

No, no. It's indefinite, certainly for now. But we, as I've just said, the overriding theme here is that we're seeing on asset management, and that is our priority.

Asset management is a wonderful business. If we do it right, if we have trust, if we have partnerships, if we have highest quality people, it really works. We've got opportunities that we would never have been able to come our way. You just have to look at infrastructure. It started from nothing. It grew beneath a huge oak, obviously, but it's a $20 billion funds under management business itself, and Airlie is the #1 Australian fund manager.

Thank you both Chris and Hamish. Again, we'll move on to a slightly different topic. Your question comes from Bruce Bennett. Can you provide an update on FuturePay and how we see this processing over the coming years?

Kirsten, can you take?

Look, with FuturePay, we're very pleased with the development of it. Paddy McCrudden is rolling out and speaking with clients and doing a sort of strategy sessions with various clients. It was always going to be -- it takes time to develop that product, but we continue to support it and look forward to actually seeing that grow in the coming years.

Yes. It's clearly -- also, Kristen, it's clearly a product that meets important needs. And I expect that we'll get even further behind it. It works. It is doing its job really well. And there's a lot of professional interest again. It takes time for something even though it's relatively simple. It has a degree of complexity. It takes time for brokers financial planners and investors to understand that it meets their needs.

Thank you. Just again a follow-up questions we've seen from multiple people about other products. The core series you were to touch on how that's progressing?

We've got specific projects already underway to consider what additional investing and efforts we need to put behind Core Series. Again, they meet important needs, they are attractive products. And I won't go into full details. It's competitively sensitive, but the stuff we can do there and will do.

Okay. Thank you. We'll now move to a question that's come through on the line. Maybe person with the number ending in 822. [Operator Instructions]

It's James Cordukes here from Crédit Suisse. Look, maybe just circling back to the buyback looking for a bit more clarity around that. I mean can you talk about how you think about the quantum of that? And maybe also to the question earlier around funding, I mean, I appreciate you're a cash-generative business, but your payout ratio is at 90% to 95%. I presume you're going to maintain that. So it has to be funded through debt or maybe some asset sales, you've got $400 million of fund investment. So would you sell some of those down? And would you add more leverage and what's the right type of leverage ratios you consider?

Thank you for the question. It's early. We do generate a lot of cash. Obviously, there is a difference between 90% to 95% and 100%. I've been -- I made a promise to go down to Barrenjoey when they pay us the dividend. So I do want to go down there. And Barrenjoey, obviously, we had a good update today on that. So maybe we get money from there. The MCP businesses themselves are extremely attractive. And as you say, we've got over $400 million or roughly $400 million of balance sheet investments. So there's lots of room. We'll do a proper plan. We'll do a proper plan, and it needs to be seen in the context of our ongoing profitability and where the business is at. So we'll come back to you. We just wanted to make very clear to shareholders that, that was one of the considerations -- a key consideration that we have in mind and to put it in front of you.

Yes. All right. Maybe just a question on the options. I mean maybe a bit more detail on how you set that $35 strike price. Was it just an arbitrary number because it was well above current share price? And how do you -- would that be adjusted for the buyback? And how did you think about the buyback when you're sitting?

No, it was not arbitrary. There was a detailed modeling done. It is an incentive or a benefit -- I'm sorry, is the right word, benefit to shareholders, we believe. We believe that given volatility, people do these models. It should trade at the value. And secondly, it will not be adjusted for the buyback. The buyback is a separate capital management exercise. So strike prices are not adjusted for buybacks.

All right. Look...

I think we lost him.

We will go to another question via the line. Again, with the dial-in ending in 112. [Operator Instructions]

This is Shaun Ler from Morningstar. Just got a couple of questions, please. Firstly, on your institutional client portfolio, can you go ahead and breakdown some of the characteristics of those mandates? For example, how many of those are low-vol quality mandates? How many are absolute return mandates, how much are relative return mandates? Any color there would be great, please.

