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Edited Transcript of MFG.AX earnings conference call or presentation 13-Feb-20 12:30am GMT

Half Year 2020 Magellan Financial Group Ltd Earnings Call

, Feb 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Magellan Financial Group Ltd earnings conference call or presentation Thursday, February 13, 2020 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Brett Peter Cairns

Magellan Financial Group Limited - CEO, MD & Executive Director

* Hamish Macquarie Douglass

Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager

* Kirsten Morton

Magellan Financial Group Limited - CFO

* Sarah Thorne

Magellan Financial Group Limited - IR

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Conference Call Participants

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* Brendan Carrig

Macquarie Research - Research Analyst

* James Cordukes

Crédit Suisse AG, Research Division - Research Analyst

* Lee Kadish

BofA Merrill Lynch, Research Division - Research Analyst

* Nicholas McGarrigle

Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst

* Oliver Stevens

Hartleys Research - Industrial Analyst

* Piers Bolger;Infinity Investment Management;Chief Investment Officer

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Presentation

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Sarah Thorne, Magellan Financial Group Limited - IR [1]

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Good morning, everyone. And on behalf of the company, welcome to the Magellan Financial Group interim results conference call for the half year ended 31 December 2019. I'm Sarah Thorne, and I lead Investor Relations at Magellan. The company's results will be presented today by the CEO of Magellan, Dr. Brett Cairns; and the Chief Financial Officer, Ms. Kirsten Morton. Hamish Douglass, Magellan's Chairman and Chief Investment Officer, is also in the room today and will join the Q&A session at the end of the call.

An investor presentation has been lodged with the ASX and is available on Magellan's website. We are not going to [sift] through the presentation on today's call. However, it is available for further information.

For those of you who have joined through the teleconference, the teleconference administrator will advise you at the end of the call how you can ask a question. And for those of you joining us via the webcast, you can submit a question by typing it directly into the webcast portal.

Please note that today's call is being recorded, and we may also have media on the line today. Please note that some of the information you may hear during the -- our discussion today may consist of forward-looking statements regarding Magellan. No assurance is given that the future developments will be in accordance with Magellan's expectations. Actual results could differ materially from those expected by Magellan. Thank you. And I will now hand over to Brett.

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [2]

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Thanks, Sarah, and good morning all and welcome. Before discussing some business highlights, let me briefly touch upon a few financial highlights for the 6 months to the 31st of December. The percentage changes I will refer to are relative to the corresponding 6 months in the previous year.

The key driving number is a 29% increase in average funds under management, or FUM as we like to call it, to $92.8 billion. This, in turn, drove a 27% increase in management fees for the half to just under $286 million. The slightly lower percentage increase in management fees reflects a small reduction in margin from the prior corresponding period due to a change in the mix of our FUM rather than any fee reductions.

Statutory profit after tax was up 13% to $195.7 million for the half. And after adjusting for noncash items and costs relating to strategic initiatives, net profit after tax increased 23% to $216.8 million. We have previously discussed our thinking behind these adjustments. And rather than going over those things again, I would point those interested to the interim report for a full explanation.

When viewed on a per share basis, adjusted net profit rose at a slightly slower pace of 20%, primarily reflecting the additional shares issued as part of the institutional placement we conducted in August last year.

The funds management segment profit after tax increased 24% to $279 million. And without the impact of performance fees, it increased 30% to just over $237 million. This reflects both the increase in the average funds under management and, indeed, scalability, with the funds management cost increasing at a slower pace of 14% relative to revenues.

In our other business segment, principal investments per share stood at $2.09 after allowing for tax on unrealized gains, a 14.5% increase since the 30th of June last year, also noting the increased number of shares on issue during that time. We think each of these measures provides useful information and should be considered. And when viewed overall, we believe the business has had a solid 6 months and remains well positioned.

The directors have declared an interim dividend of $0.929 per share, which represents a 26% increase over the prior corresponding period. The slightly lower increase in dividends relative to the 30% increase in funds management segment profit before tax and performance fees reflects the increased number of shares on issue.

As per our dividend policy, the dividend relating to crystallized performance fees after tax will be declared in August, alongside our final dividend, and therefore, is not included in this interim dividend. Crystallized performance fees before tax at 31st of December 2019 stood at $41.7 million.

