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

Ladies and gentlemen, good morning. On behalf of Magellan, I would like to welcome you today to Magellan's results presentation for the half year ended 31 December, 2022. I'm Sarah Thorne, and I manage the Investor Relations function at Magellan. Today the company's results will be presented by David George, Magellan's CEO and Chief Investment Officer; and Kirsten Morton, Magellan's CFO and Chief Operating Officer. We will hold a Q&A session at the end of the presentation. And please note that today's presentation is being recorded and will be available on Magellan's website. We may also have media in attendance today. Thank you and I would now like to welcome David to take you through the presentation. Thanks, David.

Thank you, Sarah, and thanks everyone for attending our first half 2023 results briefing today. To start today's session, I'll provide an overview of Magellan's business and financial performance for the first half of FY 2023. Kirsten Morton, our CFO and Chief Operating Officer, will then take you through our financial results in more detail before handing back to me to provide you with an update on the progress we're making in, implementing our 5-year growth strategy, delivering on our FY '23 priorities and the outlook for the second half of the financial year. We will then open to Q&A. Now, over the past 12 months, Magellan has experienced a period of accelerated and significant change. I joined Magellan in July to lead the group to the next stage of its evolution. And at our 2022 AGM in October, I outlined our 5-year growth strategy to drive Magellan's growth. The strategy builds upon Magellan's strong foundations and facilitates its transition into a more diversified business with a broader range of capabilities and offerings that deliver sustainable growth. It is early days, but we are making good progress on executing the priorities we set and we've positioned the business to execute on our 5-year strategy, which I will talk about in more detail today. We've made the necessary changes to set Magellan up for future success. We have rationalized and simplified our funds management business and we continue to operate within our financial year 2023 expense range of $125 million to $130 million. Magellan is a fund manager of scale with $46.2 billion of funds under management and is a profitable business. As a result, the Board has declared an interim dividend of $0.469 per share, which is 85% franked and will be paid to shareholders on 8 March, 2023. Markets in the past 12 months have been more volatile with the emergence of inflation. This is attracted to traditional response from central banks who are tightening policy through interest rate rises and seeking to balance a credible and committed stance on the maintenance of price stability, while minimizing their impediment to economic growth. Slowing growth, inflation and interest rate hikes have been a difficult mix for equity markets in 2022, driving negative returns for the calendar year. This is cyclical related to higher discount rates and lower corporate earnings expectations, which will evolve as we eventually reach a peak in inflation and the interest rate cycle. This market environment creates additional considerations for asset allocations for investors, which are also less supportive of allocations to equities. The first of these is related to higher interest rates as investors no longer have only anemic returns available to them from their allocation to cash and fixed income investments. The second is that a volatile environment enlisted equity markets also pushes investors to consider diversifying their risky asset allocations beyond equities towards private markets. This has been a structural feature of investor portfolio allocations, which we expect will persist. Our existing investment strategies of Airlie, Infrastructure and Global, are designed to deliver long-term returns through economic cycles and all 3 have outperformed the applicable benchmark since inception. Our Airlie Australian Share Fund maintains an exceptional 3-year and long-term track record, outperforming the S&P ASX 200 Accumulation Index since inception and over the last 3 years. Airlie as a team and business going from strength to strength with up and coming talent and capacity for new strategies. Magellan's infrastructure strategy remains one of the best of its kind globally with a strong long-term performance track record. The infrastructure team also have the depth of talent and capacity for new strategies in the future. Our process at its heart is a strict definition of infrastructure, which for Magellan excludes businesses with high sensitivity to commodity price movements, competitive pressure or sovereign risk. Whilst this approach has led to a recent period of weaker relative returns given the low exposure to businesses that benefited from the energy price spike in 2022, over the long term, its performance demonstrates the success of this disciplined approach. The underperformance in our global equity strategy from late 2020 to early 2022 was due to a number of drivers. Some were stock-specific where some part of our investment thesis was shown to be incorrect and it resulted in changes to portfolio composition. Other large drivers have been positioning-related and to mitigate this reoccurring, we've implemented dynamic risk limits where appropriate to manage concentration risks. Some of the considered and deliberate changes made focused on how the team works together oriented to creating more dynamic and regular interactions, more discussion among portfolio managers and analysts and more fluid prioritization of coverage for analysts. All of these things serve to democratize and make more transparent the debate on key issues and decisions. Our investment philosophy for Global remains unchanged. We believe investing in the world's best companies is a path to creating and protecting long-term wealth. These initiatives will take time to show up in our performance figures. However, it is encouraging to start seeing positive outcomes in the form of more dynamic engagement across the team with quality investment ideas being brought forward earlier and prioritized more efficiently. As CIO, I will continue to work with our teams to review and amend our approaches where necessary. Turning to our first half '23 financial performance. Average funds under management over the period was $53.8 billion, which was down 52% compared to the previous corresponding period. As FUM is the driver of management fees, our first half '23 management fee revenue was down 49%, broadly in line with the decrease in average FUM and reflecting an increase in average management fees. Our first half '23 group's statutory net profit after tax was $83.8 million compared with $251.6 million in the corresponding prior period. After adjusting for noncash items, unrealized items and items related to strategic initiatives, the group reported adjusted net profit after tax of $98.3 million, which compares to $248.5 million from the prior corresponding period. Looking at our core Funds Management business, profit before tax and performance fees was $119.9 million for the half compared with $293.7 million in first half of '22. Overall, our interim financial results reflect the accelerated changes the business experienced in 2022. The prevailing challenging market conditions and the reduction in funds under management over the 12 months to 31 December. Client outflows were largely isolated to global equities. So Magellan remains a business with considerable financial strength. As at 31 December, 2022, we had $837.4 million in cash, financial assets and investments and associates -- sorry, $837.3 million of net tangible assets and $882.4 million in cash, financial assets, and investments and associates. No debt and generated $90.1 million of net cash flows from operating activities during the year. We remain a profitable business, delivering adjusted earnings per share of $0.536 and as mentioned, the Directors have declared an interim dividend of $0.469 per share, franked at 85%, which is in line with our dividend policy of paying out 90% to 95% of the Funds Management profit. With a strong balance sheet and profitability, we remain well positioned to continue to pay dividends consistent with our current policy, implement capital management initiatives designed to enhance shareholder value and prudently invest in our business to deliver growth. So the foundations for growth in addition to the business's financial strength, I spoke at the AGM about Magellan's capability and foundations that will support the future growth plan we plan to deliver. Within investments, we have an exceptional research engine and large investment team who deliver intensive fundamental company analysis, industry research and macro insights. These building blocks allow our experienced portfolio management teams to deliver a range of strategies that meet our client needs. The broader Magellan team supports this with a scalable operating platform and well-established legal, operational, risk and compliance expertise. Another key strength is our market leading distribution and marketing team, who drive outstanding, multichannel connectivity, relationships and partnerships. As an organization, we have a committed and passionate team of people with an immense pride in the shared success of Magellan and a proven track record of successful product innovation and team integration. These quality attributes alongside the scale of the business provide an exceptional base from which to build, grow and diversify. I'll talk shortly in more detail about our 5-year strategy and the progress we're making but first, I'll now hand over to Kirsten, who will take you through our first half '23 financials in more detail. Kirsten?

