Magellan Financial Group Limited (MFG) Earnings Call Transcript

Good morning, everyone, and thank you for joining us today for MFG's FY '25 results briefing. My name is Emma Pringle, and I'm Head of Investor Relations and Sustainability at MFG. Before we begin, I'd like to acknowledge the traditional owners of the land on which we meet, the Gadigal people of the Eora Nation and pay my respects to elders past and present. Turning to today's agenda. Presenting first will be our CEO and Managing Director, Sophia Rahmani, who will begin with a review of FY '25 performance and the key achievements that have shaped our year. Dean McGuire, MFG's Chief Financial Officer, will then provide detail on the group's financial results, including a capital management update before Sophia returns to cover our investment management business and strategic partners. After that, Sophia will speak to MFG's strategic priorities for FY '26. We will then open to Q&A from the floor and online. Today's presentation is being recorded, and a replay will be available on our website. I'll now hand over to Sophia.

Thank you, Emma, and welcome, everyone, to MFG's 2025 Full Year Results Briefing. It's a privilege to present my first full year results to you as CEO and to share how we have built on our momentum over the past year, delivering on our strategy of providing diversified sources of revenue for our shareholders. With our refreshed corporate brand announced last week, I'm delighted that we're presenting to you today with updated MFG branding, honoring our history while better positioning ourselves for the future. I'll expand more on this shortly. We finished FY '25 with growth across most of our key metrics. These results show a business that's more diversified and therefore, more resilient and well positioned for the future. I'd like to emphasize a few key points. Operating profit rose 5.4% to $159.7 million, with earnings contribution from our Investment Management business and our strategic partners, underpinned by disciplined cost management. FY '25 operating profit also benefited from an increase in distributions from our fund investments portfolio. In our Investment Management business, assets under management increased 8.2% to $39.6 billion, supported by strong double-digit investment returns across strategies. However, revenue was down 12% year-on-year, a result primarily due to reduction in average management fees across our AUM. Income from our strategic partners more than tripled to $31.1 million, representing 20% of total FY '25 operating profit. We're encouraged by our FY '25 performance and the strong position this creates as we continue executing our strategy. Dean will take you through the financial results in further detail shortly. As you can see from the previous slide, FY '25 is a year of building on stability and strategic renewal. This result is a validation of our strategy to partner with high-quality complementary businesses such as Barrenjoey and Vinva, providing diversification and support to our strong investment management earnings base. We saw improving investment performance for each of the 3 MFG investment teams, delivered absolute returns in excess of 10%, with particularly pleasing improvements in global listed infrastructure in the second half of the year. For our strategic partners, there was a lot of focus on getting the building blocks in place to enable us in our role as distributor for Vinva since announcing our strategic partnership in August with funds launched for the retail market in Australia and focused institutional engagement through our global sales team. We also made significant operational strides. Internally, we strengthened our executive team with experienced leaders who bring deep industry expertise and global perspectives, and we continue to embed a high-performance culture. The engagement of our people is critical to our success, and it was pleasing to see our employee engagement lift by 12 points compared with FY '24. This combination of financial strength, improved investment performance, extended capabilities, a high-quality team and organizational momentum provides a strong platform from which to build a trusted financial group, one that seeks to deliver consistently for clients, adapts to changing markets and pursues long-term value creation for shareholders. Today, MFG is an innovative financial services group, headquartered in Australia and operating across key select markets. We are highly selective and focused, anchored by 2 core pillars: investment management and specialist financial services. Last week, we announced the refresh of our brand to support that for MFG at the group level and introducing Magellan Investment Partners as our outward-facing distribution brand. This brand evolution for MFG provides clarity for clients, partners and shareholders, and Magellan Investment Partners allows us to showcase the investment solutions we deliver to our clients under a distinct identity. A big part of that delivery comes from the institutional grade platform that supports MFG and remains one of our competitive strengths. It's an asset we've been building over the past 18 years, unique in the market, critical to our business and a key foundation for our future growth. We will continue to leverage and invest in it for the benefit of both our clients and shareholders. With MFG's investment teams, Magellan Global Equities, Magellan Global Listed Infrastructure and Airlie and our strategic partners, Vinva, Barrenjoey and FinClear, we have a stable of complementary capabilities and strengthened earnings diversity. I will now hand over to Dean McGuire to walk us through the FY '25 financial results.