No. There's a mix of mandates. There's no -- you see the figures. The figures are straightforward in aggregate. That's what's important for shareholders. And some of this is obviously client and confidential sensitive, so no.

All right. My second question pertains to your retail strategy. I'm just curious, is there a view of Magellan picking up more, I guess, advice for any investment vehicles in the future such as performance fees base products have some initial accounts?

With the refocus on investment management, there will be considerable opportunities both for current products, possibly extensions. What we don't want to do -- Kirsten made it very clear, we don't want to add complexity. We will not do a restructure or any addition that is not clearly in the interest of investment clients.

My last question is just about the sustainable strategies. You spoke about the sustainable strategies passing the 5-year anniversaries. Total FUM now over $500 million. Just curious, some of your comps have been able to get similar amounts of money in less than a year. So just curious, what do you see as the reason? Is this a performance issue? Is this a fee issue? Or is this a distribution issue? And I guess more importantly, whether this means for the future flows?

No, it's not a performance issue. Again, unsurprisingly, we are undertaking a detailed review with a focus on this area. My view from the outside is that we may not have been ambitious enough across that area. It is a huge and growing area of considerable importance. And if we need additional resourcing for that area via distribution or otherwise, we will certainly look at it. Our performance is fantastic. The methodology is fantastic. So no issues there.

Okay. We'll move on to another caller from the line. With the -- dial-in with the number ending in 549. [Operator Instructions]

It's Brendan Carrig from Macquarie here. Just a couple of questions. Could I just start on fees, please? So the fee rate obviously went up in the half, which I assume is mixed from St. James's Place. But in your discussions with clients, can you please just give some background as to how the comments about fees are going? And in both the retail space as well, have you had to make any adjustments to fee proposals from a platform perspective as well?

Brendan, I'll speak with you. Yes, look, we always have conversations about fees. We do find that our conversations in relation with our institutional clients. We're very much in line with market rates on those. And in terms of fees for our retail products, again, as we mentioned before, we have conviction in our long-term strategy. And as Chris said, we've got an outstanding track record, and there's no change in the retail fees.

Brendan, late in any market cycle, the birds chirp. And so the c*** has risen to the top of the water. And of course, people have issues. The people who were with us in the global strategies through the GFC know the massive outperformance and protection of capital that we achieved. So in this in the current environment, in my view, and I'm only one, I guess, I don't even have a vote yet, it would be really dumb to cut fees.

Yes. I guess maybe another way to ask from an institutional perspective that people are coming up...

Institutional...

Basis point cut. Are you going to say, no, we're just happy to take the outflow as opposed to...

That's not the nature of the discussion. The importance of the various strategies to the institutions is amazing. And I mentioned that in the outset. And so -- and gave some detail around that. Whether we're 5 basis points more or 5 basis points below is very different to major institutions for whom what we are offering is important and others do not do it. So again, fees is not the issue.

Okay. Just on Barrenjoey, so obviously, the positive contribution there. Can you just confirm the bonus accruals for that business kind of happened during the year, and there's not going to be sort of a catch-up in the fourth quarter if and when their bonuses get determined?

Yes, I'll take that. Thanks, Brendan, Craig here. Yes, that is correct. I mean the profit that we've announced today, which is our share of that includes their accruals for those types of adjustments, sign-ons, et cetera. So yes.

Okay. And then the last one I had, just on costs. So Funds Management expenses doubling those, you'd be at the bottom end of the range. But as you've highlighted today, there's a lot more overseas travel. It looks like it's on the way of a lot more contact with the adviser base and other such initiatives. So can you just sort of confirm the expectations in a bit more detail about how those costs transpire in the next half? And in terms of the options, the share-based payment expense that would be recognized. Does that factored into the Funds Management expense guidance? Or is that separate?