Before handing over to our CFO, Kirsten Morton, allow me to make some additional comments regarding the business and strategy. Our business continues to operate satisfactorily, underpinned by strong investment performance delivered over the period by Hamish, Gerald, (inaudible) and indeed the entire investment team. We've spoken often of the importance we place on looking after our clients and achieving the stated objectives to reach our investment strategies; nothing has changed. This is paramount.

With funds under management of $97.5 billion at 31 December, investment performance, both positive and negative, is a key contributor to the changes in our FUM, but net flows now tend to be more incremental in comparison. You can clearly see this in this half with $7.8 billion growth in FUM coming from investment performance and net inflows contributing $3.6 billion.

Notwithstanding the focus we have on our existing clients, we do work on and think about other opportunities. But the hurdle is high as we consider these opportunities, as we do not want to distract from what we are already doing. I noted this time last year that we were at various stages of several new product developments and that it was important that our offerings meet a need and help solve a problem. This takes time to get right, and it also requires patience and focus. We have made solid progress on a range of fronts in this regard, some of which we hope to be able to share more broadly soon.

For example, after much discussion with a range of parties, we expect to make the Airlie Australian Share Fund available on the ASX in the coming weeks. We think this is a meaningful step as it is not a new fund or a new class of units that will be issued on the ASX. Rather, the existing units of the currently unquoted fund will also be quoted for purchase or sale on the ASX. Importantly, this quotation will sit alongside the existing traditional application and redemption processes.

Although this may appear to be a subtle enhancement, it effectively represents the convergence of listed and unlisted open-ended funds into a single entity and single unit, and we believe this brings significant simplifications and other benefits to our clients as well as Magellan. We intend to build on this approach to further simplify our funds over time.

We have made further progress in developing a client solution for retirement income. Whilst there are still some issues to be fully resolved, our confidence is growing that we will be able to launch the Magellan Retirement Fund before the end of the financial year.

Our Sustainable strategies have now passed 3-year -- their 3-year anniversary and are performing well, outpacing benchmarks. We intend to launch the Global Sustainable strategy as a retail fund, utilizing the approach we have developed for Airlie towards the end of the calendar year.

Finally, we continue to assess and are making progress on a number of partnership initiatives, which we believe will strengthen the business over time. In this regard, we were very pleased with the launch of the Magellan High Conviction Trust, MHH as it's known, during the half.

Investment performance since launch, coupled with the loyalty and foundation unit issuance in mid-January this year, resulted -- has resulted in a good investor experience to date. Trading in units have shown excellent liquidity at prices generally at or very closely around the net asset value, and feedback has been positive as investors have utilized MHH to help build and diversify their portfolios.

Before handing over to Kirsten, I would also like to touch upon another important part of our adviser and client engagement, and that is our upcoming investor events, which will commence on the 21st of February. Hamish and team will be visiting 7 cities across Australia and New Zealand discussing global markets and investments.

Much work has gone into these events, with the aim of producing insightful and relevant information for our investors and their advisers. These are large undertakings. Some 12,000 tickets have been purchased in aggregate. And if you are going, we're all looking forward to potentially meeting you at the cocktail reception that follows the presentations.

With that, let me now hand over to Kirsten to run through some of the financials.

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Kirsten Morton, Magellan Financial Group Limited - CFO [3]

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Thank you, Brett. Magellan's had a strong first half with a net profit after tax of $195.7 million, up 13% compared to the prior corresponding half. Included in that net profit are noncash items of amortization expense and unrealized net gains from our Principal Investments portfolio, along with one-off transaction costs related to the Magellan High Conviction Trust IPO and the 6 months of funding costs for the DRP discount in both the Magellan High Conviction Trust and the Magellan Global Trust.

We had previously outlined that we made these adjustments to provide meaningful performance information of our business. So after excluding these items, adjusted net profit after tax for the 6 months to 31st of December '19 rose 23% to $216.8 million.

Diluted earnings per share was $1.082 per share, and adjusted diluted earnings per share was $1.199 per share, which reflects a 20% increase from the prior corresponding period.