Thanks, Sophia, and good morning, everyone. Since commencing as CFO in March, I've focused primarily on an assessment of the financial outlook for the business and a review of the capital management strategy. I'm encouraged by the opportunity set I see for the business and believe we have the right ingredients in place to deliver for our stakeholders. The MFG business is highly cash generative, operating at scale, has a strong balance sheet and a disciplined approach to expense management. The growth in earnings from our strategic partnerships continues to be a driver of returns for the business and adds diversity and synergy to our core investment management capabilities. Our approach to capital management is based around utilizing our capital and distributing our profits in a manner, which generates long-term value for shareholders. I'll talk to our capital management and dividend approach later in the presentation. FY '25 delivered solid financial results with operating profit of $159.7 million, up 5.4% from the prior year. MFG has declared a fully franked final ordinary dividend of $0.259 per share, inclusive of a performance fee dividend, reflecting a payout ratio of 95% of investment management operating profit. MFG has also declared a fully franked special dividend of $0.21 per share, which reflects the increase in our non-investment management earnings alongside our strong capital position. The special dividend brings total dividends to $0.733 per share for the year, being 80% of operating profit. Over the year, MFG has returned over $200 million to shareholders, including FY '25 dividends and the on-market buyback. Our balance sheet position remains strong with over $560 million in liquid capital at 30 June, providing strategic optionality for the group. Turning now to Slide 9, which shows more detail on the financial result for the year. The 5.4% growth in operating profit was driven by strong growth from our strategic partners and an increase in distributions from our fund investments, partially offset by revenue reductions in our Investment Management business. On a per share basis, operating profit is up 7.3%, inclusive of the accretive impact of the buyback throughout the year. Statutory profit is down 31% on the prior period, reflecting lower mark-to-market gains on investments and the one-off impact of the Magellan Global Fund options in the prior year. Moving now to Slide 10, our Investment Management result. Management fees were down 8.6% as a result of a 13% reduction in the average fee rate, partially offset by a 4% increase in average AUM. Base management fees averaged 61 basis points over the year, down 9 basis points on FY '24. The reduction in the level of base management fees is a consequence of compositional changes in our AUM with outflows in higher-margin products, including the impact of redemptions following the closed class conversion in Magellan Global Fund earlier in the period. Our average run rate management fee at 30 June is 58 basis points. Crystallized performance fees were $11.1 million for the year, driven by the strong performance of our infrastructure strategy in the second half. As at 30 June, we now offer 4 funds managed by Vinva. Sub-advisory fees we pay to Vinva as part of our strategic partnership for managing those funds are now separately disclosed in the segment report and totaled $1.6 million for the period. Turning now to Slide 11 on our partnerships and fund investments result. Our strategic partnerships delivered exceptional growth in FY '25 with invested capital doubling and profits tripling, contributing 20% of group operating profit. This result follows the $139 million investment we made in Vinva in August 2024. Our partnerships produced an average return on capital of 10% over the year, up 4% on FY '24, driven by a strong Barrenjoey result, showing a 14% return on invested capital. Barrenjoey paid a $4 million dividend in the first half, and we expect to receive dividends from both Barrenjoey and Vinva over the coming months in relation to their FY '25 profits. Vinva contributed to our annual result for the first time with 11 months of earnings since investment with financial results materially ahead of our base case, reinforcing the strategic fit and earnings potential of the partnership. Our fund investments portfolio is valued at $395 million at 30 June and produced a 15% return over the year. Compared to the prior period, cash distributions received from the investment portfolio grew substantially. This is a result of higher taxable income in the underlying funds, which resulted in higher cash distributions to investors. This line will continue to be volatile as taxable income is driven by a number of factors, most notably realized capital gains on portfolio turnover. Moving to Slide 12. During the second half, we concluded our capital management and dividend policy review. In relation to the dividend policy, for FY '26 onwards, we have broadened the earnings base on which we intend to pay dividends to include the operating profit of the entire group. Our intention is to pay out at least 80% of group operating profit each year. This policy reflects the growth in earnings from our strategic partners and the current level of liquid capital available on the balance sheet. In relation to our capital management position, we view the on-market buyback as the most efficient mechanism to return capital to shareholders where appropriate with 5.9 million shares remaining under our current buyback program. Over FY '24, we returned $74 million of capital via the on-market buyback, and we have the financial capacity to continue to repurchase our shares, subject to factors, including the share price, market conditions and other investment opportunities. We continue to carefully assess other uses of capital via strategic partnership opportunities to grow and diversify the business, consistent with our strategy and with the aim of creating long-term shareholder value. Thank you. I'll now hand back to Sophia.

