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

Good afternoon, everyone, and welcome to the presentation of Magellan Financial Group's full year results for the year ended the 30th of June 2022. I'm Craig Wright, Head of Magellan Capital and Advisory, and I oversee the Investor Relations team at Magellan. Today, the company's results will be presented by Magellan's non-Executive Chairman, Mr. Hamish McLennan; Chief Executive Officer and Managing Director, Mr. David George; Chief Financial Officer and Operating Officer, Ms. Kirsten Morton. And we're also pleased to have Magellan Co-Founder, Mr. Chris MacKay, here with us today. Please note that there will be a question-and-answer session at the end of the presentation, and I'll be back later with some instructions on how you may ask a question. Please also note that today's presentation will be recorded and a replay will be available on Magellan's website. And also that we may have media in attendance today. Thank you. And I'd now like to hand it over to Magellan's Chairman, Mr. Hamish McLennan to start the presentation. Thanks, Hamish.

Good afternoon, everyone, and welcome to Magellan's full year results for FY '22. I will surprise [indiscernible] challenging year for the company. I assure you [indiscernible]. Since our interim results [indiscernible] shareholders we have been very busy. [indiscernible] focus as always has been on our clients. For my fellow board members, our key priority is here to continue to spread the governance, return stability to our leadership team and employee [indiscernible] we have broad management initiatives supply to invest to set our interim results greatly remembered. Today I will take you through some of those changes that we maybe made in our business over the last 6 months inline with the [ priority ]. This will be followed by Magellan's CEO, David George providing an update on the business, and our COO and CFO, Kirsten Morton, who will present our financial results. Finally, David will conclude with some additional remarks on business [indiscernible], then open the session to Q&A. As we've outlined at our interim results breaking in February, we're very focused on strengthening [indiscernible] business. [indiscernible] earlier this year with [indiscernible] headed non-Executive Chairman of the Group, [indiscernible] Robert continues as independent, non-Executive Chairman of Magellan Asset Management at core business.

Hamish, we've got an audio issue by the sound of it and you're not able to be heard, okay?

Okay. We have also started a Board review and renewal program. The program is focused on attracting high-quality nonexecutive directors to the Board, who will add skills and insights that align to the needs of our core funds management business and strategic direction. Turning to Magellan's leadership team, in May, following an extensive search, we were very pleased to announce the appointment of David George as CEO and Managing Director. David joined Magellan just under a month ago following 14 years with the Future Fund. Most recently as Deputy Chief Investment Officer of Public Markets. David has deep funds management experience and as an external hire brings fresh perspectives to our team. David is a great fit for our business, and he will be an excellent leader in the next chapter of our growth. We're also delighted to have Kirsten Morton take on the role of Chief Operating Officer, in addition to her current role as Chief financial officer. Kirsten's contribution as interim CEO was outstanding, and Kirsten continues to be a very key part of Magellan's leadership team moving forward. It is also pleasing that we can welcome back Hamish Douglass in October, who returns to the business and a new consultancy role following a period of medical leave. Hamish will be available to the Magellan investment team to provide his valuable investment insights free from Board management and portfolio responsibilities. We think this new role strikes the right balance for Magellan, our clients and Hamish, and we're very much looking forward to welcoming him back in October. Finally, in March, we implemented a staff engagement and retention program. While not reflected in our balance sheet, our people are Magellan's most important asset, and we have been very focused on retaining key talent and stability in our team during this period. The program included a retention bonus plan to be paid to staff and installments in September 2024 and September 2025 as well as the issue of employee options. These initiatives are subject to conditions around investing in continued employment, and we believe we are structured in a way that creates significant alignment with the interest of shareholders. Turning now to capital management. We are pleased to have implemented the capital management initiatives we announced to shareholders at the interim results in February. We have commenced an on-market buyback of up to 10 million shares. To date, we've bought back approximately 630,000 shares at an average price of $12.43 per share. We're taking a measured approach to deploying the buyback. And at the current price, this has already been value accretive to shareholders. In March, we also announced the issue of a bonus option to MFG shareholders on a 1 freight basis or no consideration. These bonus options were issued to shareholders in April with an exercise price of $35 per option and a 5-year term. We believe these options provide a potential source of value to shareholders. Finally, in May, we sold our shareholding in Guzman y Gomez for cash consideration of $140 million. The sale was a great result for our shareholders with the sale price representing a 36% premium to our entry price 18 months earlier when we acquired the stake in January 2021. Importantly, while we were pleased with the performance and the outlook for GYG, the sale was in line with the strategy announced to market in February to focus on our core funds management business and to not make any further investments in Magellan Capital Partners. We will continue to manage our Magellan Capital Partners investments in a prudent and patient manner. As we've previously advised shareholders, we regard our investment in Barrenjoey Capital Partners as a long-term strategic shareholding, and we are very pleased with how the business is performing. Before I hand over to David, I want to reiterate that we are extremely focused on returning value to Magellan's clients and shareholders. There is much work to do, but we are committed to rebuilding trust and returning to growth. With that, David now will take you through an update on the business and its performance.

