40 slides from Sandon Capital Investments's proxy contest presentation, June 2023
Slide 1: Magellan Financial Group Ltd: Regain trust, restore value
Magellan Financial Group Ltd Regain trust, restore value June 2023 1
Slide 2: Important Information
Important Information This presentation has been prepared by Sandon Capital the accuracy or reliability of the information. Sandon results of any revisions that may be made to any Pty Ltd ABN 98 130 853 691 AFSL 331 663 (Sandon Capital is under no obligation to update the information forward-looking
Slide 3: Content
Magellan – Regain trust, restore value Content Company overview Investment thesis 1. Return excess capital to shareholders 2. Prioritise the existing business 3. Review the cost base 4. Provide further Share Purchase Plan (SPP) relief 5. Accelerate Board renewal and improve Board diversity Appendice
Slide 4: Company overview
Magellan – Regain trust, restore value Company overview MFG share price • Magellan Financial Group Ltd (Magellan or MFG) was established in 2006 and became a leading asset 80 management franchise in Australia, especially among 70 retail investors and independent financial advisers • By 2018, Magella
Slide 5: Company overview
Magellan – Regain trust, restore value Company overview • MFG specialises in three classes of listed equity Magellan Funds under Management (FUM) investments: 140.0 ̵ Global Equities 120.0 ̵ Infrastructure Equities ̵ Australian Equities (via Airlie) 100.0 • Global Equities FUM has suffered the large
Slide 6: Company overview
Magellan – Regain trust, restore value Company overview • While perceptions of Magellan might be negative, all 3 years Since Strategy 1 year (p.a.) Inception MFG strategies have comfortably outperformed their benchmarks since inception Global Equities 14.0% 4.2% 10.7% • We consider Magellan remains
Slide 7: Investment thesis
Magellan – Regain trust, restore value Investment thesis • Magellan is deeply undervalued and misunderstood by the market • Magellan has lost the trust of both its shareholders and the investors in its funds. This loss of trust is demonstrated by: ̵ Significant net outflows, especially from the Glob
Slide 8: Investment thesis
Magellan – Regain trust, restore value Investment thesis • Magellan’s current market value is underpinned by a significant amount of non-operating assets ̵ excess cash, fund investments and investments in associates • On a mark-to-market basis, we estimate these assets are worth more than $1.1 billi
Slide 9: Investment thesis
Magellan – Regain trust, restore value Investment thesis • Magellan is cheap, both in absolute terms and relative to its peers Magellan vs Peers Magellan vs Peers (FY24E consensus estimates) (Enterprise Value/FUM and change in FUM) 10.0x 10.0% 9.0x Peer Group RPL 8.0x 8.9 8.0% Average EV/FUM 4.8%, 7
Slide 10: Investment thesis
Magellan – Regain trust, restore value Investment thesis • In our opinion, Magellan’s ambitions to return to $100 billion in FUM within 5 years pose significant risks to Magellan shareholders: – We consider these ambitions may be used to justify maintaining an unsustainable cost base – New product l
Slide 11: Investment thesis
Magellan – Regain trust, restore value Investment thesis • Together, we believe these initiatives: – Optimise Magellan’s lazy balance sheet – Address the concerns of investors in Magellan funds – Improve employee morale, through addressing the ill-conceived SPP – Board renewal will provide for new o
Slide 12: Investment thesis
Magellan – Regain trust, restore value Investment thesis • We calculate that Magellan shares could be worth ($m unless otherwise stated) Low Base High between $11.79 and $15.29 per share Average FUM ($bn) 39.2 44.5 49.3 • This represents 45% - 88% upside to the current Average Management Fee 0.50% 0
Slide 13: 1. Return excess capital to shareholders
Magellan – Regain trust, restore value 1. Return excess capital to shareholders • Funds management businesses are capital light and can be highly cash generative • Magellan holds significant capital in excess of its needs. We estimate the value of these holdings exceeds $1.1bn • This epitomises a bl
Slide 14: 1. Return excess capital to shareholders
