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

Good morning, everyone, and welcome to Magellan Financial Group Limited's Half-Year Results Briefing for 2024. I'm Primal De Silva, and I work in the Strategy and Investor Relations team here at Magellan. Before we commence, I'd like to first acknowledge the traditional owners of the land on which we meet today, the Gadigal people of the Eora nation and pay my respects to their elders, past, present and emerging. Turning to today's agenda. Presenting first will be our Executive Chairman, Andrew Formica, who will provide an overview of our 1H '24 results. You'll then hear from our CFO and COO; Kirsten Morton, who will go through our financials in more detail, before handing back to Andrew to provide a strategic update. We'll then open to Q&A from the floor and online. Please note that today's presentation is being recorded, and a replay will be made available on Magellan's website. We may also have media in attendance today. I'll now hand over to Andrew.

Thank you, Primal, and thank you all for attending Magellan's Half Year 2024 Results Briefing. Today, we announced our results for the first half of 2024. And before I hand over to Kirsten, who will provide the details behind our first half financial results, I will walk you through the progress we've made in rebuilding Magellan. I would also like to outline our capital management framework and how we look at the need for the business going forward, and then conclude with our priorities for the second half of the year. The last 6 months have been instrumental in restoring stability to the business for our clients, for our staff and for shareholders. We were able to address a number of legacy issues that were causing uncertainty and hindering our ability to move forward as a business, enabling us to focus on restoring growth and to progress our strategic objectives into building a business, which is a more diversified fund manager. The first of these was the employee share purchase plan loans, which were held by existing employees and which were causing stress and anxiety for our employees and were a significant distraction. Additional retention arrangements were announced to the market in October 2023, enabling us to extinguish the balance of these loans for the vast majority of our colleagues. You will see during the half that we saw the total loan balance of current employee loans reduced by 35%, and this will continue to reduce as employee retention payments are made in September 2024 before closing out the majority of the loans of current employees by September 2025. We were also very busy working on resolving uncertainty around our Magellan Closed Class Global Fund, where we saw activism around the MGF Closed Class options, which had not put not only the MGF Closed Class, but also the whole of the MGF Open Class at risk. By acquiring the MGF Options, we reduced the financial liability on Magellan's balance sheet and prevented any possible impact to our clients and business. Magellan Asset Management, as RE of the Global Fund, also announced its intention to convert the MGF Closed Class into the open class, which will permanently address the trading discount to net asset value of the MGF unit, a course of action I wholeheartedly support. We have received positive feedback on these initiatives from our clients and shareholders, and I thank all of our stakeholders for supporting the Board in resolving these legacy issues, so that we can turn our attention to strategic growth initiatives. Instrumental in maintaining stability and restoring growth to the business will be Sophia Rahmani, who today we announced will join Magellan in May as Managing Director of Magellan's main operating subsidiary, Magellan Asset Management. This is a transitional role, and we expect to appoint Sophia as CEO of Magellan Financial Group within 12 months of her commencement. I will remain Executive Chair during this time to ensure continuity and stability, focusing my attention on Magellan's strategic development while Sophia focuses on our Funds Management business. Although we're taking a different approach to the appointment of a new CEO than may be considered typical, we believe this is the right approach for the business right now. Magellan has experienced a significant period of instability and uncertainty, and this transitional approach retains continuity and provides Sophia time to transition into the business prior to stepping into the role of CEO. Sophia brings to Magellan a deep understanding of the Funds Management industry, and I'm confident she will succeed and deliver for shareholders. In parallel with establishing a new leadership structure and resolving legacy issues, we remained focused on delivering improved investment performance for our clients and delivering on our strategic growth priorities. I will provide a more detailed strategic update later on. However, some of the highlights include enhancing and refocusing our U.S. distribution platform, announcing plans to launch the Magellan Unconstrained Fund to retail investors, seeing a positive net profit after tax contribution from our associates and continuing to assess strategic growth opportunities, both organic and inorganic that are accretive to our business. Whilst there's a lot more to do with over $36 billion in funds under management, a profitable core business, a strong balance sheet and a high-quality team, we are well-positioned to rebuild Magellan and deliver value to our shareholders. So let's take a closer look at our financial performance for the half. On a group basis, adjusted revenue and other income for the half was $182.8 million, down 12% on first half 2023, driven mainly by the 31% reduction in average funds under management over the period, though partially offset by $37.8 million of realized gains in our Fund Investment portfolio. As can be seen on the slide, realized gains in our Funds Investment portfolio were significantly greater in the first half '24 compared to first half '23. Sales within our Fund Investment portfolio will vary from period-to-period as we actively manage our portfolio of balance sheet investments. And as you would expect, we continue to have a disciplined approach to cost management. Our Fund Management business operating expenses reduced to $51.3 million in the half, down 18% on the first half '23. And we remained on track to meet our full-year cost guidance of $97.5 million to $102.5 million for the Fund Management business expenses. Adjusting our statutory net profit for non-cash items, unrealized items and items related to strategic initiatives, the group reported adjusted net profit after tax of $93.5 million, down 5% to the prior corresponding period. What these financial metrics indicate is that, notwithstanding the significant challenges we faced in recent years, Magellan remains a very profitable business. And not only is Magellan a profitable business, it also has significant financial strength, which provides us with strategic flexibility and optionality, which is important for rebuilding Magellan and diversifying the business. As at the 31st of December, we had $830.5 million of net tangible assets, equating to 4.59 per share. We had $837 million in cash, financial assets and investments in associates. We had no debt and total liabilities of $118 million, down from $236 million at June 2023. The business delivered adjusted diluted earnings per share of $51.6, and an interim dividend of $29.4 a share, franked at 50% has been declared. The Board has a policy of paying out franking credits to the maximum extent possible over time. However, this can vary from period-to-period as was the case this year, as we recognized the taxation impact of the acquisition of the MGF Options. We expect to be able to revert to a franking rate more in line with historical levels in financial year 2025. With a strong balance sheet, robust cash flows and ongoing profitability, we remain well-positioned to continue to pay between 90% and 95% of Funds Management profit as dividends, consistent with our current policy and to continue to prudently invest in our business for growth. Now, turning to our core business, Magellan Asset Management. Slide 8 sets out the movement in our funds under management from 30th of June to the 31st of December. As you can see, we experienced net outflows of $4.6 billion, and made fund distributions