As Brett mentioned earlier, the interim dividend for 6 months to 31 December 2019 is $0.929 per share, an increase of 26% on the 2019 interim dividend. This dividend reflects Magellan's dividend policy to pay out 90% to 95% of net profit after tax of the Funds Management business, excluding the crystallized performance fees. The interim dividend is franked at 75%.

As we previously flagged, given our payout ratio and the interplay with our status as an offshore banking unit, dividends are likely to be partially franked. Our effective tax rate for the 6 months to 31 December was 22.3%, and that continues to reflect the benefits of our offshore banking unit license.

Now moving on to the financial results of our core operating business, Funds Management. Funds Management revenue increased 22% to $333.9 million for the 6 months to 31 December '19. And this increase reflects a 27% or $60.1 million increase in management fees; crystallized performance fees before tax of $41.7 million, and as we have also previously flagged, performance fees will fluctuate materially period-to-period; and service fees and advisory fees from our U.S. distribution business, Frontier, along with interest and other revenues, which together have increased modestly by $1.5 million.

Expenses in the half year increased by $6.6 million or 14% to $54.9 million, with the increase primarily resulting from higher employee expenses, up 17% to $36.2 million, and higher fund administration and operational costs, up 14% to $9.1 million. Brett mentioned earlier that some fund administration costs are variable and increase with higher funds under management.

Employee expenses represented [66%] of our overall Funds Management costs for the half year. And approximately half of the remaining expenses are variable in nature, either moving in line with changes in FUM or being a function of the number of investors we have in our funds. The other half of the nonemployee expenses we would describe as fixed in nature such as occupancy costs or IT costs.

The business has developed to -- has been developed to build scalability, which is reflected in the Funds Management cost-to-income ratio, which for the half year was 18.8%, improvement from 20.9% on the previous corresponding half. After including the positive benefit of performance fee revenue, the cost-to-income ratio reduced to 16.4%. We expect that the Funds Management total expenses for the 2020 financial year to be at the top end of the $115 million to $120 million guidance range, which reflects in part expenses related to higher FUM.

Now turning briefly to capital management. The group maintains a strong balance sheet with net tangible assets of $890 million. At 31 December 2019, investment assets, which comprises cash and cash equivalents and financial assets, were $848.9 million. Current receivables were $126.4 million, and cash reserves totaled $432.7 million, from which the group's interim dividend will be paid on the 27th of February 2020.

The group's principal investment portfolio, net of tax, was $380.9 million, and it includes investments in both Magellan's listed and unlisted funds. Consistent with prior periods, we aim to earn satisfactory returns for our shareholders, with the Board setting a pretax return hurdle of 10% per annum over the business cycle for the Principal Investments, which to date has been achieved.

Over the last 1, 3 and 5 years, the pretax returns were 28.3%, 16.9% and 13.8% per annum, respectively. And since inception, from 1 July 2007, excluding the previous investment in MFF Capital Investments, the portfolio returned pre-tax 11.5% per annum.

One question's just popped up in terms of lease accounting, and I just wish to confirm that the group's lease expense, rent expense explicitly, which was previously being included in occupancy cost, has not changed. There has been a change in the accounting standard from the beginning of this financial year. And as a result, you will see that our rent expense is now presented in 2 different lines, being the depreciation expense and also within the finance costs. And we hope we've done a reasonable job in explaining that in Note 1C to the financial statements. With that, I'll now hand back to Sarah.

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Sarah Thorne, Magellan Financial Group Limited - IR [4]

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Great. Thank you, Brett and Kirsten. We'll now go to questions. Can the teleconference administrator please instruct on how people can ask a question?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Brendan Carrig with Macquarie Group.

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Brendan Carrig, Macquarie Research - Research Analyst [2]

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Just a quick one on the balance sheet and the cash. Obviously, there's $230 million of excess cash following the raising relative to where you were at in the -- or in the last half, sorry. And in the period, you've seen costs from the High Conviction Trust as well as a step-up in fee investments.

With the $50 million for retirement income still coming down the pipeline, are you able to give a bit more color around what you might do with the sort of $150 million to $200 million of excess cash sitting there and plans for deployment of that? And how long that might take?