Magellan – Regain trust, restore value 1. Return excess capital to shareholders • What we propose is not revolutionary. Magellan has previously articulated exactly the same thesis this is the predicament Magellan faces now 14 Source: MFG FY18 Financial Results Presentation
Slide 15: 1. Return excess capital to shareholders
Magellan – Regain trust, restore value 1. Return excess capital to shareholders • Our estimate of~$300 million for short term capital management comes from: • At least $95 million in cash that is surplus to Magellan’s short-term needs • At least $200 million from redeeming some excess Fund Investmen
Slide 16: 1. Return excess capital to shareholders
Magellan – Regain trust, restore value 1. Return excess capital to shareholders • The scale of Magellan’s excess capital distorts Per share values ($) unless otherwise stated Base High market perceptions of its intrinsic value and significantly dilutes returns from the funds Pre-buy back valuation 1
Slide 17: 1. Return excess capital to shareholders
Magellan – Regain trust, restore value 1. Return excess capital to shareholders • The best investment that Magellan can make today is in its own shares • Whilst we advocate for this short-term capital management now, further capital management opportunities will emerge over time. These include: ̵ Re
Slide 18: 1. Return excess capital to shareholders
Magellan – Regain trust, restore value 1. Return excess capital to shareholders • The current on-market share buyback was announced in March 2022 and extended in April 2023. It seeks to buy back up to 10 million shares. After 15 months, only 4.2 million shares have been bought back • Disappointingly
Slide 19: 2. Prioritise the existing business
Magellan – Regain trust, restore value 2. Prioritise the existing business • Industry research by Boston Consulting Group shows the importance of performance as the key driver of revenue growth 19 Source: Boston Consulting Group, Global Asset Management 2022 – 20th Edition, “From Tailwinds to Turbul
Slide 20: 2. Prioritise the existing business
Magellan – Regain trust, restore value 2. Prioritise the existing business • Magellan’s experience was no different. Investment performance was by far the largest contributor to its historic growth Investment Performance vs Net Flows 120.0 100.0 +$6.3bn $113.9bn +$36.2bn 80.0 $ billions 60.0 40.0 +$
Slide 21: 2. Prioritise the existing business
Magellan – Regain trust, restore value 2. Prioritise the existing business • Once again, what we are proposing is not revolutionary. Magellan has previously acknowledged this Source: MFG FY18 Financial Result Presentation 21
Slide 22: 2. Prioritise the existing business
Magellan – Regain trust, restore value 2. Prioritise the existing business • The Magellan Global Equities portfolios have recently shown a return to a more faithful implementation of the Investment Philosophy that was so clearly articulated in the 2007 Annual Report • Although it will take time, we
Slide 23: 2. Prioritise the existing business
Magellan – Regain trust, restore value 2. Prioritise the existing business • New product initiatives are risky. Global evidence indicates that nearly two-thirds of all new products do not exist after three years.1 In this regard, the Board need look no further than: ̵ Magellan FuturePay, which was l
Slide 24: 3. Review the cost base
Magellan – Regain trust, restore value 3. Review the cost base • Throughout most of its life, Magellan was run with industry-leading cost metrics • In the 10 years to 30 June 2022, the average cost-to-income ratio was an enviable 21.8% • The current strategy will only detract from this enviable reco
Slide 25: 3. Review the cost base
Magellan – Regain trust, restore value 3. Review the cost base • We consider the change from being a founder-led business to an agent-led one has had a significant impact on costs. This effect has been multiplied by the rapid decline in FUM • The current costs guidance of $125-130 million combined w
Slide 26: 3. Review the cost base
Magellan – Regain trust, restore value 3. Review the cost base All figures in $m unless Current Run 2016 • Operational leverage can also work against a company otherwise stated Rate ̵ The current strategy presumes that plans for growth FUM ($bn) 40,495 41,400 will absorb Magellan’s current cost base
Slide 27: 3. Review the cost base