Thank you, Dean. Turning now to our Investment Management business. Total assets under management grew 8.2% to $39.6 billion over the year with strong absolute performance across all strategies and inflows into Australian equity and systematic equity strategies. In the case of funds managed by our strategic partner, Vinva, we launched 3 systematic equity funds in the first 3 months following the announcement of our partnership and transitioned a fourth fund to MFG in April. These 4 funds amount to the $1.7 billion in global and Australian systematic equities shown on the slide. Net flows have continued to stabilize in our retail book, which accounted for 42% of total AUM at 30 June, and we remain well diversified by client type and client location. While early in the period, AUM has continued to grow into FY '26, as I'll expand on in the following slide. Looking at our AUM trajectory by asset class in more detail. Airlie continues to attract strong support from advisers and institutions. Momentum remains strong through FY '25 with approximately $2 billion in net flows. The Airlie Australian Share Fund was ranked #1 by annual net flows for active Australian equity funds for the first 12 months to March 2025, according to NMG. And Airlie secured the largest mandate win across all MFG strategies during the year, a $900 million allocation from a new institutional client. We are already seeing positive momentum in FY '26, including a $700 million top-up from an existing client in July. In global listed infrastructure, there's been continued focus on investment performance. And pleasingly, we saw a meaningful turnaround in the second half. We've also seen improved client sentiment with recognition of the asset class' resilience and income potential, particularly in more volatile times. The transition of the team's leadership in the second half of FY '25 was well received by clients with no institutional client loss as a result of the changes. There were institutional flows in July with $200 million in top-ups from existing clients and momentum has continued in August with some small mandate wins in the U.S. and Japan. In global equities, we experienced net outflows over the year, including the $1.2 billion impact of redemptions following the Magellan Global Fund Closed Class conversion. This was partly offset by strong investment performance, which continues to meet or exceed our long-term objectives. Our focus in global equities remains on reducing outflows in the Magellan Global Fund and capturing new opportunities in the Magellan Global Opportunities Fund, where performance has been excellent. With systematic equities, we are still at the start of our journey with Vinva. However, the early momentum, client engagement and investment team performance are very encouraging. Net inflows have steadily grown since the fund transition and will continue into FY '26 with Vinva Global Alpha Extension ranked 10th in global equity funds, active and passive by annual net flows for the 12 months to March 2025 according to NMG. With the strongest growth being generated in our lower-margin strategies, Australian equities and systematic equities, this naturally affected our average management fee rate over the year. Investment performance remains a key focus for all of our MFG teams. Our focus remains on long-term performance. And in this respect, each key fund has continued to outperform its benchmark since inception. That said, we know that over shorter time frames, our investment performance has not been where it needs to be. While too early to claim a turnaround, we've been encouraged by the improving investment performance, and we will seek to continue this throughout FY '26. We've made senior hires in each of the Magellan Global Equities and Magellan Global Listed Infrastructure teams who commenced during the year and new hires for Airlie were announced earlier this month. We are committed to resourcing our investment teams to enable them to deliver the results for our clients, and we are delighted with the high caliber of individuals that have joined us, a testament to the strength of the business and our existing team. I've said before that our distribution platform is a real competitive strength for MFG, and it's worth highlighting just how important that is in today's market. With the changes in the environment in which we operate, having great investment teams is only part of the equation. You also need the reach, relationships and capability to bring those strategies to the right clients in the right way. MFG's distribution team, which now operates in the market as Magellan Investment Partners, is deep and experienced with the majority of the team focused on the Australian retail and wholesale markets where we have long-standing adviser, research, consultant, broker and client relationships. Over the past year, we've extended that capability globally in selective ways, focusing our business in North America and more recently, adding a senior hire in the U.K. to cover the U.K. and EMEA. We're also increasing our focus in Asia from our Australian-based team. These markets are a longer-term opportunity for us, a 3- to 5-year play. That said, the combination of our global reach and our proven domestic expertise gives us a real edge. We are already seeing a momentum build given the stability of the business and expanded capability set. Evidence of this are the U.S. flows I mentioned earlier and the early but strong meetings we are having with prospects for Vinva and MFG's global and global infrastructure strategies. We will continue to invest in this platform in pursuing our aim of delivering better outcomes for clients and shareholders. I'll turn now to our strategic partnerships, whose combined earnings grew across the year to make up 20% of operating profit. Barrenjoey has grown from inception to a high-performing specialist financial services firm in just 5 years. In FY '25, Barrenjoey continued to achieve growth across each business line and NPAT rose 73% with revenue up 24%. Fixed income was a standout in Barrenjoey's result, supported by its expanding international presence and in particular, the opening of the Abu Dhabi Global Market Office. MFG received its maiden dividend during the year, and we are pleased to remain a supportive strategic partner to Barrenjoey. Vinva has also had a strong year with investment performance above benchmarks in each strategy they manage and growth across key business metrics. With the strategic partnership now just 1 year old, it's still early days. However, we continue to see this as an outstanding business with plenty of opportunity, particularly given its scalability. There have been some early proof points for our distribution partnership, including the $985 million mandate, which was a result of both Vinva's exceptional reputation and investment returns and our distribution strength. We've only just started on what will be a multiyear build, and we are pleased to report that the strategic partnership is already delivering mutual benefits. Turning to FinClear. Revenue grew 8% this year, and the business continued to strengthen its offering. Two notable developments were the launch of the Multi-currency Cash Hub, allowing clients to hold and transact in multiple currencies and the introduction of FCX, a regulated marketplace for private company equity transactions, the first of its kind in Australia. These initiatives reflect FinClear’'s focus on enhancing market infrastructure and broadening its service set, and we see real potential for these new business lines to contribute to FinClear’'s long-term growth. As discussed in February, when we think about what makes MFG a good strategic partner, it comes down to a few core principles. We're deliberate about where and how we invest, targeting high-quality, scalable businesses with strong leadership, proven capabilities and both strategic and cultural alignment. We focus on fewer, deeper partnerships, providing capital, access to other elements of our institutional grade platform as required, including distribution and importantly, on a long-term basis, always with a clear view of how both parties can benefit from the alignment. It is critical that we also respect the autonomy of the business in which we invest. We preserve their ability to operate independently while finding ways to create mutual benefit. This model means we can support our partners to grow without diluting what makes them successful in the first place. And in doing so, we strengthened our business. FY '25 has been a year of progress strategically and operationally. Our renewed strategy is built around 5 clear priorities. And as we've covered already in this presentation, in FY '25, we made meaningful progress on each of them. One point I'd like to focus on is enabling a high-performance culture. We want an environment that people want to join and stay. And during the year, that's spent adopting performance-focused remuneration structures and having greater alignment with our clients and shareholders through those structures. We're also continuing to invest in resources to support all our people, including access to AI tools to enhance productivity and innovation. We intend to do more on this in FY '26. Our employee engagement score improved significantly, though we know there is more to do and embedding the right culture remains a key priority for me and the executive team. As we look to the coming year, delivering consistently against the same 5 strategic priorities remains the focus for the group. We will leverage our distribution strength to deepen client relationships and capture new opportunities. Maintaining our focus on improving long-term investment performance for our MFG strategies is critical, and this means maintaining discipline in our investment process and supporting our teams. Expanding client solutions, both organically and through our strategic partners will provide a broader range of high-quality relevant strategies to meet evolving client needs. During FY '25, we reviewed and rationalized our global equities product set to meet those evolving needs. And last week, we concluded this review and announced the transition of the high conviction strategy to the Global Opportunities strategy, seeking to broaden client access to this high-performing strategy and reducing fees for the relevant funds, providing what we believe to be a very compelling proposition for new and existing clients. We will continue to pursue selective growth opportunities, staying true to our model of targeted high-quality partnerships. At the heart of everything we do are our people. And with the right culture, leadership and enablement, we're well positioned to continue delivering growth for our shareholders. Before I hand over to Emma, I'd like to personally recognize the exceptional contribution from all of our team to delivering these results. Thank you. I'm excited about what we can achieve together in FY '26 and beyond.