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [3]

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Well, thanks, Brendan. Look, as I said, we are continuing to work on these -- some of these partnership initiatives. I don't think we want to put a time frame on it. We're considering a number of these things. So look, not much has changed there. You're right on some of those numbers around retirement and MHH, et cetera. And we're continuing to work on that. Hamish, I'm not sure whether you want to add anything more on that.

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [4]

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Yes. Brendan, I think Brett's kind of hinted at that we're working on a number of simplifications and partnership opportunities. We deliberately raised our capital to give us the flexibility to do things. All I would say is we have got very good uses for that money, and watch this space.

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Brendan Carrig, Macquarie Research - Research Analyst [5]

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Sure. And maybe just specifically on the expenses. Obviously, the second half run rate looks like it'll pick up to get to that top end. Is there anything specific you wanted to call out in terms of where that cash is being allocated towards? Or is it more just a combination or across most of the P&L line items?

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [6]

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Well, on the expenses, you're right, the second half is a little bit more seasonal this time around. As we said, it was -- it's a function of relative to where we thought, at least in our budget, where the FUM has worked out. So of course, there are expenses that come along with that, which is a good news, frankly, because it is more revenue. The marketing that I alluded to, the investor events, a lot of those costs this time around are going to occur in that second half, and that will push it up towards that top end.

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [7]

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Yes. Yes. The biggest swing factor in the seasonality is actually the marketing expense line because we have a very large road show. Those expenses hit the second half. We also do an investor magazine, where the expenses hit the second half. And the rest is just sort of seasonality, which goes with FUM trends.

The average funds under management, where we're sitting at the moment, look like they're going to be higher in the second half than they were in the first half. And there is, as Kirsten said, an element of our expense base that is variable related to funds under management. So it's that trend line of what the average fund under management's doing 6 months on 6 months, plus the marketing expense, it's pretty second half-weighted.

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [8]

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Yes. Look, it's not going to be materially different to that $120 million, we don't think at this stage. And as I think I've made the point in the report, I think I've said it last year with a 18%, whatever it is, cost-to-income ratio, the expenses aren't driving the profitability, it's the top line.

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Brendan Carrig, Macquarie Research - Research Analyst [9]

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Sure. And last one, on the performance fees, I'm just trying to find the note on specifically the other funds and mandates. It looks like it was sort of a key driver, again, in the half, with (inaudible), and also the new High Conviction Trust. Are you able to just give a bit of an -- obviously, you can't speak to too much detail on that line item, but just a bit of a detail in terms of the strategies that was driving that performance fees within that line of sort of other funds and mandates?

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [10]

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Yes. I can tell you, it's largely related to the Global Equities strategies. The reason why people missed these is our mandates don't necessarily have their strike dates at June and December year-ends. So some of them may have April and September year-ends. So really, the performance you have to look at at that point in time, some of them may have slightly different benchmarks as well in terms of how they get triggered.

But there are different time periods in which the mandates get measured versus where the funds get measured. Many of those mandates were probably getting measured closer to 30th of September rather than 31 December, and that's why people may have missed where the performance fees could have kicked in in that 6-month period.

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [11]

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Yes. It's a tough one because there are a number of ways the performance fees are expressed. Some, as Hamish was saying, are different periods. Some are actually of average performance over a number of years rather than a more spot period. So --.

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Brendan Carrig, Macquarie Research - Research Analyst [12]

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Okay. No. Yes, that was the crux of my question. Obviously, you can't give the exact numbers for us. But no, that makes sense. I understand.

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Operator [13]

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Your next question comes from Lee Kadish with Bank of America.

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Lee Kadish, BofA Merrill Lynch, Research Division - Research Analyst [14]

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With regards to the (inaudible) climate (inaudible) are you able to provide any color as to how you (inaudible) and how long does it take to get on (inaudible)?

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [15]

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The -- well, how to distribute it and the nature of the way that it's going to be, if you like, put is really one of the reasons I was describing Airlie, we see this as both listed and unlisted, if I can put it that way. How long will it take to get to the platform? We will work through our usual processes on that. Look, I don't want to go too far down and sort of raise too much of an expectation. As I've tried to say in this, we are making progress on this, and we're very hopeful we can launch that fund prior to the year-end.