Magellan – Regain trust, restore value 3. Review the cost base • If Magellan truly does pay close attention to its costs and has a cost-conscious culture, we would expect a significant reduction in the operating expenses for the funds management business in the 2024 financial year. • The current cos
Slide 28: 4. Provide further SPP relief
Magellan – Regain trust, restore value 4. Provide further SPP relief • An issue that we consider warrants immediate attention is the effect the Share Purchase Plan (SPP) might be having on employee morale • As a scheme that was crafted when MFG shares were rising rapidly, we consider the SPP was a m
Slide 29: 4. Provide further SPP relief
Magellan – Regain trust, restore value 4. Provide further SPP relief • As at 30 June 2022, the outstanding loan balance was $33.5 million. Based on disclosures in the FY22 Annual Report, we estimate these loans are split between: • Directors - $1.2 million • Group executives - $0.6 million • Former
Slide 30: 5. Accelerate Board renewal and improve Board diversity
Magellan – Regain trust, restore value 5. Accelerate Board renewal and improve Board diversity • Accelerating Board renewal is critical • When we look at the skills the Directors bring to the Magellan Board, we observe two areas where it appears to lack experience: • Funds management C-suite profit
Slide 31: Appendix - Magellan Fund Information
Magellan – Regain trust, restore value Appendices • Appendix 1 - Magellan Fund Information as at 31 May 2023 Fund Name Mgmt. Fee Perf. Fee Benchmark Performance Fee Basis Fund/Unit Class Size Magellan Global Fund (Open Class) (ASX:MGOC) 1.35% 10% MSCI World Net Total Return Index (AUD) Higher of Ben
Slide 32: Appendix - Frontier Fund Information
Magellan – Regain trust, restore value Appendices • Appendix 2 - Frontier Fund Information as at 31 May 2023 Fund Name Mgmt. Fee Perf. Fee Benchmark Performance Fee Basis Fund/Unit Class Size Frontier MFG Global Equity Fund 0.80% MSCI World Index n/a US$83.9m Frontier MFG Global Plus Fund - insto cl
Slide 33: Appendix – Market comparisons
Magellan Financial Group Limited Appendices Appendix 3 – Market comparisons Compelling market pricing for MFG Historic Enterprise Value as % of FUM MFG GQG PTM RPL PNI AEF MFG PTM RPL/VGI GQG AEF Average Median Share price ($) 181.5 2,952.8 574.3 253.8 194.5 112.8 30 Jun 2016 8.6% 11.7% n/a n/a 4.8%
Slide 34: About us
SANDON CAPITAL About us
Slide 35: Company Snapshot / Our Funds
Company Snapshot “Ever since 1934 we have argued in our writings for a more… energetic attitude by Our Funds stockholders toward their management.” BEN GRAHAM, THE INTELLIGENT INVESTOR Sandon Capital Activist Fund (SCAF) SINCE 2008 We have established a Unlisted unit trust for wholesale / Sandon Cap
Slide 36: We seek change to create or enhance value
Why Sandon Capital We seek change to create or enhance value Extensive contacts We build coalitions of like-minded investors Pre-eminent and unique track record of Stakeholders include institutional shareholder activism investors, directors, proxy advisers, We have unrivalled investment bankers, jou
Slide 37: We invest in undervalued companies
Investment Opportunities We invest in undervalued companies As value investors, we look for undervalued assets, where: Human nature creates attractive investment opportunities that require shareholders to liberate or Prices are below their intrinsic value create value. We can encourage positive chan
Slide 38: We actively engage with companies to promote positive changes
Our Approach We actively engage with companies to promote positive changes Identify companies that are Transform a company so its Takes time for our approach Use rigorous analysis to build mispriced and where there value is better appreciated by to bear fruit. Capital we shareholder consensus. are o
Slide 39: We unlock value by taking a proactive approach
Our Activism Technique We unlock value by taking a proactive approach We focus We adapt to each on engaging unique situation, to maximise the employing both a certainty of our range of visible value creation and less visible strategies techniques Discount (Asset Value) Intrinsic Value Bilateral Mult
Slide 40: Gabriel Radzyminski
C O N T A C T Gabriel Radzyminski CIO & Portfolio Manager T 02 8014 1188 M 0408 936 357 E gabriel@sandoncapital.com.au