Thank you, Hamish, and good afternoon, everyone. As you know, I joined Magellan less than a month ago, and it is my pleasure to be here today. Before I get into today's presentation, I'd like to thank the Board for the opportunity to lead Magellan. I know that our clients and shareholders have had a difficult 12 months and that there's a lot of work to do. However, I am excited about leading the company on its next chapter. I'd also like to reiterate comments made by Hamish just now that we are highly focused on delivering excellent performance to our clients and service to our clients, and, in turn, to create value for shareholders. This is the key focus of mine and of the entire Magellan team. Now pleasingly, my early observations of the team are of a resilient and committed group of professionals with tremendous pride to deliver for our clients. I'm also encouraged by the strengthen of the Magellan platform, which lays the foundation for future growth. I'll speak more on this, including my first impressions in some of my key priorities later in the presentation. But before I do, I'll spend a bit of time providing a business update before handing to Kirsten for a deeper dive into the financial results. Okay. So starting with the headline financials. Adjusted net profit after tax is down 3% to $399.7 million. Our statutory net profit after tax is $383 million, and that is up 44% on fiscal '21. It's worth noting that the significant increase in fiscal '22 comes off a very low base. And statutory net profit in fiscal '21 was impacted by a number of one-off items, including expenses for strategic initiatives, which are primarily related to the Magellan Global Fund closed class units and options under the Global Fund partnership bonus and bonus options issue. While statutory earnings are a key measure of Magellan's performance, it is important to be mindful that accounting standards dictate the inclusion of items such as uncrystallized gains and losses and other corporate one-off items that are not operating items and thus these can make year-to-year comparisons more tricky. So despite a material decline in funds under management, which stood at $61.3 billion, as of 30 June '22, there was a more modest decline in average funds under management of 9% to $94.3 billion. This is mostly due to the timing of client outflows, which came just prior to and during the second half of fiscal '22. Management fee revenue was down 7%, and that's broadly in line with average funds under management decline of 9%. So finally, profit before tax and performance fees of our funds management business were down 11% to $470.6 million. Now I mentioned that client outflows during the period came primarily in the second half of the financial year, which in turn materially impacted profitability in the second half. So on this slide, we've broken out the performance between the first half of fiscal '22 and second half to present this more clearly. So the weighting of outflows into the second half of fiscal '22 also means that we expect fiscal '23 results to be affected. So turning to investment performance of our funds. And the first thing I'd like to say is to point out that Magellan has a very long history and track record of growing wealth for our clients. With that being said, it is clear that recent performance in the global equity strategy in particular has not lived up to Magellan's reputation nor the high standards of our team. So reviewing and strengthening the investment processes of the global equity strategy and across the entire business is one of my key priorities. I've devoted a significant part of my first couple of weeks to spending time with the investment team. And I am optimistic that there's -- there are scopes to further develop our capabilities. We will, of course, keep our clients surprised of these developments. Our infrastructure strategy delivered a solid 6% for the year, and this adds to its solid long-term track record. The infrastructure strategy invests in companies with -- through their very specific definition of infrastructure, which are companies that provide dependable cash flows with limited exposure to cyclical factors such as commodity prices. Our Australian equities business, Airlie, also continues to perform well, and has developed a strong 3-year track record in the early Australian share fund offering in particular. Turning to funds under management. Funds under management ended the year at $61.3 billion, and that reflected net outflows of $49.5 billion during the period. So just over 95% of that outflow came out of the global equity strategy and just under 90% of those net outflows came from the institutional side of the business. So in what was a challenging year for markets, there was also investment outcomes, which impacted the funds under management by $2.3 billion. Net of distributions, again, we ended at $61.3 billion. And I'd just like to say our clients have a choice about who manages their money. And over the last 12 months, it's clear that the events have impacted our clients' confidence in us. So my priority as incoming CEO, and indeed the focus of the entire team is on rebuilding that confidence and trust, achieving strong investment outcomes for our clients and providing them with excellent service. If we get these things right, we will stabilize flows and in time, return to growth. So turning now to business mix, and this is based on our most recently reported funds under management as of 29 July 2022, we continue to have good balance in this business. So on the institutional side, that makes up 62% of our funds under management and 32% of our base fees and services income. The retail side, on the other hand, which is a broader client component makes up 38% of our funds under management and 68% of our base fee and services income. So I'll have a few highlights of the financial position. And the important point here is that Magellan retains a robust balance sheet and is in a strong financial position. There is no debt in this business, and there are $915.5 million in net tangible assets on the balance sheet. There are $963.3 million in cash, financial assets and investments in associates. And importantly, the business remains very cash generative. So there are $434.6 million in net cash flow from operating activities in the last fiscal year. So that brings me to the dividend for the second half of the financial year. So as confirmed by our Board in the results briefing in February 2022, our dividend policy is to pay out 90% to 95% of profit of the funds management business and an annual performance fee dividend also of 90% to 95% of net crystallized performance fees after tax, and that's, of course, subject to corporate, legal and regulatory considerations. The Board has declared a final dividend of $0.65 per share, and a performance fee dividend of $0.039 per share, equating to $0.689 per share for the second half of fiscal '22. The franking rate for this dividend is 80%, that's an increase on the prior half level of 75%. With the offshore banking unit regime coming to an end in 1 July 2023, we expect our franking levels to increase in future years. So that brings the total dividend for the year to $1.79 per share with an weighted average franking level of approximately 77%. The record date for the dividend is Tuesday, 23 August, and the payment date will be Tuesday, 6 September. So I'll now hand over to Kirsten, who will take you through our financial results for the period in more detail. As I do, I'd like to add my thanks to those of Hamish to Kirsten for her outstanding service as Interim CEO, and also congratulate her on her additional responsibilities as COO. Kirsten?