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Lee Kadish, BofA Merrill Lynch, Research Division - Research Analyst [16]

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And one last question. Should we expect institutional flows to sort of start to slow down given capacity -- sort of capacity constraint?

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [17]

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Hand over that one to Hamish.

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [18]

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Yes. It's a hard one. They're not that large in the scheme of things, to start with. We do have a number of accounts that still have open capacity, and they're sort of flow accounts. So the reason it's hard to answer the question -- so the answer is yes, we have a number of accounts that will continue utilizing capacity that has been granted, and that's sort of multi-year.

But then you can get redemptions out of a $70 billion book. You can get redemptions that will kind of offset -- we don't give you the gross and the net numbers there. So it's very hard to predict on a large book exactly what the net flows -- or we could probably predict what the gross flows are going to look like. But it's much harder to predict what that net flow number would be because that's the hierarchy of people making internal decisions across 140 accounts.

They may reallocate it 10% if we performed really well. Sometimes they just decide to rebalance and take some money away from us but actually not take our weighting in their strategy down at all. We don't get that sort of underlying visibility. So the difference between gross and net is incredibly hard to predict in the scale of our business [units]. But on a gross basis, we still have some meaningful account relationships that have multiyear reserved capacity.

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Operator [19]

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(Operator Instructions) Your next question comes from Nicholas McGarrigle with Ord.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [20]

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Just a bit of an open-ended question (inaudible) like to cover as much as you'd like or not. Can you describe the way you see the retirement market in Australia? Maybe some comments around some of the products or offerings, your strategies, generally, that you see? And where you think that there's an opportunity to improve the outcome for (inaudible) investors?

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [21]

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That's a small question, Brett. I'll sit back and listen.

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [22]

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Well, I'll go ahead and (inaudible) because I prefer not to run through all that. Look, I think that the nature of the products and the income that's being demanded, obviously, aren't quite there. And then -- again, I don't want to get too far into this. And so we're -- what we're looking to try and do is to come up with something that rationally helps fill that gap. I'm not going to promise obviously to solve everyone's problems and all that.

A number of these solutions tend to either involve portfolio only-type solutions where there are different variations of how you address the portfolio. Some tend to, obviously, involve more assurance-like solutions, which tend to be, in my view at least, quite expensive and come with other liquidity issues.

We're trying to work within [months], if I can put it that way, to come up with something. As I've said before, we see this as being a listed product and accessible, as someone pointed out, and so on, on a platform. So I'll leave it -- I'd really like to leave it at that. I don't think it's --.

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [23]

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I'll add a few comments and what we're seeing and why we're seeing the opportunity. First of all, it's an annuity market, an annuity is effectively providing people a guaranteed income. It's often very capital intensive and very expensive, particularly about the residual value you can get out of that. So there's often very little to pass on to future generations. There, the people are wanting absolute income security.

For those people who have limited amounts of financial resources, that can be a very important product for them. So we're in no way being critical of the annuity market, but we actually regard the annuity market being a very small subset of the total retirement market. Where the larger part of retirement market has been -- these people really sort of just shifting their asset allocation and moving out of equities and much more into sort of fixed income and deposit and hybrid-style instruments in their portfolios, often in an incredibly simplistic way. And in that part, which is a larger part of the market, there's been very little innovation there.

Now in this world where we're headed to sort of super low interest rates, it makes that large part of the market very hard to solve ultimate desires to get a decent income out of your retirement assets and keep your assets for passing on to the next generation there. It's become a very difficult dilemma, and the dilemma is people may be increasing their risk profile from a credit point of view to try and maintain their income.

So our challenge has been -- is can you effectively take more equity risk into retirement? I don't want to go into too much detail, but that is an area where we think, ultimately, is how can you take equity risk into retirement without exposing yourself to enormous, what is known as sequencing risk, that if markets go down, you could actually have a massive erosion of your capital. And if you're keeping wanting to take a fixed amount of income out, you're actually drawing down your capital to satisfy your income retirement needs.

So how do you solve it? It's kind of the Holy Grail in terms of how do you actually take a decent amount of equity into retirement without exposing yourself to excess sequencing risk. I'm not going to tell you how we have solved that problem, but it's kind of a Holy Grail issue that's going on. And with this very low interest rate environment, it's becoming even a bigger issue for people.