Sure, Brendan. Yes. So in -- you're right, if you doubled the first half, it would look like we're at the low end. In taking into account the employee retention bonus plan announced, I would guide you to be midway through that expense guidance range. You are spot on as well. We are looking to do more travel and there's a little bit of seasonality in some of the other expense lines as well with a couple of licenses, et cetera, that kick into the second half of the year. So, yes. Hopefully, that clarifies your question. I think your second question was sort of in terms of options in the share-based payments. They won't be treated as a share-based payment, but the retention bonus plan would come at a -- create or come at a cost to the business and that's been factored in, in our expense guidance range.

We'll just go to one more dialer on the line with the dial-in with number ending 685. [Operator Instructions]

Firstly, my question would start on maybe just the conversations with institutional clients. So I assume you've been speaking with them intensely, particularly post Hamish's leave of absence announcement, what kinds of concerns are they raising with you? What's the key concern? Is it performance? Is it Hamish's departure? Potentially other institutional clients, it doesn't seem that fees are a key issue. But what are the key concerns there? And what are you doing to address those?

Look, I'll start with that. Chris might want to chip in. Hamish is a unique individual, but there's a strong team that supports him and a lot of our key clients know that, too. So there's been a lot of discussion around how they're all faring. And I sort of reiterate that we do hope it's a speedy return for Hamish because he is an important part of the team as Chris, Kirsten and all of our portfolio managers are. Obviously, performance does come up and we discuss it. And I think what's important is Chris has superbly been addressing his view. And what's interesting is that he's very much a part of the team, and he certainly has some views on whether we make any adjustments. But on the whole, he stated publicly on numerous occasions, we're going to see the course he will have a view on whether any adjustments need to be made, but we're not looking at any wholesale changes. I think that's fair that you think.

That's absolutely fair. The combined portfolio manager group in global being Nikki Thomas, Arvid Streimann and myself, is very well received by the institutional clients. And similarly, in our conviction, Chris Wheldon, is excellent, and on the long side, so that side of it's fine. Sometimes the clients have clear terms in their mandates, which require redemption when the lead portfolio manager steps away even if it's only temporary, and that's triggered a bit. Some others, frankly, there's a bit of sheep-like behavior, particularly from consultants, consultants are quality, but we always get asked what are other people doing. In terms of the impact on remaining institutions, remaining retail clients, there is none. Certainly, at this stage, we're ahead of the curve with increased liquidity. We're in massively liquid companies all around the world. We've taken some early action at the bottom of the portfolio to just assist the margin in additional liquidity. So there aren't any of the ongoing issues, but it's a fair and repeated question just to make sure that their interest in if it's a pooled vehicle are being also cared for. For mandates, it's obviously not an issue.

Yes. Got it. Just a couple of follow-on questions on that. Firstly, you mentioned some clients do have a requirement where there is a change in CIO or PM. They'd be required to redeem. Is there any further headwind on the rest of the institutional book from that? And then separately, obviously, you've got a great team sort of replacing Hamish temporarily. But is there any foreseeability as to when he'll actually be back?

Okay. I'll deal with the first one, if you like. For the ones for whom it's mandated, they may already have given notification, and you'll note that the release included notifications as well as redemptions. But of course, there will be people who will come through over time on that regard. For others, of course, we've got a variety of factors as we answered in your previous question. Hamish is still CIO, Obviously, he is on temporary leave of absence. Hamish Mc, do you want to...

Yes. Look, it's premature to just say when he'll be back, fully expect for that to happen. And we want a speedy recovery from him. We're messaging each other. So when we're in a position to talk about that with more information, we'll do that. So accepting that some private matter for Hamish, all I can say is that we wish him the very best and expect a speedy recovery and he'll be back with us soon. But I just want to reiterate Magellan has always had a very deep bench. A lot of our clients and investors may not have seen it because Hamish is such a high profile front person that, as Chris and Kirsten have stated, we've got Nikki, Arvid, Dom Giuliano, the guys in the infrastructure to Airlie. We've got fantastic people here, too. So all the bases are covered from our side, and we're really grateful and thankful that Chris MacKay has also stepped into the spotlight as well.