of $300 million during the half, which were partially offset by $1 billion of investment returns across our strategies, which has resulted in our fund under management at the end of the year -- at the end of December being $35.8 billion. The funds under management outflows of this period were well below the corresponding period in 2023, which were $14.9 billion, and I'm pleased to see the outflows are slowing. Our funds under management remains well balanced between retail and institutional clients, with our average base management revenue increasing as retail clients form a greater slice of the pie. Approximately 47% of our total funds under management, or $16.7 billion is retail, with the remaining 53%, or $19.1 billion being institutional funds under management. Looking at each of our strategies, you can see that as of the 31st of December, we had $14.9 billion of funds under management in our global equity strategy. This is where we've experienced the majority of net outflows, which equated to $4.5 billion for the period. Whilst this is disappointing, it has been pleasing to see this strategy demonstrate continued signs of investment performance improvement under our portfolio managers, Arvid Streimann and Nikki Thomas, adding approximately $0.5 billion in investment returns. Our infrastructure strategy had net outflows of $300 million during the half and as of the 31st of December had $15.8 billion of funds under management, making our largest strategy. And on Airlie, our Airlie team continues to outperform the benchmark with positive investment performance for the half, adding $500 million and attracting $100 million of net inflows. If we look at the trajectory of net flows over a 2-year period, pleasingly, you can see that they have been moderating in recent quarters. The volatility and dramatic outflows experienced in the earlier periods appear to have settled down over the past 6 months or so, and we even saw small institutional inflows in August and December last year. Whilst we are still experiencing net outflows, funds under management flows, particularly institutional, can be lumpy in their nature and vary from period-to-period. Importantly, as I noted, outflows appear to have moderated which is both, positive and pleasing to see and largely due to improved investment performance as well as stabilization of the business. It is worth noting that months where we saw larger institutional outflows in the first half of '24 were generally a result of an individual client redemption. As outlined on the previous page, institutional client funds under management within the Global Equity Strategy is approximately $3 billion as at the 31st of January, 2024. If we now turn to the investment performance of our strategies, all of our strategies are designed to deliver attractive, risk-adjusted returns over the long term for our clients. And importantly, our processes and investment philosophy have remained unchanged. We continue to believe that investing in the world's best companies is a path to creating and protecting long-term wealth. As of December, the early signs of improved performance that we reported mid-last year continued with our infrastructure and Airlie strategies, both outperforming their respective benchmarks over 6 months and 12 months as well as since inception. Our Global Equity Strategy has also delivered strong returns in the 12 months December, adding 22% for clients in absolute sense and continuing to outperform its benchmark since inception. In relation to the Global Equity Strategy, it is worth looking at the performance of the team since the PM changes were made in February 2022. It has now been approximately 2 years since Nikki and Arvid took over portfolio management of the Global Equity Strategy. Over this period, the team has delivered solid investment returns relative to benchmark and peers, and has shown continued improvement. It is worth noting that the investment philosophy and process of the Global Equity Strategy has remained consistent since its inception and remains in good hands with Nikki, who first joined Magellan in 2007, and Arvid who joined nearly 10 years ago. I'm also pleased that Arvid has just been appointed as the Head of our Global Equities team. Looking at other funds in the Global Equity Stable, Nikki and Alan Pullen managed the High Conviction Strategy, which was first established in 2013 and managed against an absolute return target of 10% per annum. This strategy has also seen improved investment performance in recent periods, while maintaining a strong long-term track record of outperformance against that absolute return target. The unconstrained strategy is an investment strategy that has been managed by Al since inception in 2022. Alan joined Magellan 12 years ago as part of the financials team and was promoted to Portfolio Manager in 2016. The strategy has generated a strong 2-year track record, outperforming its benchmark consistently. The strategy's key difference from our Global Equity Strategy is that it is unconstrained from the risk ratio restrictions that apply to the Global Equity Strategy. Today, we have announced that we will launch the unconstrained strategy to the Australian and New Zealand retail markets in the coming months. I'm pleased to see a highly regarded process bearing fruit and clients are starting to take note. We know we need to sustain this in the coming months and years ahead and of course, this is a key focus for us all. Before handing over to Kirsten, I would like to provide a brief update on our market-leading distribution capabilities and the work that continues in the client-facing side of our business. What is often underappreciated about Magellan is the competitive advantage that our distribution platform provides us and its importance in driving future growth. Despite the challenges of the past 2 years, our distribution team retained strong relationships across financial advisors, brokers, dealer groups, platforms, researchers and consultants. Client engagement remains as strong as ever. The feedback we are receiving is they are pleased with our improved performance and the strong engagement we have around our process and focus, along with the actions taken to address the legacy issues and to reduce the level of noise around Magellan as a corporate. We have significant global and local brand awareness across our global equities and infrastructure strategies, and our Airlie Funds Management brand and profile is growing rapidly, reflecting the quality of Airlie's investment team and of course, their continued strong outperformance against their benchmarks. From a communication and engagement perspective, our business continues to have a physical presence in all the major Australian cities and our distribution team are consistently engaging in regular face-to-face interactions with clients, with conversations spanning our entire product suite. In the 6 months to December, our team held over 2,000 meetings with advisors, researchers and consultants and over 90 meetings with institutional clients across the globe. Client meetings are supplemented with timely and relevant communications across a variety of mediums, and I'm pleased to report that we have just launched our new Magellan website, which went live yesterday. Please do check it out, and we would welcome any feedback you have on it. Our clients across Australia continue to attend our annual roadshows in considerable numbers, and we are pleased to be back on the road with our Global Equities and Infrastructure Investor Roadshows, which will be held next month. This will mark our first Global Equities Roadshow in 2 years. Our Annual Airlie Roadshow was held late last year and will be followed up with another one in September or October later this year. We're excited by the high level of interest we are seeing in our upcoming roadshows. These events really provide a great opportunity for our team to demonstrate and showcase our products and investment talent. I'm also pleased to be joining the team to directly answer any client questions on the corporate focus and priorities and to give me an opportunity to meet our clients directly. Later, I will talk in more detail of our plans to leverage our distribution capabilities to drive growth not only in Australia, but also offshore. But first, I'd like to hand over to Kirsten who will take you through our financials. Kirsten?