Thanks, David and good morning, everyone. I would first like to take you through the financial results of the group, followed by our core funds management business and then our expenses outlook. The group's adjusted revenue for the half year ended 31 December, 2022 was $208.8 million and the group's adjusted net profit for the same period was $98.3 million. The net profit is down 60% on the prior period, which reflects the reduction in funds under management, the recent change the business has gone through as it transitions from being a founder-led business, along with very challenging market conditions. Management and services fees were $181.1 million for the 6 months to 31 December, 2022 and this result was broadly in line with the decrease in average funds under management during the period. Performance fees were not material for the period, however, as we always mentioned, these fees are lumpy and they have the potential to fluctuate significantly period to period. Other revenue was $27.6 million in the current half year, up $7.6 million. This revenue typically comprises distribution to be earned on investments in our funds, realized gains and losses on those investments, foreign exchange movements, interest income and also advisory income of our U.S. business, Frontier Group. The increase in other revenue for the current half year is mainly due to higher distributions earned on our Fund Investments and also interest income given the higher interest rates. Our share of the financial result from our investments in Barrenjoey and FinClear was an $8.1 million loss for the 6 months to 31 December, 2022 primarily due to challenging market conditions. I will touch on that in a little bit more detail shortly. As we've mentioned previously, our view remains that adjusted net profit provides a much more meaningful performance information on our business and the comparability of results half on half. So by way of a reminder, it is the group's statutory net profit, excluding certain items. These items are now shown on Page 10 of the slides and for the December 2022 half year comprised 5 adjustments, which I'll go through. A $2.4 million relating to the noncash strategic transaction costs and that relates to the revaluation, which is for accounting purposes of the Magellan Global Fund option liability. The next adjustment is a noncash item of $2.3 million, which relates to the amortization expense on intangibles from the Airlie and Frontier businesses that we acquired in 2018. $0.9 million relates to the noncash accounting remeasurement of staff equity loans. Now as a reminder, whilst the accounting for staff equity loans remains unchanged, there is P&L volatility due to changes in the repayment assumptions and also changes in loan terms for departing staff. These changes differ for each employee, and so can make it the period to period net P&L impact 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. We also have a noncash item of $2 million relating to non-cash employee share option expense and this is a new adjustment this period and it relates to the one-off issue of share options to employees in April 2022 as part of the staff retention program. So it's not included in the prior year comparatives. We are making this adjustment as it's a noncash item. And $6.9 million of unrealized capital losses in shares and units held in our proprietary portfolio, the Funds Investment portfolio. And as we record market movements of those equities directly in the P&L, we feel it's meaningful to remove the unrealized market volatility from our revenue, whether it's a gain or a loss. And just please note that all those adjustments I mentioned are after-tax amounts. If those adjustments were not made, the group's statutory net profit after tax for the half year ended 31 December, 2022 was $83.8 million. Finally, diluted earnings per share was $0.456 per share, which is in line with the movement of in statutory net profit. Adjusted diluted earnings per share was $0.536 per share and that's in line with the decrease in adjusted net profit. And as David mentioned earlier, the Directors declared a dividend for the 6 months to 31 December, 2022 of $0.469 per share and they were pleased to increase the franking of the interim dividend to 85%. The group's effective tax rate for the 6 months to 31 December, 2022 was 28.4%. Now this rate is higher than past years, which is a direct consequence of having lower funds under management offshore. The other point I'd just really like to make is that the gap between our effective tax rate and the prevailing corporate tax rate of 30% is now small, far smaller than previous years and what that means is that there will be a smaller one-off impact on Magellan when the offshore banking unit license regime is abolished on July 1, 2023. Of course, one benefit of paying higher tax is that it generates higher franking credits available to distribute to shareholders and the Directors review the franking rate every 6 months and under a higher corporate