Thank you, David, and good afternoon, everyone. I would first like to take you through the financial results of the group, and then followed by our core funds management business and then finish off with the expenses outlook. Let me just get this. So the group's adjusted net profit after tax for the year ended 30 June 2022, was $399.7 million, slightly lower by 3% compared to last year. The decrease is due to a mix of items, but mainly due to lower funds management fees, which are broadly in line with a 9% decrease in the average funds management -- funds under management this year, most notably in the second half. Performance fees for the year ended 30 June 2022, totaled $11.5 million. They were mainly derived from the infrastructure funds strong performance. Whilst performance fees are lower, and as we always mention, these fees are lumpy and they have the potential to fluctuate significantly period to period. Other revenue increased $10.6 million in the current year. This revenue typically comprises distributions we earn on investments in our funds, the realized and unrealized gains and losses on those investments, foreign exchange movements and advisory income of our U.S. business Frontier Group. And this year, the increase in other revenue is mainly due to foreign exchange gains and higher distributions and dividends on our investments. Our share of profit from investments in Barrenjoey, Guzman y Gomez and FinClear totaled $6.6 million for the 12 months to 30 June 2022. And all associates contributed a net profit for the period of our ownership this year, which is a really pleasing result. Now by way of a reminder, the adjusted net profit is the group's statutory net profit excluding certain items. That provides comparability of results year-on-year. And the items are shown on the slide on Page 14. These adjustments comprise -- well, there are 5 adjustments this year, and I'll now step through those. The first adjustment is a noncash item of $4.6 million, which relates to the amortization expense on the -- of the intangibles from the Airlie and Frontier businesses we bought a few years ago. The second adjustment is $15.8 million relating to noncash strategic transaction costs. Now this year, that is a benefit rather than a cost. The item relates mainly to the noncash accounting remeasurement of the liability relating to the Magellan Global Fund options, which we issued in January 2021. And just as a reminder, that liability moves up and down, depending on the changes in the net asset value of the closed class units, and also reduces obviously when the auctions are exercised. So more detail on that can be found in Note 14 of the financial statements. But as the financial liability decreased this year, it's actually resulted in a lower expense, if you want, a benefit. The third adjustment of $65.1 million relates to the unrealized losses in shares and units, net of tax, held by our fund investments portfolio. Now as we record market movements of those equities directly in the P&L, it's meaningful to remove the unrealized market volatility from our revenue, whether it's a gain or a loss. The last 2 adjustments are actually new this year. So there's an adjustment totaling $50.6 million or after tax, $40.4 million, and that relates to one-off benefits in connection with our associates. The amount comprised of 2 items. The first, a gain of $33.7 million from the sale in June of the group's 13% stake in Guzman y Gomez, and dilution gains of $17 million. In May, Barclays made a further $75 million capital investment in Barrenjoey, that resulted in an increase in the net assets of Barrenjoey, consequently, an increase in Magellan's carrying value of Barrenjoey. Therefore, whilst Magellan's economic interest in Barrenjoey was diluted, from 40% to 36.4% as a result of that transaction, Magellan recorded a gain in its P&L for the increase in its investment value, and we call that a dilution gain in the P&L. Finally, there's an adjustment of $3.3 million relating to noncash accounting remeasurements for the staff equity loans. Now let me explain that further in detail. The accounting impact in each period for the staff equity loans has been very stable, given predictable loan repayment profiles due to consistent dividends and bonus