Thanks. Thank you, Andrew, and Good morning, everyone. I'd first like to take you through the financial results of the group, followed by our Funds Management business and then our expenses outlook. The group's adjusted revenue for the 6 months to ended 31 December, 2023 was $182.8 million, and the group's adjusted net profit after tax for the same period was $93.5 million. Adjusted net profit after tax is down 5%, as Andrew mentioned half-on-half, which primarily reflects the reduction in funds under management offset by an increase in other revenue. Management and services fees were $130.3 million for the half year ended 31 December, 2023, down 28% on the prior half, which was broadly in line with the 31% decrease in average funds under management for that period. Performance fees before tax were not meaningful. And as we always mentioned, those fees are lumpy and they have potential to fluctuate significantly period-to-period. Other revenue for the half year was $52.4 million, up $24.8 million on the prior half. Now, that revenue typically comprises a few things; dividends and distributions that we earn on the investments in our funds, realized gains and losses on those investments, foreign exchange, movements, interest income and advisory income from our U.S. business. The breakdown of the components of other revenue for the 6 months through 31 December was as follows. Dividends and distribution income of $6 million, interest income of $8.2 million, and realized capital gains of $37.8 million from the sale of investments in our proprietary funds investment portfolio. Now, we actively manage the investments in the group's portfolio with a view to maximize shareholder value. As a consequence, sales of investments can actually fluctuate period-to-period. The gain this year is larger compared to past years, and the realized capital gain for the 6 months to 31 December, 2023 was derived mainly from the sale of a portion of our holdings in the Magellan Global Fund Open Class. Now, with regards to our investments in associates and notwithstanding very challenging market conditions, we were very pleased to see our share of the financial result of Barrenjoey and FinClear generated a $3.1 million profit for MFG for the 6 months to 31 December, 2023. That was compared to an $8.1 million loss in the prior half. We continue to view adjusted net profit as providing more meaningful performance information of our business and comparability of results period-to-period. Now, just by way of reminder, adjusted net profit is the group's statutory net profit, excluding some certain items. And those items are shown on the slide, and I'll just take you through them now. The first adjustment is a $22.1 million net benefit to the P&L arising from the acquisition by MFG of the Magellan Global Fund Options. That amount comprises a few different things. A $64.9 million expense for acquiring 649 million MGF Options at $0.10 as of 31 December 2023, along with some related transaction costs. That was more than fully offset by $97.6 million reduction in the MGF discount funding liability because the 7.5% discount that would have been payable upon exercise of the options is no longer going to be required as MFG now holds 649 million options and does not intend to exercise those options. The movement in the discount funding liability is explained in a bit more detail in Note 7 to the financial statements. The second adjustment of $0.1 million of transaction costs related to strategic initiative. And for the 6 months to 31 December, 2023, this relates to costs incurred for the proposed Closed Class conversion of Magellan Global Fund later this year. The next adjustment is a non-cash item of $0.7 million, which relates to the amortization expense on the acquisition of Airlie and Frontier businesses in 2018. The adjustment of $1.7 million relates to non-cash accounting remeasurement of share purchase loans. Now, as a reminder, whilst the accounting for these loans is actually unchanged, there is P&L volatility due to changes in the repayment assumptions and changes in loan terms for departing staff. These changes differ for each employee and can make the period-to-period net P&L impact less predictable. So, considering the increased volatility on the loans, which reduces that comparability of results, we have just removed the non-cash interest income and expense. $1.5 million relates to non-cash employee share option expense as a result of the share options issued to employees in April 2022 as part of the staff retention program. We are making this adjustment as it's a non-cash item, and the expense is lower in the current half year and that's due to the forfeiture of options when staff leave. The non-cash gain on dilutions and disposals of associates of $0.1 million. What's more? It just relates to one of our associates issuing additional shares at a higher price than our issue price. It's resulted in a very small gain and a negligible dilution in our holding percentage. And the final adjustment to statutory profit is $11.1 million and that relates to the unrealized capital losses in the shares and units held by the proprietary fund investments portfolio. And as we record those mark-to-market movements 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. Just please note that all those adjustments that I just mentioned are after-tax amounts. Now, if those adjustments were not made, the group's statutory net profit for the half year ended 31 December, 2023 would be $104.1 million. Diluted earnings per share was $0.574 per share, which is in line with a movement in the statutory net profit. Adjusted diluted earnings per share is $51.6 per share, in line with a decrease in adjusted net profit after tax. And the group's effective tax rate for the half year was 29.2%. And as Andrew mentioned earlier, the Directors declared a dividend for the 6 months to 31 December, 2023 of $0.294 per share franked at 50%. Now let's turn to the financial results of our core business, our Funds Management business, the driver of the group's profitability and dividends. Funds Management revenue for the half year ended 31 December, 2023 was $131.2 million, down due to lower funds under management. Average base management fee at 31 December was 70 basis points, up 4 basis points on 2022. And that just reflects the change in the mix of the funds under management towards retail. Consistent with prior years, our main operating expense, aside from tax, of course, is employee expenses, and that's reflecting the fact that our people are absolutely fundamental to delivering value for our clients. Employee expenses were $34.1 million for the 6 months to 31 December, 2023, down 25% period-on-period. And that reduction is a combination of a few different items, mainly due to lower headcount. And the current half also includes the full benefit of the organizational realignment that we announced in October 2022. There is lower staff retention bonus expense in the current half year as there was an acceleration in the payment date in retention payments -- acceleration in the payment date. And in retention payments, we saw a one-off expense in the prior half. And the reductions were offset by some one-off payments in the first half, which include payments to the former CEO and Head of Distribution who retired on the 31st of December. And just to be clear, the Funds Management employee expenses excludes the employee share option plan expense of $1.5 million that I discussed earlier. Excluding employee expenses, other expenses were a modest 2%, up half-on-half. And whilst we have experienced CPI increases across various expense lines, we continue to manage the cost prudently and drive efficiencies. After adjusting for performance fees, profit before tax of our Funds Management business decreased 33% to $79.9 million. Despite the reduction in profit and generally challenging business conditions, Magellan does remain a highly profitable business as Andrew had mentioned. Now moving on to expenses. There are couple of items I'd just like to touch on here. Our cost-to-income ratio, excluding performance fees, was 39.1%, compared with 34.2% for the prior half. That increase is mainly a function of lower revenue from lower funds under management during the period. Expense discipline does remain paramount though, and we will continue to ensure expenditure has a view to growth, supports client-focused outcomes and in turn, shareholder returns. The Funds Management business operating expenses of $51.3 million for the first 6 months is a little higher than the expenses we expect in the second half of the year. And this is due mainly in part to the timing of some expenses which occurred in the first half. But I do reaffirmed that the reoccurring expenses to operate our core business, our Funds Management business for the year ended 2024 is on track to be in line with our expense guidance range of $97.5 million to $102.5 million. It is likely to be towards the upper end of that guidance range. And finally, in October, the group announced an additional retention arrangement to current employees who have outstanding staff equity loans, as Andrew had mentioned. And that redemption is designed to assist in the repayment of the loans. The total cost of that additional retention is $6.5 million approximately. And the cost will be spread evenly over the period of that arrangement, which for the vast number of employees is January 2024 to September 2025. The expense impact for the 2024 year is approximately $1.7 million, which has been taken into account in our guidance and will be recognized in the second half. That is due to the timing of the acceptance of the arrangement by employees. It is worth noting that the total cost and cost in the 2024 year is smaller than when we announced the initiative in October, and that is primarily as a result of a slightly higher MFG share price. Finally, I'll just turn to Fund Investments. Fund Investments is a subset of the group's balance sheet and a very important part of the group's liquidity. The portfolio includes seed and co-investments in both Magellan's listed and unlisted funds. A summary of the Fund Investments' portfolio is shown on the slide. And at 31 December, 2023, the portfolio totals $334.5 million compared to $392 million at 30 June. As I mentioned earlier, the sale of a portion of our investments that drove the reduction in Fund Investments during the period. And consistent with prior years, our aim is always to earn satisfactory returns for our shareholders, and Magellan has set a pre-tax return hurdle of 10% per annum over the business cycle for the portfolio's performance. Investment returns for the 12 months to 31 December, 2023 proved to be very strong at 23%. Since inception from the 1st of July 2007, and excluding the group's investment in MFF Capital Investments, the portfolio returned a satisfactory pre-tax return of 10.3% per annum. And with that, I'm going to hand back to Andrew.