rate, the franking credits will accumulate faster, which should enable the franking rate to be lifted over time. Now let's turn to the financial results of our core business, our Funds Management business and the driver of our group's profitability and dividends. Funds Management revenue for the half year ended 31 December, 2022 was $182.5 million and down due to lower funds under management. The average base management fee at 31 December, 2022 was 66 basis points. The increase in our average fee is due to the change in the mix of the retail and institutional funds under management. Consistent with prior years, our main operating expense aside from tax of course, is employee expenses as our people are fundamental to delivering value for our clients. Employee expenses of $45.5 million for the 6 months 31 December, 2022, an increase mainly due to the expense for cash retention payments and initiatives we announced in March 2022, as part of the broader staff retention program and costs associated with the company's realignment that occurred in October 2022. And just to be clear, Funds Management employee expenses excludes the $2 million of non-cash expense for the employee share option plan that I just discussed earlier. Other expenses are down 16% compared with prior half year and that's mainly reflecting disciplined cost management. After adjusting for performance fees, the profit before tax of the Funds Management business decreased 59% to $119.9 million. Now, despite the decrease in the half year, Magellan is still a highly profitable business with a very competitive cost/income ratio of 34.2%. Turning to Slide 12. Just a couple of comments I'd like to make about expenses. Our guidance for Funds Management expenses for the year ended 30 June, 2023 is 123 -- sorry, to $125 million to $130 million. We continue to operate within this guidance and in the current year this also includes $15.2 million of costs associated with the acceleration by 1 year of staff costs retention payments and also costs associated with the company realignment in October. A cost-conscious mindset regardless of the prevailing business conditions has always been a central part of how this business has been run. Nothing has changed. Business operations are managed efficiently and when it comes to expenses, we will continue to manage the business prudently as we always have. With expense discipline being paramount, we will continue to invest to support client-focused outcomes and ensure expenditure with a view to growth. Turning to Slide 13. The funds investment portfolio is a subset of the group's balance sheet and an important aspect of the group's liquidity. A summary of the funds investment portfolio, which totaled $359.3 million at 31 December is shown on the slide and that portfolio includes co-investments in both Magellan's listed and unlisted funds, which creates very strong client alignment. Consistent with prior years, our aim is to earn satisfactory returns for our shareholders and Magellan has set a pretax return hurdle of 10% per annum over the business cycle for the funds investments portfolio. Since inception from July 1, 2007 and excluding the group's investment in MFF Capital Investments, portfolio has reported a pretax return of 9.6% per annum. We acknowledge that the current return is lower than 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. Associate investments. Now, before handing back to David, I will touch on our associate investments. At 31 December, the group held 2 investments on our balance sheet. These are a 36% economic interest in Barrenjoey Capital Partners and a 16% interest in FinClear. During the period, our share of the associate's results after tax was a loss of $8.1 million. Despite weaker market conditions and trading volumes across the investment banking industry, Barrenjoey continues to strengthen and diversify revenues. During the period, a number of new business lines went live, including fixed income derivatives, equity financing and private capital. The half year financial results were negative for the period after taking into account the establishment costs, things like technology and operational development costs and staff acquisition costs, but establishment costs are expected to decrease materially in the next financial year. Barrenjoey expects to largely complete its initial build out in the 2023 financial year and is now focused on growth. Briefly touching on FinClear. FinClear's public equity markets business has been impacted by weaker market conditions. However, they continue to invest in attractive growth opportunities and recently launched FCX, a secured DLT-based platform for investors in private companies. Magellan remains a supportive shareholder of both businesses and continues to manage and assist these holdings in a prudent and patient way. Any further investment in these businesses would depend on the opportunity at the time with the focus of maximizing shareholder value. And with that, I will now hand back to David.

