Steady as she goes despite exit of Magellan CEO

Lewis Jackson  |   15th Dec 2021  |   5 min read

Dr Brett Cairn’s sudden resignation from Magellan Financial Group is expected to have a limited impact on the investment manager’s earnings outlook, says Morningstar.

With founder Hamish Douglass staying on, the change in chief executive is likely to mean more of the same at narrow-moat Magellan (ASX: MFG), says Morningstar equity analyst Shaun Ler, maintaining his fair value of $50.50.

“In the grand scheme of things, this is small. We don’t think his departure will have any bearing on the company’s earnings outlook,” Ler says.

“Key person Hamish Douglass remains chairman, chief investment officer and lead portfolio manager.

“The main takeaway for investors is that Dr Cairns leaves Magellan with a product suite with strong growth prospects.”

Magellan chief executive Dr Brett Cairns resigned from the $116 billion fund manager on Tuesday citing “personal reasons”. He had been in the role since 2019. Cairns will be replaced by chief financial officer Kirsten Morton on an interim basis, who has been on the senior management team since 2013. The announcement comes just weeks after Cairns fronted Magellan’s annual general meeting in October.

Founder Hamish Douglass will remain in his role as Magellan Executive Chairman and portfolio manager of the flagship Global fund.

The pair had distinct responsibilities when it came to running Magellan. Douglass’ pay rises and falls with investment performance while Cairn’s $2 million plus pay packet last financial year was tied to the rollout of new products, people management, compliance and keeping costs down.

Markets reacted negatively to the resignation announcement, sending Magellan shares down more than 6% on Tuesday to close at $29.10. Magellan is trading at a 42% discount to fair value and is a Morningstar best idea.

Cairns’ resignation comes as a string of investment missteps triggered fund outflows and a share price rout at the fund manager. Shares are down 48% since July as the manager grapples with souring investments in Chinese technology companies Alibaba and Tencent.

The fund also paid a price for a cautious approach during the pandemic. Douglass had more than 10% of Magellan Global in cash in September 2020 as global markets rebounded from covid. He defended the approach at October’s annual general meeting, calling it a “prudent” approach to capping risk.

Magellan Global (ASX: MGOC) lags the MSCI World ex-Australia index on a 1, 3 and 5-year basis. The fund returned 12% over the last twelve months, underperforming the index by 12.3%. Investors responded by pulling roughly $1.8 billion out of the fund manager in the July and September quarters of this year.

Funds under management remain just north of $116 billion, as of 30 November.

Dr Cairns joined Magellan in 2007 as a non-executive director, the same year it was founded by Hamish Douglass and Chris Mackay. He was appointed executive chairman in 2015.

In recent years, he led efforts to launch new products including Magellan FuturePay and exchange-traded funds as the fund manager seeks to widen its appeal to retirees and low-cost investors. Ler expects new products to help the fund manager reverse negative fund flows by FY2025.

“The one thing to watch is the pipeline of product development,” he says.

“Brett played a leading role in the development of new Magellan products like FuturePay and the exchange traded product series.”

At the depressed price, Ler believes Magellan represents an opportunity for investors.

“Magellan is currently priced like a sinking ship, with the market factoring in annual returns less than passive ETFs and significant outflows (more than double Platinum Asset Management’s cumulative outflows from fiscal 2016-21) over the next five years,” he says.

“We believe these assumptions are overly pessimistic and ignore Magellan’s investing calibre, growing distribution initiatives and enduring intangible brand.”

Magellan is also diversifying beyond its traditional business of funds management. In September, it took a 40% stake in start-up investment bank Barrenjoey. Douglass claimed the company turned a profit in the first quarter of this financial year. Magellan also owns a 12% stake in Mexican fast-food chain Guzman y Gomez.

Unlike Douglass and Mackay, Cairn’s is not listed as a substantial shareholder in Magellan Financial Group in the latest annual report. A recent ASX release shows he owns directly around 1.1 million ordinary shares, amounting to less than 1% of the company. He currently retains his seat on the board of Barrenjoey.

Founders Hamish Douglass and Chris Mackay own roughly a fifth of all shares between them. Ler says the departure of either man from the firm would be cause for concern.

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