So what -- it's -- if it was an easy problem to solve, lots of people would have already solved it. The definition of what I've said is, a lot of people involved in this space understand this problem very well. It just hasn't -- there hasn't been much innovation trying to solve that actual issue.

So you could think of a product that you can take more equity style-risk into retirement without exposing yourself to excess sequencing risk to maintain your income that you want. And then hopefully, at the end of the period, then leave a substantial legacy to your beneficiaries as well.

So that's what we're trying to solve for. We think it's a massive unmet retirement need. We all understand the demographics and the baby boomers, what's happening to people bringing more and more assets into their retirement pot. It's a very large pot to go around. And hopefully, what we're doing is going to bring some innovation and new thought to the table. Beyond that, I don't think we should say more. Brett, you probably said it. I shouldn't have said what I said. So --.

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [24]

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Yes. Look, I think for me, you've summed up the demand side of it -- the problem, of course, and you've hit the nail on the head in my opinion -- is that you can do so much within the portfolio itself to try and help solve some of this problem. And there needs to be something else that needs to come to the aid to help mitigate that sequencing risk, which is really at the heart of this issue.

We talked a little bit about this, I think, at the AGM on this. The issue that I think that's hard to grapple is what is the balance between all these? What are really conflicting desires in amongst all of this. So really I think Hamish is absolutely right. The demographics in this, I think I saw a stat the other day there's like $70-million-odd moving out of accumulation into postretirement every year, and that's increasing, obviously, with the demographic.

So it is a very large problem exacerbated, as you say, Hamish, with where fixed income -- traditional fixed income securities currently are. So look, we do -- we're trying to balance up a lot of conflicting things here, including liquidity. Some have rightly asked how we can access those products.

As you rightly point out, the growth side of equities go into that but also being able to draw what is a -- essentially a fixed dollar amount coming out of that risky pool of assets. And that inherently is gives you the problem of sequencing risk, and that's what we're trying to develop to help mitigate that. So having said all that, which we weren't going to say, we'll try and talk about more fully into -- before the end of June.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [25]

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No. I appreciate the elaborate response. It was good detail. I think that we haven't necessarily heard that in the past. So that's really nice. The probably one follow-on question from that is, do you feel like you've got the portfolio management capabilities across the spectrum of asset classes to deliver the outcome? Or there's -- this is part of the partnership comment, that you require some of those to have a fully rounded-out offering in the retirement fund?

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [26]

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Yes. Let me just repeat the question. I'll paraphrase it because I understand those on the webcast can't hear it. It was, do we have the portfolio, I guess, tools and capability in-house to deal with this or do we have to partner with someone, hence some of the partnership things we talked about? [That's just now we've got to deal] with what we've got. And so we can get into the -- and we're sort of veering off now the details of the product. But we see the portfolio being built around what we currently do.

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [27]

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Our internal equity capabilities are quite unique for trying to solve this problem. Let's not take all of that. But the combinations of what we've got internally from an equity perspective are very, very nice in terms of some of the volatility in our risks that we need to deal with.

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [28]

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Yes. I mean, look, the sequencing risk itself, if you think about it, is a function of volatility. And Hamish's and the firm's approach to thinking about downside, capture of downside risk in that, is very important in helping solve that. So we think we've got the building blocks internally to leverage that.

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Operator [29]

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Your next question comes from Oliver Stevens with Hartleys.

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Oliver Stevens, Hartleys Research - Industrial Analyst [30]

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Just I noticed you've [slated] a couple of Frontier [aged] products to about USD 26 million. Just wondering if you could provide some background and a few thoughts and expectations with it.

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [31]

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Yes. Maybe I'll just repeat it so that -- we did -- and you're right, we did slate a couple of Frontier funds, what are our expectations on that. They're looking very small, one is the sustainables fund and the mutual fund in the States for us, and another is a very small emerging markets fund that we've partnered with Frontier to cede. And we're --.

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [32]

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With an external manager.

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [33]

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With an external manager. And we just -- we have an interest in that.

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Oliver Stevens, Hartleys Research - Industrial Analyst [34]

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And then one very quick one. I noticed there was a $2.5 million loan to a third party. What's the background there?