assumptions. And given we had no voluntary repayments, they weren't committed. And in 2021, the impact to the P&L was about $200,000, and it was slightly less in prior years. Now whilst the accounting for the staff equity loans is the same, year-on-year, there is higher volatility in the P&L this year due to changes in the repayment assumptions, and the extension of the loan term to 15 years for staff loans, which we announced as part of the retention program. Now changes in the loan repayment profile and they differ for each employee leads to larger timing differences between interest income and expense on those loans. So over the life of the loans, these differences always have and will continue to net to nil. But period-to-period, the net impact on the P&L is actually now less predictable. So in light of the increased volatility on the loans, which reduces the comparability of results period-to-period, we've excluded the noncash interest income and expense. Now if all of those adjustments were not made, the group's statutory profit after tax for the year ended 30 June 2022 was $383 million, which is up 44% compared to the prior year. Finally, diluted earnings per share increased 43% to $2.069 per share compared to last year, which is in line with the higher statutory net profit. Now adjusted diluted earnings per share is $2.159 per share, slightly down by 4% year-on-year, and that's in line with the decrease in the adjusted profit. Now as David mentioned, the directors declared a dividend for the 6 months to 30 June 2022 of $0.689 per share, bringing total dividends for the current year to $1.79 per share. The franking rate on those dividends will increase from 75% to 80% with immediate effect, and therefore, that will apply to the final 2022 dividend that we've announced today. Now this is a result of the upcoming removal of the offshore banking unit license regime in Australia, and that takes effect on the 1 July 2023. Now as we have previously flagged, this will remove the concessional 10% tax rate that we apply to certain revenues and expenses, meaning that all revenues and expenses of the group will be taxed at the corporate tax rate of 30% from the 1 July 2023. All things being equal, it will result in higher income tax payments by the group in 2024 and reduce the group's after-tax earnings. However, the flip side is that higher tax payments will result in higher franking credits available to shareholders. So for clarity, Magellan will continue to benefit from the offshore banking unit license for the 2023 financial year. Now let me step here through the financial results of our core business, our funds management business, which is on Page 15 of the slides. Funds management revenue for the year ended 30 June 2022 decreased 7% to $592.6 million due to lower management fees, namely in the second half as a result of lower funds under management. The average fund management fee at 30 June 2022, which is a point in time, was 62 basis points. Due to the timing of the client outflows in the second half of the year, the annualized impact of the management fees from lower funds under management is not really fully reflected in the 2022 result. And for this reason, we've provided the run rate of the average base management fee. So based on our most recent funds under management announcement on the 29th of July 2022, our base -- our average base management fee run rate is 65 basis points per annum. Now the increase in our fee rate is due to the change in the mix of the retail and institutional clients. Consistent with prior years, our main operating expense aside from tax is employee expenses. Our average number of employees at 30 June 2022 is 137, which remains quite stable compared to 135 last year. Employee expenses account for approximately 68% of total expenses, broadly in line with last year. The year-on-year increase in employee expenses is largely driven by the payment of deferred bonuses that were earned in prior periods. The payment to Mr. Douglass upon his resignation and a pro rata expense for the 2022 retention program. It is worthwhile to flag that employee expenses were $3.4 million lower in the 2022 -- 2021, sorry, comparative, and that was due to remuneration decisions that we talked, due to COVID in 2020, which was