Well, not in the spotlight, you'll see in the retail road show that we're intending either at every road show event or very close to it to allow some of the amazingly skilled younger members to speak as well as and we'll be showcasing obviously, Arvid. Arvid, I mentioned, is just extraordinary, and Nikki is a well known quantity. I'll talk less there and listen more.

I might also just ask an extra question on cost, and I appreciate the comments earlier. I mean firstly, just focusing on the St. James's Place contribution and trying to sort of backfill that. In looks like it was pretty much very high margin, 100% or roughly thereabouts, and you did mention earlier that you do expect some contributed outflows at least in the short term. And conservatively, you'd want to keep all your staff and have all the systems in place and therefore, the costs might remain elevated in the short term. But if you do continue to see sizable outflows, at what point in time will you start to sort of reconsider those costs? And how should we really think about the cost-income ratio perhaps in a couple of years or in the outer years.

Yes, I might jump in there, so you're spot on. Our funds, obviously, have a higher cost base than our mandates. So yes, SJP do have a high-margin spot on. In terms of our costs, tough to make any forward predictions about the future earnings and then the related costs that maybe have affected the cost base of the business. There will be some moderate reduction, obviously, in fund admin expenses. But going forward in terms of trying to work out where the cost base will be, I'd actually look back in the past, if you want. But 5 or so years ago, if you look at our cost-income ratio, that might provide you a little bit of a guide and look back over the trends, and that could give you some indication as to the costs that we'll continue to invest for our future in the business. Well, I think it is, hopefully, it's, that's somewhat indicative.

Okay. Exactly. I know you've all got to model the cost ratios, but please go back to what we said at the outset. If we get the systems, the process, structures, culture, trust, all those things right, we won't be talking about cost ratios.

And I'd just like to add to that, too. We're a very profitable robust business. So the Board and management are not looking at massive reductions in costs certainly at this point in time. We're managing it for the long term. We're protecting the assets that we've got, and our assets are the people, and we've got very good people in the business.

In fact, we're investing in people, thus no reductions.

And proven in terms of being prudent on costs as well. Yes.

We'll now move back to some final questions that have come through the webinar. Again, back on capital management from Scott Ferguson, can you touch on why the DRP was suspended?

Yes, because it was c***. Sorry, I'm not allowed to say that. It wasn't serving a proper purpose. There's no point retaining the capital. No point annoying people and no point issuing at what the then share price was, and the idea of going on market and buying, you can do zero cross brokerage. So people want cash, like cash, they can determine when they do it.

Okay. Thank you Hamish. The next question comes from Shreyas Patel at UBS. Have we seen any resignations across our distribution team over the last few months?

No, no.

Great. One more from Tim Bingham. Can you touch on the feedback that we've had from conversations with research agencies recently?

The engagement is high. We'll leave it for the research agencies to speak for themselves. There have been very detailed conversations.

Two are still under review.

The next question comes from Ben Clark. We've seen our core global equities offering become a bit more complex over the last few years with closed-ended vehicles and options. Is there plans to simplify the core offering?

We prefer simple. We dislike complexity. The -- down the track, maybe that's something to look at, but it's not a priority. If we do any sort of action like that, it will be because it's in the interest of unitholders in the respective funds.

Thank you. I move on to one final question from Keith Bolger. Can you outline what type of role Hamish might return to?

I did that in the outset. So a world-class global investment manager has world-class relationships with major institutions. So it's temporary, but that's something that's important. Let's see, hopefully is happy and well very soon.

Well, thank you all to the panel, and we really appreciate everyone on the line for joining us. We will look to reach out to any shareholders if you have any further follow-up questions, and we look to see you soon. Thank you so much.