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [35]

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Yes. So the question was there was a $2.5 million loan to a third party. It was just that -- entry into new project [ceding].

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Operator [36]

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Your next question comes from James Cordukes with Credit Suisse.

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James Cordukes, Crédit Suisse AG, Research Division - Research Analyst [37]

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Just a question on the sustainable strategies. They've got their 3-year track record now. Can you just provide a bit of feedback on how those strategies are being received in the institutional market?

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Brett Peter Cairns, Magellan Financial Group Limited - CEO, MD & Executive Director [38]

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Yes. Look, I'll hand this to Hamish. But I'll sort of travel it around a little bit as well. There's a lot of interest, obviously, in ESG and the Sustainable strategies, generally, I would argue, and I think that's increasing. How institutions are looking at it varies quite a lot, I think depending on what they -- who they are and what their sort of underlying business, if you like, is.

We are seeing a lot of discussions. Indeed, we had some people through last week, I think, on doing some due diligence on the sustainable strategy. That's increasing in my view. Hamish, you have much closer discussions with a lot of the institutional investors. And I mean --.

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [39]

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Yes. I think the ball is really starting to shift on the whole sort of sustainable and ESG discussion. Before, it was probably a very small subset of institutional clients here. I think it's becoming much broader in terms of its acknowledgment and its importance for stakeholders and in terms of risk management, I hear.

But for some large institutional investors, it's still very early days for them, but it's certainly getting on their radar. And that is something that we were predicting, particularly when we started with carbon and expanded it to a broader sustainable side of that. There's a lot of pressure from regulators and other things, particularly on the carbon side of the sustainability topic, and we're very heavily sort of branded there.

When people go through what we're doing in carbon on sustainability, people are impressed and very interested. Remember, we've only just come up a 3 years' track record. As Dom moves around the world, he has a very full calendar of meetings whenever he goes over. So there's a lot of interest.

But what I would say is from your first meeting to getting the money, and really, once you get your 3-year track record is when you're really starting to get meetings, and when he's going overseas, the team he has booked up, people are seeing that. We've had a fairly large group out doing detailed due diligence. In the last few weeks, we'll see where that heads.

But I think it's a space where the investor interest is growing, and some of it's still fairly early days for those institutions. The performance has been strong. The 3-year track record is up. And Dom has a full calendar every time he goes overseas, speaking to institutions with people very interested in our approach and actually interested in the whole sustainability side within their organizations.

And some of those organizations are building their own internal capability at the moment on sustainability and understanding what they want to do in the space. So it's still early days. But I think us developing this over the last 4 years or so, I think has been the right thing to have done. I think we're in a nice -- a very nice spot in terms of where we are, particularly on the lower carbon within our sustainability here.

And from 3 years, people often take multiple meetings and then they have to send people out to Australia. And it takes them time to convert that interest into account relationships. But I'm pretty pleased with how it's developing at this point.

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Operator [40]

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Your next question comes from Piers Bolger with Infinity Investment Management.

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Piers Bolger;Infinity Investment Management;Chief Investment Officer, [41]

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Maybe just a quick one from -- in terms of the split between (inaudible) and retail. So the main number (inaudible) is this 70-30. So just to get your thoughts on how do you see that evolving just given the fact that certainly, retail markets here locally, you've got an enormous uptick pcp from the first half of last year. And do you think it's now getting to a critical mass where growth in retail [in terms of] percentage or if dollar terms might have flattened out?

And then secondly, around that, on the institutional side, where are you seeing that evolve both domestically and globally or just in terms of the positioning of the institutional offer on a global basis?

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [42]

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Yes, I'm very happy to. To repeat the question, is our retail business in the last 6 months had a very strong growth at pcp. Are we hitting a maturity point in our retail business? And are we expecting the sort of flows to taper off there and then how are we looking at our institutional business? That's a very, very broad question.

But first of all, in understanding our retail business, in terms of our global equities retail business, it's really split into 2 markets. One is the adviser market. We are very heavily penetrated in the advice industry in terms of our representation in [model] portfolios across the spectrum.