typically have been paid and expensed in 2021. And that, therefore, magnifies the year-on-year increase in 2022. Other expenses are higher by $4 million year-on-year, but not really due to any one particular expense type. Travel and marketing expense is higher, and that's really just reflecting post-COVID in-person activity in 2022. Fund administration has increased due to some activity levels by unitholders and shareholders. And there have been some other higher IT and professional consultancy -- consultant fees. Now after adjusting for performance fees, the profit before tax of the Funds management business decreased 11% to $470.6 million. But despite this increase, it's still a highly profitable business. Now on Page 16 of the slides -- there are just a couple of comments I'd like to make about expenses. Now we guided our funds management expenses for the year ended 30 June 2022 in the range of $125 million to $130 million. We are in line with guidance at $127.1 million. And that includes a pro rata accounting expense covering the period April to June 2022 for the retention program that we announced back in February. A cost-conscious mindset regardless of the prevailing business conditions has always been a central part of how this business has been run. Our team is actually very accustomed to that approach, which is a benefit as we navigate the business going forward. The business operations are managed efficiently. And when it comes to expenses, we will continue to manage the business prudently and as we always have. For the 2022 financial year, the cost-to-income ratio increased to 21.3%, up from 16.8% last year. Whilst this result is still low compared to industry standards, it does highlight that there is buffer to continue to invest in our business in the future. So for the coming year, we view the recurring expenses to operate our core business, funds management, for the year ended 2023 would be in the range of $125 million to $130 million, a level that is consistent with the 2022 results. Whilst expense discipline is absolutely paramount, we will continue to invest -- continue to support, I should say, client-focused outcomes and ensure that there is expenditure with a view to growth. Now turning to Page 18, on fund investments. The fund investments portfolio is a subset of the group's balance sheet and is an important aspect of the group's liquidity. A summary of the fund investments portfolio, which totals $358.4 million after tax at 30 June is shown on the slide. The portfolio actually includes co-investments in both Magellan's listed and unlisted funds and that creates a strong client alignment. Consistent with prior years, our aim is to earn satisfactory returns for our shareholders, and the Board has set a pretax return hurdle of 10% per annum over the business cycle for the fund investments portfolio. Now since inception from the 1 July 2007 and excluding the group's investment in MFF Capital Investments, the portfolio has returned a pretax return of 9.8% per annum. And we acknowledge that that current return is lower than where we would like it to be, and we are highly focused on improving investment performance in our funds, which in turn should improve the performance of our funds investment portfolio. Just touching on Magellan Capital Partners, the segment that holds our associate investments before wrapping up on Slide 19. We're very pleased with the performance of the investments, which have delivered an $8.4 million after-tax profit for the group for the year ended 30 June 2022. And in particular, Barrenjoey has delivered a profit after just 2 years in business. As mentioned earlier, the investment in Barclays and Barrenjoey this year further supports the value of Magellan's investment in Barrenjoey. We were also very pleased with the timeliness of the sale of our holding in Guzman y Gomez, and obviously, I'm very pleased with achieving a 36% premium on the initial investment, resulting in a net gain of $33.7 million. The investment in Barrenjoey and FinClear are separate to our core funds management business. And as Hamish mentioned earlier, we have no plans to make any further investments in these businesses or the Magellan Capital Partners segment going forward. And with that, I'll hand back to David.