Thank you, Kirsten. Now I'd like to refresh for you our strategy for growth and diversification in the coming 5 years. Our objective for Magellan in 5 years is to be a fund manager of greater scale with over $100 billion in funds under management from a broadened product mix and to be attractively positioned to grow in segments aligned to client demand. We will also focus on maintaining our position as a partner of choice for the Australian wealth industry and broadening institutional relationships at a global level. These are the critical ingredients for delivering returns to our shareholders and clients. To deliver our long-term strategy, our growth will come from 3 areas underpinned by disciplined capital and cost management and aligning our employee value proposition with client and shareholder outcomes. First and foremost, our focus is to ensure that all of our 3 primary investment strategies are delivering on their performance promise. I spoke earlier about the steps we've taken to date to create the conditions for improved outcomes in our global strategy. We have substantial capacity available across our 3 primary strategies, and our Airlie and infrastructure teams are well positioned to engage with clients and take on new business. We also have well-defined opportunities to leverage the skills and investment we have made in our current capabilities to deliver new products in the near-term, which is our second growth pathway. Magellan has a large investment team, which has developed over many years, deep knowledge and capability in several areas. We are well positioned with a high-quality platform and a history of innovation to create strategies in areas of growing client interest, such as energy transition, our Core series and Australian small cap equities. We will also expand beyond our current strategies to add new and complementary capabilities through inorganic growth. To reach our $100 billion goal, inorganic growth will be a key contributor. In deciding where to invest, we will look to areas of increasing demand and allocations and where the needs of our clients are growing, such as in alternatives and private markets. We will then explore opportunities to invest in experienced quality teams and capabilities where we can replicate the integration success of Airlie. Our approach in this regard will at all times be disciplined. Any acquisition or investment we make in this area will be strategic, scalable and complement our existing business, delivering diversification and synergies to the platform and clients with the objective of ultimately creating long-term shareholder value and sustainable revenue growth. Our people continue to be our most valued asset, engaging our people within a high-performance environment and with an attractive employee value proposition will be central to achieving our long-term objectives. These 5 critical elements play to our strengths and leverage the qualities and financial capacity that Magellan possesses. So let's now look at the progress we're making in delivering our FY '23 strategic priorities across our 3 pillars; platform, product and people. You can see on this slide what we said at the AGM would be our FY '23 areas of focus. And on the right-hand side, details of what we have delivered since then. In regard to our platform, we've simplified Magellan's Funds Management business. This has included considered adjustments to our organizational structure to realign resources to support more coordinated communication with clients through distribution and marketing and within our product strategy and development. Cost management remains an area of focus, and our funds management business continues to operate within our FY '23 expense range of $125 million to $130 million. As Kirsten mentioned, this is inclusive of costs associated with the acceleration of retentions and of organizational change. We've bought back 4.2 million shares to-date in relation to our on-market share buyback of the authorized 10 million at a cost of $46.7 million. In terms of product, we've had a very busy period. As I've outlined, we took steps to create the conditions for improved performance in the global equities investment team. This included adjustments to portfolio management responsibilities, as well as to meetings in the modes of communication across the team. These changes are designed to facilitate improved collaboration and information flow. We are starting to see positive outcomes from these changes with interactions and debate becoming less formal and more frequent, investment ideas being brought forward earlier and then prioritized more efficiently. As part of this process, we've continued to add to and expand the depth of our work in ESG, building on what has been developed and refined over the past 15 years. We welcomed a dedicated ESG with specialist resource to the team in the first half and have continued the process of embedding this thinking more actively across all of our client solutions. We've also made good progress on our product development pipeline. These strategies leverage our current intellectual property and will be supported by our strong operations and distribution capabilities and represent new avenues for FUM inflows. Our new energy transition investment strategy is now available for institutional clients. This strategy is oriented towards the significant investment opportunities that arise as the world's economy shifts to a dramatically lower carbon intensity. This will occur over a multi-decade cycle and our research experience in infrastructure and sustainability has provided a strong knowledge base on which to identify and invest in companies that we believe are positioned to drive and benefit from the energy transition. We have also been making good progress in the relaunch of our Magellan Core series with work completed to refine and reconfirm