But if you looked at our infrastructure business, we are still partway-through penetrated mainly because not all advisers are currently using infrastructure as an asset class as part of their overall portfolio construction. But as they start to adopt infrastructure, we tend to get a very high representation of those model portfolios. So that is something that's still developing, and we see a lot of interest in that space.

The other side of our business is really the more broker and self-directed side of the business, which is really our listed product that we've launched over the last 4 years or so. I would still say the opportunities for people to continue to increase their global equity exposure and actually their infrastructure exposure as well in seeking income in that -- in the infrastructure space, we still see enormous opportunity in that sort of listed, more self-directed space. I think we now have 80,000 direct unitholders across our sort of listed investment.

To us, a part of why we're doing this much larger, sort of investor road show with 12,000 people is increasing the whole awareness amongst the community in what we're doing. We're very happy with the progression there. We see very nice flows and increasing unitholder numbers there. Brett has often said, we've got 80,000 direct unitholders. He'll be happy when we're at 0.5 million. And I don't think that's unrealistic if you take a medium-term view.

So I think there's a lot of penetration to go in that space. But it is very, very hard to scale because we're having to communicate with individual people. And that is a very, very difficult thing for the funds management industry to do. I don't think anyone has really scaled in this space at all. I think what we've done in the listed space has been second to none so far.

And all I would say, in terms of that, Brett has referred to simplification, a single unit, trying to converge unlisted worlds and listed worlds together. This has been a whole strategy we have been working on for multiple years, and all I would say is watch this space. There is still more to be done there, we're obviously trying a completely new road show format this year. We've gone from 3,000 people to 12,000 people. And that side of the business, I think, there's a lot of upside.

But the 1 area that probably doesn't have a lot of incremental upside is the Global Equities advice space. That's fairly mature. I don't think that -- in the first 6 months of this year, we did the Magellan High Conviction Trust, $862 million. We're not going to do an $862 million closed-end trust every single 6 months. So the high uplift was somewhat affected by that. But we will be doing more partnership things in the future.

And then, of course, we've got retirement product. Brett has actually slipped out in his speech that we will be launching the sustainable, the Magellan sustainable fund later this year. And you can probably think we're working on a few other things that I'm not going to go into.

In terms of the institutional business, we are closed for new institutional accounts in the core Global Equities space. But we still have a number of old and new relationships with reserve capacity. We still have capacity existing in our infrastructure strategy. And then, of course, we've got our Sustainable strategies that are launched in that space, who've just gone on their 3-year track records.

But if you look at our business, the fundamentally largest part of fund movements by far and away at the moment is change in investment performance, and we are giving you the breakdown there. Our long-term objectives for the strategy is if you blend them all together, we get our objectives with -- we're aiming at 8% per annum sort of net of fees.

So any new funds flow on top of that is increment above that 8% per annum. And we think we've got a whole series of things that are incremental in terms of new (inaudible). But predicting what happens in a 6-monthly period is actually incredibly difficult to do.

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Operator [43]

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There are no further phone questions at this time. I'll now hand back to Ms. Sarah Thorne.

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Sarah Thorne, Magellan Financial Group Limited - IR [44]

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Thank you. So before we final up, we will just ask 1 question from the webinar, which is, "January looks like a pretty good month for MFG. Can you comment on outperformance this half so far?"

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Hamish Macquarie Douglass, Magellan Financial Group Limited - Chairman, CIO & Lead Portfolio Manager [45]

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Our performance this half? I don't actually have it at the middle of the month. But January, we were over 200 basis points above the index for January net of fees in the global equity strategy, which is a nice material one to performance fees. But things can move around a lot.

So performance fees for the global -- for the main global fund crystallizes on the 30th of June. It actually matters what happens in the unit price from the 1st of January to 30th of June. Whatever happens in between is quite irrelevant. But if you measured -- if you looked at today, it would be material performance fees across the business sitting here today, but they can move very materially with movements in investment performance.

So -- and we've seen very substantial shifts within a month occur on sort of accrued performance fees. That's -- if that's why you're asking the question. But we are meaningfully ahead of benchmarks at the moment this far into the year.

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Sarah Thorne, Magellan Financial Group Limited - IR [46]

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Great. Well, thank you, Hamish, Brett and Kirsten and for everyone joining us today. We look forward to seeing you again for our full year results in August. Thanks very much.