Thank you, Kirsten. Excellent. Okay. So before we open the session up for Q&A, I'd like to cover some of my key priorities in the short term, recognizing that I'll be providing a more fulsome update in the lead up to our Annual General Meeting. And once I've really had a chance to get my feet under the desk properly as the new CEO. So it has been a year of many challenges for our clients, our shareholders and employees. We are keenly aware that recent performance of our global equity strategy has fallen short of our high expectations. However, the goal is, and it will continue to be to protect and grow the wealth of our clients, through investments in high-quality global companies that are deeply researched and carefully selected. We have an experienced team here who are all aligned to this goal. I've been very impressed with the resilience and determination of the whole Magellan team. They are passionate about investing. Our focus, therefore, is in our core funds management business, particularly in strengthening the processes and driving consistent and improved investment performance. If we get these things right, we will rebuild trust and confidence. So what is clear to me and what excited me about joining Magellan is that we have a strong foundation to build upon future growth, with funds under management of over $60 billion, a diversified client base, Magellan remains a globally significant manager of relevant scale. Our core investment capabilities, global, infrastructure and Australian equities are supported by deeply experienced investment teams and strong investment processes. All of these have available capacity and are the foundation for growth. These core capabilities also give us the capacity to innovate and build on our existing strengths as we have seen with the development of the MFG Core Series and sustainability strategies. We have a robust balance sheet and a level of profitability that allows us to continue to invest in our core business as well as take advantage of any other opportunities that arise. And importantly, we continue to have strong relationships with clients, financial planners, advisers, stock broking firms and institutions around the world. So looking ahead, my #1 priority in the short term is to stabilize our core funds management business and position it for growth in the medium to long term. The key ingredient for that is improving performance in our global equity strategy. To this end, I'm working very closely with the team to focus on efficiency and effectiveness in our investment activity. In my career, I've had the opportunity to see 1,000 investment managers, investment processes and investment cultures in practice. I have a good perspective on what good looks like. These -- there are lessons there, which will complement our current practice and how we turn our research advantage into portfolios that outperform. This is a very good environment for active management. We're at a turning point in the economic regime. A long cycle of lower and lower interest rates is now transitioning to 1 where inflation and monetary policy environment is shifting. That's going to bring some volatility, and it might mean that returns in a broader market sense are a little bit lower going forward. That's when I want an active manager instead of the index. So that's when I might want a franchisees team that can dig very deeply and get granular on a consumer products company, for instance, and pick it at product by product to figure out what elements of their supply chain are subject to cost pressures and inflation and how much pricing power they have to deal with those kinds of things. That's where deep research and active management adds its value. And the Magellan can do that. So when I'm not doing that, I'm going to continue to engage with Magellan's various stakeholders, both internally and externally to help identify areas for improvement and formulate a strategy to return value to clients and shareholders. There is a lot to do. However, the Board, the team and I are dedicated to delivering for our clients and shareholders. And I look forward to providing my thought -- my further thoughts on the business in October. Now I'm going to hand over to Craig, who's going to moderate the Q&A.