our definition and portfolio construction process for the Core international and Core ESG strategies. Each offering within the Core series represents the broadest exposure to the Magellan research engine and companies which fit our definition of business quality, as well as meeting our stringent investment criteria. The investment universe defined by Magellan's forward-looking and fundamental research differentiates the Core series. And we believe that with the appropriate distribution support, this offering is scalable and provides a strong value proposition to cater towards lower-cost client requirements. We are also well progressed on the launch of the Airlie Small Companies Fund, a retail fund, which we expect to make available to investors in the second quarter of calendar year 2023. Small cap equities in Australia is an area where high-quality managers can generate consistent outperformance. The Airlie team has a strong track record in the Australian market and already covers some of the smaller Australian companies. This makes expansion into this segment a logical near-term growth opportunity for Magellan. Beyond executing on our new product pipeline through the remainder of FY '23, our performance focus remains our #1 priority. This half, our focus will be on opportunities to support portfolio managers and analysts with additional tools and data. The third pillar of our FY '23 priorities is our people. We're a people business, and we want a culture that supports high-performance career development and opportunity. One priority has been to initiate a discussion on reaffirming our culture and values. Magellan has a good culture, but culture is something to surface, work on and evolve continuously. This is a process of soliciting feedback and having discussions to define our ethos as a company. There are also opportunities to engage on day-to-day improvements in the business and explore how we drive high performance and career development and align teams to the long-term success of Magellan, our shareholders and clients. During the half, we've accelerated the staff retention program, bringing forward the payments by 1 year from September 2024 and September 2025 to September 2023 and '24, respectively. These retention initiatives are important to allow employees to remain focused on clients and the business during a period of change and uncertainty. They also help mitigate the stress that some of our team bear with the staff loans, which can be a hindrance to high performance in our teams and are therefore aligned with shareholder outcomes. We recognize the need to ensure our employee value proposition aligns our team to deliver our 5-year growth strategy and positive client outcomes. We will establish a long-term incentive plan designed to achieve this, which will balance an opportunity to participate in Magellan's shared success with value for shareholders. We're prioritizing this work and aim to complete it during the current financial year. In terms of the outlook for the remainder of the financial year, a critical debate for markets remains the inflation picture and the reemergence of interest rate cycles in countries around the world. Higher interest rates has resulted in a predictable slowing in economies. And while it appears we are closer to the end of the interest rate hiking cycle, it is far from clear how sticky the higher price pressures will be and therefore, how quickly Central Banks can ease off on the brakes. China's easing of COVID Zero policies and apparent willingness to stimulate for growth should be a net addition to global growth, but perhaps also to inflationary pressures. This won't necessarily be negative for equity markets overall, but these interrelated drivers indicate that it will be a patchy period of data and, therefore, a volatile phase until the shape of peak inflation and interest rates becomes clearer with the time. Importantly, these are more challenging conditions for businesses. And for that reason, we see the focus of market shifting from the interest rate cycle to corporate earnings. Cost pressures, financing pressures and slowing economies will create challenges for many companies, resulting in dispersed performance and earnings outcomes. I've said before that I'm bullish active management, and this is exactly the environment where deep understanding of companies can allow our team to differentiate and capitalize on value as it emerges. Thoughtful long term and deeply research and investing will be rewarded. These are good conditions for performance. Volatility offers periodic opportunities to invest in businesses at attractive prices, and Magellan has the experience and capabilities and long-term orientation to be nimble and lean into these opportunities. To wrap up the presentation today and before opening to questions, I would like to reiterate what I said at the start. We are at the beginning of the next phase of Magellan's evolution. We've outlined our 5-year growth strategy, and our focus is now on building upon Magellan's strengths and transitioning the business into a more diversified one with a range of capabilities and offerings that deliver sustainable growth and revenue. In the 4 months since we announced our 5-year strategy, we are making good progress in delivering our FY '23 strategic priorities. We are well progressed in organic product development, as I've outlined. We are also now better placed to review opportunities to add new and established capabilities, which will complement our offering, both in equities, but also beyond in areas such as private markets, consistent with our client portfolio needs and with our capacity to deliver. We have much to do, but we've hit the ground running with our strategy, and I look forward to updating you on our ongoing progress at the full year results in August. I'll now open up to questions. Sarah?