Thank you, Kirsten. I'd like to spend some time now to give you an update on our strategic plans. As I mentioned at the outset, we've made good progress in restoring corporate stability over the last 6 months, in part through the resolution of legacy issues that required our focus. With those issues resolved, we continue to push ahead with delivering on the strategic initiatives that will help drive our growth. These strategic initiatives and priorities can be put into 3 buckets; colleagues, clients and capabilities. So starting with colleagues, as I outlined at our AGM in November, one of our key objectives is to become the home for the best investment talent, which in turn will allow us to deliver strong outcomes for our clients. To achieve this, we must first have stable and strong leadership. With the Board renewal program completed and today's announcement on our transitional leadership structure, we now have achieved this much needed stability across our Executive and Board. As I noted earlier, we've also addressed the employee share purchase plan loans. With that now in the rearview mirror, we are in a position to provide our employees with incentives that align them to the success of our shareholders and our clients. To this end, work continues on our development of our employee equity plans, which will introduce short-term and long-term equity-based incentives more in line with market standards and that of our peers. We are committed to implementing this new equity plan by the end of June 2024, and expect to bring it to shareholders in due course. Beyond financial incentives, however, we must provide a holistic employee value proposition that spans culture, engagement, career development, diversity and inclusion, mission and impact, working environment as well as compensation. These are all pillars of a positive and high-performing workplace that will enable Magellan to attract and retain talent. From a culture perspective, we recognize that this requires an ongoing process of soliciting feedback and having discussions to define our ethos as a company. In 2023, we refreshed Magellan values and are now focused on embedding these across the organization. These values guide our decision-making, set the tone for our corporate culture and establish trust with our clients who are increasingly seeking to invest with organizations that share their values and principles. More recently, in December 2023, we undertook an Employee Pulse Survey, which saw an engagement score of 52%. This score is disappointing, but it's also not surprising given the challenges our employees have faced over the past 2 years. Based on the individual and team discussions I've held across the business, it is likely that engagement has already started to improve. I hold a firm view that what is measured is managed and therefore, employee engagement scores will form part of the KPIs of our new remuneration framework for our key management personnel. We plan on continuing to undertake Employee Pulse Survey later this year and into the future to track our progress. Finally, it's important to recognize the success and achievements of our team and we're pleased we've seen a number of internal promotions across the business in recent months, demonstrating the strength of the team and the high-quality talent that is embedded within our business. Moving on to our clients. As I have said previously for our business to succeed, we must focus on being a client-led organization and our immediate priorities must resolve around restoring trust, confidence and value to our clients. This starts and frankly ends with delivering on our own clients' objectives. As noted earlier, we continue to see signs of improved investment performance in our Global Equities and Infrastructure strategies, and our Airlie team continues to deliver consistently strong outperformance of its benchmarks. Since my appointment as Executive Chairman, I have embarked on an extensive client engagement program and spoken to many of our clients or our client advisors. I'm encouraged by their support for us as a business. They regard our recent challenges as an unwanted distraction from the successful management of their portfolios, and they are pleased with the progress we've made in restoring corporate stability, the early signs of investment performance improvement and the actions we're taking to resolve legacy issues. One thing that is coming through is that ESG is increasingly important to our clients. Our focus going forward, therefore, is to on delivering and building upon our existing ESG commitments, both within our funds and at a corporate level. These commitments encompass responsible and sustainable investment practices and demonstrate our dedication to reducing risk in our portfolios for our clients. Over the half, we have made solid progress on this front. We have commenced preparing initial disclosure of Magellan's first Climate Report in 2024, aligned to the recommendations of the task force on climate-related financial disclosures. We've also published our first Magellan Climate Stewardship Strategy, which outlines our approach to engagement and voting for climate-related risks and opportunities and adopted a new risk management framework encompassing these. It is pleasing to see our efforts being recognized externally with significant improvement in our 2023 Principles for Responsible Investment assessment score, which is well above the median for our peers and also our CDP score has improved and is defined as taking coordinated action on climate issues. As always, there's more work to do in an area of Funds Management that is growing rapidly, but we are heading in the right direction. As a client-led organization, it is imperative that our business continues to build upon our existing capabilities so that it can continue to deliver excellence for our clients for now and into the future. From a product and distribution standpoint, we have created a Strategic Product Committee, which brings together senior leaders from across the business to ensure new and existing strategies are receiving the right resources and senior management support to enable efficient decision-making around the future direction and structure of our strategies and product offerings. This committee has hit the ground running, with meetings held in December and February and now set up to run each month. And this will ensure we maintain momentum on the product initiatives, including the planned launch in the second half of the Magellan Unconstrained Fund to retail investors. The Magellan Unconstrained Fund is an exciting and compelling offering that is complementary to our existing Global Equity Strategy, with a key difference being that it's unconstrained from the risk ratios constraints of our more defensive Global Equity Strategy. The product satisfies a client demand, and the timing is right for launching this product as it has just received a strong 2-year track record, which includes delivering investment returns of over 30% in the 12 months to the end of January. I'm also excited by the opportunities for our business in the U.S., which we've driven by new leadership in our enhanced and refocused U.S. distribution platform. And I'll speak more on this shortly. This brings me to inorganic growth. We continue to assess strategic growth opportunities that are attractive and accretive to Magellan and its shareholders. And Magellan remains an attractive partner to asset managers due to our strong client relationships and reach, our balance sheet and our innovative culture. Our focus is on building upon the existing investment talent in the business to position Magellan as the home of the best investment talent in the market, and we are pragmatic to the structure that will best deliver this. Turning to our operations and costs. At the AGM, I spoke about the inevitable disruption of the funds management industry through technology, which I believe presents a significant opportunity for the business given Magellan's innovative and entrepreneurial DNA. To capitalize on these opportunities, we have established an artificial intelligence working group charged with finding and implementing the right AI tools for our investment team that will facilitate better processes and decisions and thus, outcomes for our clients. In time, we see this expanding into tools and methods that we will implement across our distribution and operational functions, which we expect will improve our ways of working and bring enhanced productivities across the business. Finally, we remain highly focused on disciplined cost management. We have provided full-year '24 Funds Management business expense guidance of between $97.5 million and $102.5 million, and we are on track to achieve this. Looking forward into full-year '25, we expect Funds Management business expenses to be in line with full-year '24. Turning now to capital