Thank you Sophia and Dean. We will now open the floor to questions. There have been no pre-submitted questions, so we'll turn first to the teleconference line. Operator, Chris, over to you.

[Operator Instructions] And the first question comes from Elizabeth Miliatis with Macquarie.

Just the first one, just around the infrastructure fund. And I recognize that you guys have seen a decent improvement on a relative basis over the last 6 months. But if you could give us an update on how your institutional clients are feeling now that Gerard's officially left just last month. And then also how you're feeling around upcoming fundraising reviews. I think there's a few coming in the next month or so. So just an update there would be great.

Thanks, Liz. I'm happy to answer that question. Look, as I said in the presentation, we've seen no institutional client outflows in our infrastructure business as a result of Gerald's departure. Again, as we said, our institutional clients were probably more prepared for this than the market was given, what we would call the textbook succession plan that was put into place with Gerald and the team. So Ben and Ofer have well stepped into those shoes. Our clients have responded very positively to that. I think the discussions with our researchers is also supportive of that. And as you say, we'll see that hopefully come through in the research reports that will be issued later in this year. So flows have been positive, particularly in the first few weeks of FY '26, which, again, I hope we can attribute to the stability in the team, the really exceptional leadership that Ben and Ofer have shown through this period as well as with people having weakening views on medium-term growth outlook, infrastructure, again, listed infrastructure, particularly becomes a strong asset class, and we're seeing increased client attention to the asset class. So we are optimistic about the future for that team.