Well, thank you very much, David and Kirsten, for the presentation. [Operator Instructions] Okay. David, we'll just start with you. The first question that's coming through is, does Magellan see itself in business in 20 years?

20 years is a very long time, but I think it's -- Magellan has been in business for 20 years already. And so I think seeing it in 20 years is an easy thing for me to do.

Great. I'll head to you as well. Just in the cost guidance. You called a $15 million of retention payments. Does this imply as a one-off and there's scope for employee expenses to step down next year? Or should we be using the FY '23 employee expenses as the base going forward?

So by their nature, the retention expenses and the retention program was a one-off. So I don't think that, that number should be directly translated into the forward period, and we don't provide forecast at this time for fiscal year '24, but retentions are one-off expenses.

Okay. David, I think this one's for you as well. Can you comment on the performance of the high conviction strategy?

I certainly can. So the high conviction strategy is a concentrated portfolio. So naturally has greater variability relative to market and greater risk and volatility attached to it. So performance has not been as good as we would have hoped. I've made some changes with the portfolio management team, in particular, appointing Al Pullen and Nikki Thomas as portfolio managers. And I believe we've got the right team in place, and I'm confident that returns will be more towards our expectations going forward.

Thank you very much. Again, on the investment team, can you please detail the changes that have been made to the investment team and whether you have flattened the hierarchy of the team?

So flatten the hierarchy is a reasonable way to think about. The first and most important piece of those changes has been to remove some of the other and potentially distracting efforts that we were undertaking in the investment team. So we're always looking at new strategies and ways to think about our markets and where we can apply our skills. But we'd let that expansion happen too broadly and into areas that weren't directly adjacent to skills and capabilities that we are already able to demonstrate. So I focused the team back towards the baseline, the global strategy, the infrastructure strategy and less on the new strategies that we're too far out of the team's current remit. In terms of the team function, we did make some changes to how the leadership works and how our analysts work together. So the first of these was the appointment of Gerald Stack as Deputy CIO. He's a very talented manager of people and has built an outstanding team within the Infrastructure Group. So he takes a larger role in working with analysts across the broader team in order to get the interactions working, in order to get work allocation working better and also interactions between portfolio managers. So some of the changes that he's been instrumental in have been working towards how we have our meetings, how quickly we discuss new ideas and how frequently everyone is in the same room or having conversations at the desk. So it's creating a more dynamic interaction environment has sort of been the key piece.