management. The purpose of this slide is to talk you through how we are thinking about capital and our capital requirements. On the left-hand side, you can see that we continue to maintain a strong balance sheet as at the end of December, with cash and net fund investment of approximately $660 million and investments in associates of approximately $150 million. This strong balance sheet and capital base have provided protection for the business against the challenges faced in the recent years. On the right-hand side, you can see how I and the Board view our capital requirements, which we believe reflects the requirements for the business as we rebuild and position the business for growth. Stepping through each of these, as you expect, we have corporate requirements, which include regulatory capital and reserving capital for commitment and operational risk purposes. We then have our seed investment bucket, which we think of as capital required to develop and support the growth of newer funds and strategies while they begin investing and attracting flows. We currently have around $50 million in our existing product investments that we would classify under this area. We believe this will through time increase by a further $200 million and support the launch of new products and as we hire new talent and acquire investment boutiques in the future. Our intention is for this seed capital pool to be recycled, firstly, from the existing investment we have in established funds, then in time, recycled to newer products and strategies from previously seeded strategies. We then have our investment in the associates of approximately $150 million. This reflects the carrying value of our investments in Barrenjoey and FinClear as reflected in our accounts. As we've mentioned previously, we are supportive shareholders and will manage these investments with a view to maximizing shareholder value. I'll spend some time detailing Barrenjoey's progress shortly. Finally, we have the last bucket, which we think of as a strategic capital and also a stability buffer. As I mentioned earlier, our strong balance sheet has protected the business from the challenges faced in recent years. This included providing clients with confidence that the business remained financially strong and would continue to provide the service level they should expect and also providing shareholders the comfort that we would not be driven by short-term decision-making and would continue to focus on creating long-term shareholder value. As we progress on the journey of rebuilding, the business will require a lower level of protection or stability buffer. But given the nascent period of stability we have experienced, we are still only at the beginning of this phase. Alongside this, we, of course, require capital to execute our strategic agenda which I've talked about. Our objective is to become the asset manager of choice in the Australian market across a diversified offering. To achieve this, we will be required to invest in strategic opportunities and initiatives that we believe will return growth to the business and result in positive outcome for shareholders. This is a priority for the business and will require the deployment of capital. Moving now on to our capital management framework. Our capital management philosophy is to ensure we consistently pay dividends to shareholders, reinvest in the business in the areas of growth such as our U.S. platform and new product launches and to execute on strategic initiatives to diversify and rebuild the business. We believe this capital management framework, when considered in combination with our strategic agenda, best positions the business for future growth whilst ensuring we remain disciplined with our capital base and deliver value to our shareholders. Next, I wanted to do a deep dive into 2 exciting areas of growth for our business. Firstly, our U.S. distribution platform and then, also our 36% economic interest in Barrenjoey Capital Partners. Both of these represent attractive growth areas for Magellan. If we start with the U.S. distribution, we are making some changes to our U.S. distribution platform and have appointed new leadership in this business with a view to leveraging our existing infrastructure and relationships, and to developing a high-quality multi-boutique business. Our intention is for this refocused business to service and distribute our own existing product base, but also third-party managers in which we will hold an equity stake. Our existing product capabilities have some attraction to the U.S. market, particularly our global and infrastructure strategies and we believe that investing in and distributing strategies of third-party managers through a multi-boutique model provides significant growth optionality for Magellan. I see tremendous opportunity in the U.S., in part due to its sheer size. The U.S. market remains the most attractive and largest capital pool in the world, and we do not need to have a large share of this market to be incredibly successful. With a highly experienced and entrepreneurial leadership team now in place, Magellan has a significant opportunity to leverage our existing platform to offer an enhanced and differentiated product and attract investment talent to the Magellan Stable. This is an area of growth for Magellan that I'm excited about, and look forward to providing more details to shareholders as we progress. If we now turn to our associate investment in Barrenjoey Capital Partners. As a reminder, Magellan holds a 36% economic interest and a 5% voting interest in Barrenjoey, an investment we made in 2020. Since then, we've been very pleased with the progress of Barrenjoey, having gone from a blank page to a fully serviced financial services firm in only a few short years. And they now boast some of the best results across league tables in their chosen areas. We are especially pleased to see Barrenjoey turn to profit in the first half '24, contributing an after-tax profit to Magellan. This is a great achievement given the size and scale of the business and the short timeframe in which it has managed to capture significant market share. Barrenjoey saw record revenues in the half, up 35%, a result of revenue growth across all of its business lines in the first half '24. And all key business lines are now established, including its fixed income derivatives and equity financing businesses. With revenue growing at the top line and a flat expense base, Barrenjoey is seeing increasingly operating leverage, bottom line profitability and strong cash generation as a result. Finally, it is pleasing to see the business continue to exercise prudent risk and financial management by maintaining regulatory capital greater than 350% above its requirements. These financial results are a testament to the high-quality team Barrenjoey have built with over 360 people across their offices in Sydney, Melbourne and Perth. I do believe that the business will become the preeminent investment bank in Australia, and that it is, therefore, an attractive investment for Magellan and our shareholders to be exposed to. We will always manage our balance sheet investment with a view towards maximizing shareholder value. We continue to be a supportive shareholder to Barrenjoey, and we continue to believe it is an attractive investment. Before I wrap up today's formal presentation, I'd like to run through our priorities for the remainder of this financial year and make some closing remarks. As we look to the second half, we have a number of priorities across the business that we are focused on delivering. From a people perspective, we are committed to launching our employee equity plan I discussed earlier and also ensuring we make progress on improving our employee value proposition. We, of course, remain resolutely focused on delivering for our clients, including progressing the conversion of the Magellan Closed Class Global Fund, maintaining strong investment performance, launching our refocused U.S. distribution strategy and launching the Magellan Unconstrained Fund, all of which I touched on earlier. We'll also be building upon our existing ESG commitments and continuing to engage in decisions with investment teams and talent to join Magellan's platform. As I stated at the start of today's presentation, we still have a lot more to do, but we are making progress. We are focused on moving forward and now gaining momentum on our strategic priorities, having resolved legacy issues and restored corporate stability. We remain a highly profitable Fund Manager of scale, with a strong balance sheet that provides us with strategic flexibility and optionality. We have no debt, robust operating cash flows, generate attractive dividend and importantly are well positioned for growth. I'd like to thank you for your attention now. And now, I'd like to hand over to Primal, who will take us through the Q&A.

