Magellan duo move a little further apart

Over the past decade, Chris Mackay and Hamish Douglass have proved investment bankers can make great investors.

But as Magellan Financial Group, the $4.8 billion company the pair co-founded, prepares to raise funds for a multibillion-dollar listed global investment trust, it has become clear how separately the co-founders now choose to work.

Investors in Mr Mackay’s MFF Capital Investments – originally called the Magellan Flagship Fund – are not being offered the loyalty bonus available to investors in Magellan funds, despite it being the first fund the company raised back in 2006.

The decision to exclude MFF from the bonus offer is being seen by some in the sharemarket as the most public step yet in the separation of roles in the once-close partnership between Mr Douglass and Mr Mackay, which began when Mr Mackay stepped down as MFG’s executive chairman in 2013.

But Mr Mackay, who owns 10.8 per cent of Magellan, denies there is any fracturing of the relationship. Mr Douglass has has a 12.7 per cent stake, worth $600 million, partly through his investment vehicle Midas Touch.

“There is an extremely strong relationship where we work very well together,” Mr Mackay told The Australian Financial Review, denying there had been a “cooling” in his partnership or friendship with Mr Douglass.

“We described it in the MFF annual report as a very strong relationship with Magellan – and Hamish.

“Hamish is the driving force behind Magellan. Both companies have done extremely well. According to the brokers, MFF has been the best performing LIC and Magellan has clearly performed extremely well. The relationship works.”

The rebranded MFF is run and managed by Mr Mackay, who owns 11.7 per cent of the listed investment company and pays Magellan Asset Management for services and research.

Sources said the decision to exclude MFF investors was a logistical decision. In essence, it was too complicated to extend the offer to MFF investors as it would require approval from their separate board and complicate the process.

Another reason, one source said, was that MFF investors had the opportunity to invest in Magellan at 97.5¢ and there is likely to be a significant cross-holding, though it is unclear how many who chose to do so have retained their holding.

Whatever the reason, it’s the latest, and most final reminder yet, of how effectively Mr Mackay and Mr Douglass have separated Mr Mackay’s investment vehicle from the rest of the investment group.

In 2006, Mr Mackay, who had run UBS Australia, and Mr Douglass, a Deutsche Bank Australia co-head of investment banking, left the industry to set up a global funds management house, backed into Pengana and reborn as Magellan Financial Group.

The unlikely pair – though they did work together at Schroders and on multiple deals after that – saw a gap in the market: Kerr Nielsen’s Platinum Asset Management dominated global equities from Australia and no one was challenging it.

The market was sceptical. How could two investment bankers, however successful, possibly beat funds managers at their own game?

More than 10 years on, they’ve proved the sceptics wrong. Magellan’s funds under management swelled to nearly $50 billion by July this year from when the firm was established in 2006 with just $378 million in its first listed investment company. Magellan is in the S&P/ASX 200 and is in the process of raising a relatively untested listed investment trust that is expected to raise more than $1 billion.

And now, the market is watching to see what happens with Magellan’s next big leap: how much Magellan can raise with its new global trust in a structure that will locks the funds under management permanently into the vehicle because of its closed capital structure. A successful listing may position the Magellan headstock for an eventual sale, say industry watchers.

Others question when Mr Mackay, who runs his own listed fund and has no obligation to continue to hold Magellan other than backing it as an investment, will choose as the moment to sell.

While Mr Mackay says the relationship works, the signs of Mr Mackay and Mr Douglass’ decision to separate businesses and responsibilities have been there in plain view.

Back in 2007 in an interview with the Financial Times, Mr Mackay praised Mr Douglass, saying their relationship represents a “combination of skills and trust”.

“We don’t always agree, but there are already hundreds of examples where I come up with a suggestion and Hamish has very materially improved on it,” he says.

“He is the best person I’ve seen to take a thought process, turn it upside down, invert the analysis and then determine whether we are doing the right thing in investing in a company that might be sustainable for the next 15 years and can continue to grow.”

But by September 2013, Mr Mackay stepped down as executive chairman, though he was appointed as “special adviser” to the group’s board and CEO.

The MFF annual report discloses Mr Mackay is paid consultancy fees of $250,000 each year under an indefinite term agreement that can be terminated by Magellan Asset Management or Mr Mackay on three months’ notice.

As Mr Mackay has carved out a reputation as an astute investor, though his fund trades at a discount to its net asset value,  Mr Douglass has pursued aggressive growth of the Magellan stable and the pair have continued to separate their interests.

This year, Magellan Flagship Investment, the listed investment fund run by Mr Mackay, was quietly rebadged as MFF Capital Investments, removing the Magellan name. MFF Capital Investments remains on the Magellan website.

MFF also renegotiated its research and services fees with Magellan Asset Management. It now pays $1 million each quarter to MAM, with performance fees of $1 million a year should MFF’s total shareholder return exceed 10 per cent per annum compounded annually.

For its upcoming mega raising, Magellan will cover all costs in addition to offering existing investors a loyalty reward worth 6.26 per cent. That is, any investor who has invested in Magellan or its retail strategies – excluding Mr Douglass and MFF unitholders – and participates in the priority offer will get a bonus 6.25 per cent of the value of their subscription.

So an investor with just $10 in Magellan product can still qualify for a $30,000 investment (ultimately $31,875 including bonus units) and an investor with $1 million in Magellan product can qualify for a $100,000 investment (and receive $106,250). Because the structure is a closed-end one, Magellan is effectively paying to lock in funds under management.

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