Okay. Thank you, David. Again, this question is for you, and moving on to the growth strategy that you've outlined. How do you explain the ongoing outflow of FUM?

So we publish our FUM figures every month. And ultimately, FUM overall is a function of client decisions. And so our clients have made some of those decisions, and we've talked about some changes we've made, in particular, on the global side to address performance. It's just one of the things that's important for clients. So we focus on what we can deliver. We can deliver performance, which we are hyper-focused on and we can deliver outstanding client service around that. We have a number of strategies across the Magellan business, many of which are very well positioned to have proactive and positive conversations about FUM flows. That includes our infrastructure strategies, that includes Airlie, and that includes some of the organic growth strategies, energy transition is available at the moment going forward.

Thank you, David. And we'll move towards some balance sheet questions now, and I'll address these to you. Can you touch on the balance sheet capacity and ability to continue the buyback and also invest in inorganic opportunities. In that, how much of the $882 million is deployable?

So the focus in the last 6 months has been about resetting the strategy and then orienting the organization to be best able to execute on this strategy. And so that's been the priority, and we've done a great job at that, I think. In terms of capital management and the balance sheet, that's something that we'll assess on an ongoing basis and in light of that and in context of that strategy. So I expect that's an ongoing conversation. But one of the most important things to say about where the balance sheet is, is that it provides us with a tremendous amount of flexibility to invest for growth and to be disciplined about how we do that.

Thank you very much, David. And sticking with balance sheet theme, the next question is, does it make sense to hold as much fund investments versus using the funds to buy back more stock?

So the fund investment portfolio, as Kirsten outlined, serves a couple of purposes. One, in some cases, is about seeding products, and we do some of that. And as well, it provides an opportunity for us to align ourselves with clients. And so that's the other purpose. So the size of that will shift and change over time, and we think it's appropriate at the moment.

Okay, thank you. And just one final question on balance sheet. Do you intend to reintroduce the dividend reinvestment plan?

We have no plans to reintroduce the dividend reinvestment plan.

Okay. Thank you, David. The next question, again it's for you, relates to the Airlie Small Cap Fund. And the question is, what is the target for FUM for this product, assuming its focus is Australian only?

So we have thoughts on capacity, but capacity is something that in -- particularly in Australian small cap equities, needs to be managed carefully. So we'll certainly manage capacity prudently as we gain inflows, and that's a process of ensuring that as we gain FUM and perhaps approach capacity, we're monitoring that very closely, but prudently managing capacity will be a key focus in that market.

Thank you very much, David. Again, the next question for yourself and it touches on your growth strategy you've outlined. The question is, given many managers are focused on growing in alternatives and private. Are you confident you can attract the team at a reasonable cost? And how should we think about the time frame for this?

Well, I think it is an area of interest for clients, and therefore, I imagine other managers as well. So I'm confident that we, as a platform, have a great value proposition for investment managers. We had outstanding operations. We had outstanding compliance, risk management support, and we have outstanding distribution. So those are things that investment teams appreciate and it makes their life easier, and it allows them to focus on what's important for them. So I do think we have an opportunity to expand the platform and we're an attractive destination. In terms of time frame, there's nothing -- it's very difficult to put a time frame on things like that. These are opportunistic processes, you need to have a lot of things go right for it to make sense. But in doing that, I think we'll just operate with our normal discipline. We will make sure that any acquisition or any transaction in that space makes sense for shareholders and adds value.

Thank you very much. And again, just touching on the growth strategy. The question is, I know you were targeting $100 billion in FUM in 5 years. But right now, what is your best guess of FUM trajectory over the near term?

So, I won't offer a forecast on FUM trajectory, and we never have. It's a function of client choices, but also markets. And so that's a very difficult question to answer. As outlined in the question, over the 5-year term, we have a target to be a much larger investment manager. And so we will do that by diversifying our business, and we will do that in a way that grows from within from our current strategies, grows organically from products that we develop from capabilities that we can demonstrate and grows through acquisition.

Great, thank you very much. The next question, again, I'll direct to you, David, in regard to our associate investments. There is talk that the investments Magellan holds are worth much more than book value. What are your thoughts on this?