Thank you, Andrew. Before we commence Q&A, I'll quickly provide some instructions on how our attendees can ask questions. So for those of you who've joined us by webinar, please use the Q&A tab at the bottom of your screen to submit your questions. [Operator Instructions]. We'll start now by taking questions from the floor. We ask that you keep it to 2 questions per person to give all attendees a chance to participate. Siddharth?

Siddharth Parameswaran from J.P. Morgan. Thanks, Andrew, particularly for the slide on capital. I was keen to just clarify. There's 2 buckets there, which seem new, the $200 million, which I think is for new initiatives and the $311 million, which you're basically saying is surplus but is a strategic buffer. I mean, from that slide, it seems like there is no extra surplus capital at the moment as you see it for the foreseeable future. So prior comments around buybacks, et cetera, should not be viewed as something, which will be ongoing.

You're right. In terms of the way we're looking at the capital, we believe that whilst at the moment we've got a lot of investments in Fund Investments, those are in some ways a passive investment. They aren't providing support to the growth of those strategies but obviously, aligned with our clients and our belief in the strategies. So, there's a shift in that, which is where you get to the $250 million to actually be truly investing in both, seed and as funds develop, to make sure they maintain a sufficient track record and sufficient size. So that's the first change. To the point at the top, around $311 million, you're right that this has provided that significant strength to the businesses and stability at a time when there are other areas that were holding that back. And that's the area that should we be doing anything that requires inorganic growth, that would be where we would draw upon, should we do that. Now, primary, our aim, as we've mentioned over the last period has been really around small focus boutiques. So, it's hard to sit there and pin exactly how much of that capital will be needed, what we do until we progress some of those conversations. But it's from that period, we do that and therefore, for our view as we sit here today, I would say that the capital structure that we have provides a strong comfort and support for what we're doing and we're not looking to return additional capital at this point. We do have an ongoing share buyback program and we will maintain that and gives us the flexibility and optionality as things change. So it's our intention to continue to ask for the ability to do so. But it's not our intention at the moment to be committing to a significant amount of share buyback today.

