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Magellan powers on as its young competitors struggle

6 Feb 2013 THE AGE - STEWART OLDFIELD - STEWART OLDFIELD IS A RESEARCH ANALYST AT INVESTORFIRST SECURITIES.



JAMES Packer's latest investment in listed financials, Magellan Financial Group, has so far added about $75 million to his net worth. Shares in Magellan have risen 350 per cent over the past year, giving the company a market capitalisation of just over $1 billion.

This puts the stock on an eye-watering forward P/E of more than 40 times.

The billion-dollar market capitalisation of Magellan also means that the two founders of the business, Chris Mackay and Hamish Douglass, are sitting on shareholdings worth about $122 million and $71 million respectively. This does not include the value of options and B-class shares worth tens of millions more.

Packer used to talk about Challenger Financial as his listed financial services play but he sold out his $400 million stake in 2009.

The rise and rise of Magellan comes as dozens of other funds management businesses, which were started around the same time as Magellan, are struggling.

By contrast, Magellan enjoyed net inflows of $659 million in December alone as it has entrenched its status as a global equities and listed infrastructure investor with the local financial planning community.

At the end of December Magellan had $6.4 billion in funds under management, up from $5.7 billion at the end of November.

The question is how many shareholder "insiders" will look to cash in any discretionary-held holdings when a trading window opens in the wake of a shareholders' meeting on Tuesday and the release of the company's first half results in a couple of weeks. The share price has more than doubled since the window was last opened.

The share prices of other listed fund managers have been savaged in the past when insiders have shown a willingness to sell.

By its own description Magellan's investment strategy is straightforward. It says it has an advantage over other investment managers in that it focuses on "quality" companies and has a time horizon of three to five years rather than the next quarter. It likes to invest in companies with long-term sustainable competitive advantages.

The Magellan Global Fund has 24 investments that are typically high return-on-equity, well known franchises trading on double-digit forward P/E multiples. It is backing a few concurrent investment themes: emerging markets consumption growth, an eventual rebound in US interest rates, a recovery in the US housing market, a cashless society and the internet/e-commerce sector.

Big holdings include Google, eBay, McDonald's, Visa and Wal-Mart.

Magellan's marketing efforts are supreme. During an August roadshow it gave briefings to about 1100 financial planners and brokers. Over the past three years its Global Fund has generated a 10 per cent per annum return, net of fees.

As portfolio manager for this fund, Douglass has developed something of a cult-like following in the financial planning community.

As Magellan has noted in past disclosures, barriers to entry to its line of business are "extremely low" while the barriers to sustained success are "extremely high".

The company has just 52 staff, including 19 investment staff and a nine-strong business development team. The company listed on December 19, 2006 through a recapitalisation of Pengana Hedge Funds.

The two founders believed there was a compelling case for more Australasian investors to increase the geographic diversity of their investment assets.

At the time there were only five global asset managers in Australia that were catering to individual investors.

Last year the company generated $22 million of revenue from ordinary management and administration fees while an additional $9 million came from performance fees.

The company has already flagged a further $5.8 million in performance fees this financial year as it looks to almost double profits on last year.

Magellan's mandate entitles it to 10 per cent of its funds' outperformance above a relevant benchmark index as long as it is also generating an absolute return above the 10-year government bond index and is above a client's entry price.

Magellan manages three global investment funds: the Magellan Global Fund, Magellan Infrastructure Fund and the ASX-listed Magellan Flagship Fund.