So we certainly value those investments according to accounting principles and standards, which perhaps Kirsten could talk to more. But we have 2 associated investments. They are both businesses that are in a growth path. So the valuation for the future, hopefully will reflect all the efforts they're putting into that growth path.

Okay. Thank you, David. Again, just another follow-up question in regards to the Airlie Small Cap strategy. Will it be managed by the Airlie Large Cap team? And if so, won't that dilute the large cap offering?

So there's careful consideration into that question, certainly, and the strategy is under development. So what we will ensure happens is that we have appropriate resourcing and appropriate skills. So we'll invest where we think we need to expand the team in order to support additional coverage and ensure that there is no distraction.

Okay. Thank you very much. Again, I'll direct this next question to yourself in relation to the broader strategy. Are you currently in conversations around acquisitions? And if so, how far down the path are you?

I'm not going to comment on any specific M&A or any discussions like that. As I said before, in our strategy, we do have one of the pillars as expanding the platform in areas that make sense and that may be through inorganic growth. But other than that, I have no details to share.

Okay. Thank you very much, David. And again, this question is directed at you with regard to the comment in the article in today, they are suggesting John and Matt from Airlie, considering their future with Airlie, given the completion of the 2018 earn-out agreement. Are you able to comment on that?

Yes, I can. I mean I can't comment on any speculation in the article. But Magellan has built a very good relationship with John and Matt over the last 5 years, and the Airlie business has been very good for Magellan. And I think Magellan has been very good for Airlie in supporting the business with a great platform as well as with distribution avenues for them to grow and diversify the Airlie offering. So I expect that to continue for some time.

Thanks, David. As part of the growth strategy or organic growth opportunities, you've outlined the energy transition investment strategy. Can you please confirm some rough numbers for capacity of this strategy?

Yes, so there's no exact capacity. The expectation, though, is that the capacity for that strategy is very large. So these -- it covers a global universe and there's a range of companies, but many of them are large global companies. And so overall, from a diverse strategy point of view, there should be significant capacity measured in the tens of billions.

Thank you very much. And just touching on FUM again. The next question is how much institutional FUM remains in global equities?

So we don't disclose that directly, but we still have a range of institutional clients in global equities.

Okay. Thank you. We'll now move to the phone lines. May I ask the participant with a phone number ending in 1362 to please unmute themselves and go ahead and ask your question.

The first one is just on the institutional money. And just if you could characterize how your discussions are at the moment with the institutional clients. We've seen some pretty elevated outflow still through the back end of last year. Though this month -- sorry, this year was actually not too bad. So if you could just give us color on that? And then also on the fees, it seemed like there was, on my calculations, a bit more compression in institutional fees in the first half. If you could just sort of give us color on that and whether we should expect some continued compression going forward?

Thank you for the question. So in terms of the discussions, we have very active and very transparent discussions with our institutional clients around the world. And I can tell you they're mostly focused on performance. They're mostly focused on markets and they're really transparent and active. From a flows perspective, I think what I can say is larger flows we're seeing in early 2022. And certainly, that's perhaps to be expected in an institutional market when there is a certain amount of change within a strategy. So what we've seen, as you say, is perhaps less. And so the discussions have been really transparent about how we're performing in markets, adjustments we're making to the process, and they're very good. From a fees perspective, we -- again, the focus of discussions is much more about how the strategy is going, the portfolios and the investment process that we're delivering for them.

Okay. Well, thank you very much. That's all the questions on the line. We'll just have one more question that's come through online. And David, again I'll direct this one to you. What is Hamish Douglas's role, if any, in Magellan at the moment?

Sure. So Hamish Douglas is engaged through a consulting agreement with Magellan. So that was put in place to offer Magellan and ensure that it was available to Magellan Hamish's insights and input through time. Now that consulting agreement has just come on foot in October, so it's quite early days, but it's working as expected. It's a consulting agreement like we have several of in service of the investment process and clients. And so over time, we will evaluate that just like any other in terms of the value it provides both to the team and clients.

Okay. Well, thank you very much, David and Kirsten. That concludes the Q&A and today's presentation. We appreciate everyone for dialing in, and we look forward to welcoming you at our full year results in August. Thank you very much.