Okay. That's quite clear. Just a second question just around some of the pivot on distribution. Just keen to understand, is there likely to be a lot of new investment? Is there a further rejig of your expense base?

Are you talking for the U.S. distribution?

For the U.S. in particular.

We've already got quite a significant cost base we're running over there and infrastructure we put in place. So, there will be some additional expenditure over a 3-year period. Most of that will be backend loaded to the period as we see growth come through. It will draw upon both the seed capital and the strategic capital buffers should we need, because as we mentioned there, one of the changes -- we already run a third-party distribution alongside representing Magellan funds over there. The shift that we intend to do is to have a modest equity stake in the businesses that we invest in. Now, I don't expect -- I think these are -- we're intending to look for very small, independent boutiques that struggle to get strong distribution. And the reason we're going down this path is the ability to attract really world-class, highly entrepreneurial leaders of that business, requires them to have more than the investment capabilities that we have on offer at the moment. So really, the ability for them to be able to bring new investment strategies alongside it and for us to have a stake in that sort of plays to the strength of what we provide. It means we offer more to the boutiques than they're getting elsewhere. So, we're not just supporting them on distribution, but we're actually saying to them, we really believe in your business and we want to be part of that growth and we have the capacity and capital to do that. So, some of the capital that we have set aside will support them in both seed, and it'll be a relatively modest part of this. We're not expecting it to be a large part, but you would expect to see capital deployed to the U.S. as that plan develop over the next 3 years or 4 years.

Going to the back.

Gabriel Radzyminski from Sandon Capital. Congratulations, Andrew. Just to clarify on your response to the previous question. The $311 million strategic/buffer, the $200 million is described as seed capital and growth investments. Are we double counting there?

No. When I say growth investments, I mean investing into -- I look at seed capital sometimes as just as modest amount of capital to get a strategy up and running. Sometimes one of the restrictions of a fund moving to scale is that you need also a set amount of money invested in the strategy to hit certain thresholds. So, some platforms might need you to have $50 million, for example, in the strategy. So, you may only need $2 million to get the fund first launched. After 2 years or 3 years when it's starting to give performance, it may need $50 million, say, to be seen as other clients coming in. So, that would be an investment in funds that we see a growth potential. And as client money comes in, we would then take that out. So...

And so that's additive to the $311 million that you want available for potential acquisitions?

The other one would be investing in the business rather than investing in funds, I think.

So, basically, I need to think about it as potentially $511 million at risk.

Yes.

Another question up in the front here.

My name is Launa Hall, and I'm a Private Investor. I've got 2 questions. The first one is, can you just talk a little bit about the core strategies that were launched a few years ago and what's happening to them, if there's any plans?

Yes. We actually relaunched the core strategies about just under a year ago and they're doing well. We're actually seeing some growth in some of those areas. They're going to take a little while because of the relaunch and repositioning them. We've actually also rebranded them under the Magellan umbrella, the MGF brand rather than Magellan. So, that's part of the package. Relaunch of any programs do take a while, but they do remain integral. I'd hate to say core to our strategy, but they do remain integral to our success. So, you will continue to see us talk about those and develop those.

Haven't seen much yet. Haven't reached poor old retailers. The second one is, it was good to hear about your ESG initiatives. You talked a bit about climate, but you didn't talk about social. And one of the reasons I've never invested in Airlie is because of their gambling investments. So can you just talk about that a little bit, please?

Yes. You're absolutely right that ESG covers a number of fronts. It's not just environmental. It's social and governance. And so we look at across all of those, and I'm happy afterwards as well we've got some of our representatives in our team in the audience today, so we can talk to you a bit more about that. We do look heavily at the social side of what we do. It doesn't mean that in all our portfolios, we'll have an exclusion policy, where it means we will be investing in some areas. And hopefully, we're very clear about that, so you can make the decision as you've made. I'm uncomfortable with those investments, my investments being in that. And so at least you know where we do that. We take our responsibilities in that area, even when we invest in areas that may have challenging sort of social issues that we work hard to bring those to the fore. So, we don't see ourselves as just excluding strategies, but really working with management to make sure they improve and become more responsible in their management of these processes. And the Airlie team, particularly around gambling takes that a very strong part of what they do. So, we'd like to hope that we're seen as responsible stewards in that regard, active stewards, and we tend to really do more and more in that. But I'd love the team can give you more details of what we do around that regard as well, and on the other side on governance as well after this, if you'd like.

Do we have any other questions from the floor, or should we move to online? Okay. We'll now take questions from the webinar. The first question, Andrew and Kirsten, is why do you continue to equity account Barrenjoey and FinClear, when this method arguably does not give a sensible carrying value for these holdings? Does MFG really have an influence on Barrenjoey? And why not just carry them at Directors' valuation with suitable justification?

Well, look, I totally hear that accounting standards can create some very frustrating outcomes. But certainly, with our 36% investment in Barrenjoey, we need to comply with the accounting standards and the accounting standards actually require us to equity account. Andrew is also on the Board, as well of Barrenjoey and we do have other certain rights. So, we certainly -- it would be inappropriate to not equity account. And to include a valuation in the accounts that would potentially conflict might also bring us into a space that we don't want to be full compliant with ASX. So, unfortunately, I hear the frustration, but we are unable to do anything different.