[Operator Instructions] When asking a question by the phone, can you please identify yourself by name and also with applicable where you're from, which firm. And also to ensure that everybody has given the opportunity to ask a question, can you please limit your questions to 2 per call. And also if you could please provide those questions both upfront, that would be much appreciated. Now I will start with questions from the webinar. So the first one, the question is, where do you see Magellan in 5 years? I might hand that over to you, David.

I think it's a very short answer. There's a long answer, but we'll get to that, I think, in more detail in October, but the short answer is bigger and better. So I think there's room for us to grow and add to our investment capabilities, and that will be both organic, and I think there'll be opportunities to add investment people, and maybe even investment teams. So we'll be looking for those opportunities as well.

Thank you. Next question. You talked about a measured approach to the buyback. Can you touch on the outlook for the buyback and your willingness to contemplate the buyback in the year and ramp up the acquisition of shares from here. And I might hand that over to Kirsten in the first instance.

Thanks, Craig. Look, the buybacks being obviously used to return excess capital to shareholders in an efficient and creative manner. We announced that we would buy back up to 10 million shares. And you can see on Page 70 of the financial statements that we have bought back about 627,000 to date, about 5.4% of shares on issue. So we have a process for deciding if and when we're going to step into the market, and to ensure that we deploy capital sensibly. And obviously, our buyback is impacted by some luck out periods as well, which is when we're going to be restricted from entering into the market.

Thanks, Kirsten. Next question. It has been said that the company will sharpen its investment process. What will this sharpening involve? And David, I might hand it over to you in the first instance.

Thanks. Certainly. And I should -- I'll just preface by saying it's early days, but 1 of the methods that I would use is to work with the team -- and I've been starting this process to look at each stage of the decision-making process that we have as we build -- we take from the research capability that we've got, which is powered by just an enormous and talented analyst team and turn that into a portfolio, whether that's choosing which stocks and how to take risk. And so I think there's a way to do that meticulously. And the key part to that is ensuring that we've got the right data and tools to support those decisions. So that's my focus, and we're already started on that.

Perfect. Thanks, David. Next question. How does the company plan on using funds from the sale of Guzman? David, it might give this to you because it's a bit of a future forward use of funds question.

Sure. Thank you. So obviously, we had a good result out of Guzman, and that brings more capital into the business. So the balance sheet is very strong. And I think the first thing to say is that while we're executing the buyback and certainly are committed to the dividend policy, we also have the headroom to invest in the business as we see fit. That's a capital management decision that I think goes to strategy and how we go forward. We are committed to ensuring that we're returning capital to shareholders, though. But I expect that as part of my update in October, I'll be talking more to capital management.

Next question. It has been said that Guzman y Gomez was sold to focus on the company's core business. Why was Guzman y Gomez sold but not FinClear? I might address this one, if that's okay with everybody? Guzman y Gomez is obviously not in the financial services sector. That's one main consideration. The second consideration was its relative size. It made up about 8.5% of our total asset base. FinClear is a lot smaller. It's around about 2% of our asset base. So naturally, we felt that Guzman was the first 1 to address. We're very happy with FinClear. It's a great business led by great management team and they're a market leader in retail market infrastructure. We're continually assessing our investment in FinClear, but the reality is that at 2% of our asset base, it's not very material to Magellan, nor does it take up much of our time with one director onboard doing some quarterly board meetings. So we'll move on to the next question. Can you explain why employee expenses will be the same in FY '23 when there will be no payout to Hamish or cost for employee options. I might hand this over to Kirsten in the first instance, David may also have some input into this.

Yes. So look, I'll start. Obviously, we've been able to provide you with some expense outlook. Look, acknowledging that the business obviously gone through a very significant adjustment in a very short space of time, but we have a very cost-conscious culture, and we're very cognizant of how we're going to spend shareholders' funds. David, anything to add?

I think there is something I would add. Thanks, Kirsten. One is that there are some costs in the fiscal '23 expenses around the retention and options issues. So there is still some impact in fiscal '23 for that. But I guess I'll just add to what Kirsten said on cost. We are a very cost-conscious organization. The company is used to it. And we will be laser-focused on finding efficiencies through the business where it makes sense. But where we will not be compromising and we'll be investing with an eye to growth is ensuring that we're focused on supporting investment and client outcomes. So that's investment performance, and that is making sure that our investor clients see great service, great operational excellence, and safety and compliance for their funds. So that's something we won't compromise on. And we certainly want to think long term to ensure that we are making investments that seed the ground for our future growth.

Thanks, David and Kirsten. The next question is about investment performance. Previous underperformance has been explained as having invested too heavily in China. Where will you redirect your investments worldwide and why? Chris, I might hand this over to you in the first instance.