And then just around Barrenjoey, I mean, I know that you guys don't provide guidance, but just obviously, we've seen year-on-year improvements for a number of years now. Would you characterize that business as close to maturity or mature? Or do you still see the next 1, 2, 3 years still seeing some pretty strong growth from a profit perspective?

Thank you. Look, Barrenjoey has had a fantastic year. Profits up 70% year-on-year, a strong contribution to our result, as you've seen today. I think given they're 5 years into the journey, I would certainly not expect that they're in a mature state. They're just building into that. They're seeing growth across multiple business lines. And again, we're delighted to continue to work with them and from an MFG perspective, look at more ways to work with them to support their future growth.

And if I could just sneak one more in just around net flows, what have you seen? I think you made a couple of comments through the presentation. But for the first 7 weeks, is it much of the same as what we saw in the final few months of full year '25? Or has there been material changes either positive or negative?

I would say no material changes, just what it feels like, and again, it's obviously very, very early in FY '26 is that we had some good momentum building through FY '25, and we're seeing that continue through FY '26. But again, it's very early in the year. It's, as you know, volatile times in markets. So our team continues from an investment perspective and a distribution perspective to work on returns and relationships with our clients, yes.

[Operator Instructions] At this time, there are no further audio questions, and I would like to turn the conference back over to Emma to address webcast questions.

Thank you, Chris. The first question that we have coming through the webcast relates to our margins. It's been noted that we had a 58 bps base fee exit rate. And the question is, what is the impact to the base fee with the transition to High Conviction Trust and the impact from the 150 bps to 75 bps that we're seeing with the changes there.

Thank you for the question. The exit rate is 58 bps, that's correct. The transition of the fee rate on High Conviction will take effect from September, but the AUM is only about $600 million. So against the book of $40 billion, the impact will be relatively small, we expect.

Our next question online relates to our assets under management. And the question is Magellan's funds under management have been falling for several years. With FY '25 showing an uptick, do you see this as a start of sustained stabilization? Or is it further pressure, including from super fund internalization and geopolitical instability inevitable?

Thanks, Emma. Look, Magellan, as we know, have had some more challenging years, but it's been really pleasing to see growth for the last couple of years in our assets under management. FY '25 did show an uptick. As you can see through the numbers, we've got some of our investment teams in growth. Some of them continue to be in slight outflow, and it was well supported by investment performance overall. So we definitely, I think, from a client perspective, can see the stabilization message coming through. It's really pleasing to actually hear the stabilization message being played back to us by clients. And frankly, some of our institutional clients wanting to spend less time on the corporate side and cut straight through into the investment teams and what our portfolio managers are doing and thinking of markets, which, in my experience, is always a really good sign that clients are wanting to talk to us about what we want to talk about as well. So we are continuing to see that stability come through. There continues to be super fund internalization, as you say, and political instability. But what we do see is so long as we can continue to provide Alpha in a very good strong proposition for our clients, we'll continue to see client opportunities and partnerships where we can with key clients.

Operator, we might just jump back on to the teleconference line. I believe there's been another question come through on the phone lines.

Yes, that is correct. And the next audio question is from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can, please. One is just on the revenue margins, the fee margins on the funds management business. So I just wanted to check whether there had been any actual changes in any of the fees. I know you mentioned that mix was a big contributor, but I just want to make sure or check if there have been any actual fee reductions made.

Thanks for the question. There's been no change in the advertise rates of the products. There has been a slight increase in rebates throughout the year. But predominantly, the reduction in fee rates are compositional as we mentioned, but there is a small move from rebates about 1 basis point.

Is the 1 basis point half-on-half over the year?

Over the year.

Just the second question that I have is just around Vinva. Just keen to just get an understanding of just the profit contribution and how much of it was actually made from base and performance fees? And I suppose just to understand if there's any component of that contribution, which is perhaps not sustainable.

So the profit from Vinva specifically, we don't call out in our materials. What I will say is we are very pleased with the first year of financial performance against our expectations. Vinva's revenue does have a mix of both base and performance fees, which will have some volatility over time. We're not in a position to disclose at this point the specific composition of that. But we do expect Vinva to continue to grow as a business. Its performance has been very strong. And so we're positive on the outlook there.