Thanks, Kirsten. The next question is on our Funds Management expenses. Does the FY '25 outlook for stable expenses allow for the new employee equity scheme? Or will this add additional cost or dilution?

Yes. I'll start. You can finish. The construct and the sizing of that scheme is still bit of work in progress at the moment. So it's a bit of premature actually at this stage to comment, but we will certainly have further information available when we next speak to you in August. Andrew, is there anything else?

Yes. I was going to say that we've obviously taken some consideration into that, but we don't want to be -- I think guidance of full-year '25 will give as we finish 2024 and where we'll have much greater understanding of that. But we have taken into consideration, but it's hard to be definitive at this point.

Thank you, both. The next question is what gives you confidence to enter the U.S. multi-boutique market? It is large, but also well served and crowded, plus the core MFG management team is not U.S. based.

Yes. Look, I have spent considerable part of my career in the -- working with U.S. businesses and U.S. distribution teams. The individual, Chuck Thompson, who will be leading the initiatives over there, has really built 2 businesses from scratch in terms of established U.S. presence for non-U.S. firms. One was a U.K.-based firm. One was an Australian-based firm. And so he's got extensive experience in doing so. And as I said earlier, if you just take 10% of the U.S. market, it's still bigger than the entire Australian retail and institutional market. So, you really don't need to be in a huge amount of the market to be incredibly successful. I'd also say that the regulatory environment in the U.S. is actually quite supportive for Fund Management. I'd say it's far more supportive than say, the U.K. and Europe regulatory regime is at the moment. And as well, fee levels, whilst competitive and discussions are robust, they're still actually a lot higher and you'll often see in a number of cases higher than you get here in the Australian marketplace. So when you put all that together, it's quite an attractive market and with some really strong entrepreneurial leadership that we now have, given we've already got existing investments in there, this is a real opportunity to revamp what we've already have, the established presence we've had for 5 years or 6 years. And I don't think -- saying that, the question sort of says that the market was already well serviced. I still think people are looking for a lot of the smaller boutiques over there, really are looking for distribution talent that they -- we won't be going into competing strategies. So, each new boutique we do will sort of own the space it's in. So it'll be complementary to areas we're already investing that we'd be bringing from Magellan. But it also means they won't be competing against other like-minded boutiques in that regard. I think that's an important differentiator.

Thank you, Andrew. The next question is what types of new investment strategies or investment teams are you looking to add?

Yes. It's premature to go into too much detail. We do have some ongoing conversations. I think the earliest and easiest things for us is complementary areas in the area of expertise for us. So, listed equities, whether it covers global equities such as emerging markets or alike, are definitely areas that we would be considering. I actually quite like diversifying into fixed income, I think, where we are in the rate cycle as well, has provided interesting opportunities for clients in the fixed income markets. And we know that whilst they can have lower overall margins, they do also have very long-term support from clients in that regard. So that's an attractive area. I think in time, we also need -- we can't ignore what's going on in the alternative space and the non-public market side of investment world. I'd say that's further down our priority list at the moment just given the amount of areas we've been sort of looking at and fixing as well in the business.

Thank you. The next question is what is the current feedback from your existing institutional clients as well as financial advisors in order to stem the outflows?

Yes. Look I think, obviously, 2 years on from the significant changes the business saw, the institutional clients who remain in the business -- and I'm predominantly talking here on the global equity side, they have stuck with us, they've obviously engaged heavily with us and they're seeing the fruits of that support in terms of we had very strong performance in the recent past. So, that obviously bodes well. One of the things that they've pretty much all commented on is just the concern of hearing the corporate narrative and the noise associated with it, and they themselves are commenting on how that is starting to diminish. They're seeing less of an issue. It's still very early days. So, I don't think we can claim victory on that front. But what I think we can claim is that we're able now to be engaging the right points and we're seeing that in the feedback. It's not dominating the conversations with these clients. It's now only a small component of that, and that's just important we do that. Obviously, from institutional accounts we have, they do look over a longer time period of our performance. They also look at their own needs and we see shifting needs, whether it's from active to passive or reallocation to different strategies in different areas of market. So, we'll always be impacted by that. The trouble we've had up to this point over the last few years has been very hard to grow new institutional business. It's obviously been very easy to lose the institutional business we have. I think now what we've got is a more balanced approach to that. So, I think in the year -- in the next year and probably the year after that, we'll start to have much stronger ability to grow institutional. And let's not forget the infrastructure team and the Airlie team have both, over the last 12 months, won significant institutional money. So, we're talking really here predominantly global team. And then with the clients that we have lost, the clients that are in there now are starting to see better performance. So hopefully, we see a moderation of institutional outflows in that business. And in the coming sort of halves and years ahead, we'll have the chance to also add to that.

Cool. Thank you. For recent institutional inflows, were they sourced from brand new institutional investors? Or were they from existing institutional clients who have previously redeemed or rebalanced?

They were predominantly leveraging existing relationships. And as I've said earlier, they're in the Airlie and the infrastructure team rather than in the global team.

Thanks. So the next question is on costs. So, we've said that FY '25 costs will be broadly in line with FY '24. What about beyond that, FY '26 and beyond? Is there a view to manage expenses in line with the size of the business excluding M&A?

Look, we haven't provided any cost guidance beyond '24. We might take that on Board and discuss that when we speak in August about our FY '25 guidance.

Thank you. So, we've got one more question on the webinar and then we'll go to the phones. The final question is, is there still a target for fund growth to $100 billion?

No.

Brilliant. Thank you. We'll now go to the phones. [Operator Instructions] The first question we will take is from the caller with the phone number ending in 957. [Operator Instructions] Just give them a second. I think we may have lost that question. We'll just give our callers another opportunity to ask any questions, but otherwise we might be moving on. So that actually -- yes, that ends our questions. That's all the questions online and on the phones. Thank you for attending MFG's results presentation today. I look forward to seeing you at our next one in August. Thank you.

Thank you.