Thanks, Craig. Actually, the firm has done very well over its 15 years out of China. It was one of the first international investors into major multinationals who were very successful in China. Yes, there was a period, I think, 2019 and 2020, maybe through '21, where there was a heavy investment in China, which didn't produce the results that we hoped for at the time. The movement since that time, since the main global strategy has gone ex China, has been towards the United States. That has been very favorable. The macroeconomic analysis led by Arvid Streimann is one of the portfolio managers, has been excellent over the past 6 months. I'm certainly seeing some processes that are stabilizing and hopefully performance will follow. But at the moment, U.S. multinationals are the main focus area for the lead global strategies. There are 3 other global strategies, which have slightly different weightings. Thanks, Craig.

Thanks, Chris. Next question. Are there any mandates that will return as a result of Hamish Douglass returning to the business. David, I might hand this to you.

So I'm not aware of any mandates that are returning because Hamish is returning to the business in a consultancy capacity. Where we've had some client wins in the past month even since I've joined, it's hard to tell exactly their reasoning, and so I wouldn't want to put words in clients' mouths for their allocation decisions.

Next question. Can you touch on your gross sales inflows for the second half of '22 and the outlook of where you see growth in flows in the near and medium term. And David, I might pass this on to you again if that's okay.

So it's -- I actually don't have the figures to hand, so I can come back in terms of gross sales and inflows. We just have the net figures provided here. But in terms of the forward outlook for where flows and growth is in the medium term. So I'm excited about the prospects for both the core strategies around infrastructure, as well as with Airlie. And I'm also quite excited about the core series. I think that, that is -- got tremendous potential. It's an access point for Magellan's research capability that involves a little bit less active management at a different price point, and I think which can have quite a broad appeal to clients that we don't currently have on our roster.

And David, do you have a 10-year-plus track record for the core series in infrastructure. It is a very successful and well-designed product. It meets client needs.

Thank you.

Thank you. Next question is in 2 parts. What are the cost implications of closing FuturePay and what learnings can be leveraged for future products. So I might give Kirsten the first part of that question. What are the cost implications of closing FuturePay and then David, key learnings for future products, if that's okay.

Sure. Thanks, Craig. So in terms of the cost implications, FuturePay was immaterial to the results of the group, both the income and the cost side. So in essence, that's the change on the cost implications. But obviously, when we were considering the closure of that product, we always felt comfortable that, that product had developed -- was developed to meet the needs and was, in fact, meeting the needs of investors who were seeking a predictable retirement income stream, and it was very unique. But the decision was really made as part of the simplification of the business and where we needed to appropriately deploy the capital best.

Yes. So I might just add on the second piece of that question is that, that decision, which has been made, again, I'm a big believer in ensuring that any change that we make has learnings, and we're capturing those and ensuring that we learn as much as we can going forward from them. In this case, it's reflective of the strategy that was announced in February 2022. We are seeking simplicity in the business and focusing on both our investments and our time on the core funds management piece. And essentially, one of the lessons is that we've made a capital allocation decision and a focus allocation decision towards the core funds management business.

Next question. Over the 3 months, with your engagement with key [ intro ] clients and financial advisers, what are the main pieces of feedback or concerns from them. David, this sort of predates you a little bit, but you may have some first impressions that you'd like to give. I might actually give this over to Chris in the first instance, I think all of Chris, Hamish and Kirsten have been engaging heavily with clients over the last 6 months, in particular, and we'll have some insights.

First instance, right. Okay. There's a lot of feedback. Principally, it's get better. And I believe the formal comments addressed many of the issues. We know that performance has to improve -- for performance to improve in a sustained manner, process has to improve. David is right across that. He's come into the business like a hand into a glove where we've got a lot of work to do, and I'm confident that David and the team will get it done.

Perfect. Did you want to add anything?

Yes. I mean, I'd like -- again, my perspective is a bit further forward. So rather than 3 months, I've had closer to 3 weeks. But I have had some limited client engagement, and that's something that's quite important to me going forward. And I'll be listening. So both to what they want to see from us and how we can better serve clients. And that's part of my forward priorities is to ensure I'm getting that engagement right. And frequently and using that to help develop the strategy.