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Magellan Financial’s results overshadowed by a cap raise and IPO

Brendon Lau
Initial Public Offering (IPO)

It’s all about timing! The best performing S&P/ASX 200 (Index:^AXJO) (ASX:XJO) listed fund manager, Magellan Financial Group Ltd (ASX: MFG), announced a $275 million capital raising and the launch of a new listed fund along with its full year results this morning.

Magellan is making hay while the sun shines. There’s no better time for the group to sell new shares as the MFG share price has more than doubled over the past year and is trading near a record high.

The group is also trying get its new fund off the ground ahead of any market correction as several experts are warning that the golden run in global share markets could be coming to a sudden end.

The Magellan share price is in a trading halt to facilitate the institutional placement that will help fund the initial public offer (IPO) of the Magellan High Conviction Trust, the development of a new retirement product and to bolster its balance sheet.

The news comes as the international fund manager unveiled a 35% jump in adjusted net profit to $364.2 million, a 28% uplift in average funds under management to $75.8 million and a 24% increase to its final dividend of 111.4 cents per share.

The strong performance in its investments contributed to the gain as the group also collected more fees. Magellan manages around $87 billion on behalf of clients.

IPO overshadows profit results

The robust returns from its investments has prompted the group to launch a high conviction fund that will use Magellan’s eight to 12 best ideas with the aim to replicate its tested investment strategy that returned 16.6% per annum net of fees since inception on 1 July 2013 to 31 July 2019.

Those who subscribe to the IPO will enjoy bonus shares worth either 7.5% or 2.5% of their allotment, depending on whether they come under the priority offer or the wholesale/general public offer.

What’s interesting is that Magellan is by-passing financial advisors and brokers on concerns of “conflicted remuneration”. It seems management would rather reward IPO investors when pay commissions. If this trend catches on, it won’t bode well for investment banks.

Magellan’s chairman and high-profile fund manager Hamish Douglass said he will not only take up his entitlement to the new fund but will subscribe for $20 million units under the wholesale offer.

Details of the Placement

Shareholders won’t get a chance to participate in the latest capital raise though as Magellan sold nearly 5 million new shares to institutional investors at $55.20 a pop.

The offer price is a 7.7% discount to Magellan’s closing price on Monday but if you adjusted for the final dividend payment, the discount comes in at around 6% instead.

“The $275 million placement will strengthen Magellan’s balance sheet and will provide us with significant flexibility to continue to invest in growth opportunities,” said Douglass.

“Every dollar we pay upfront to people investing additional capital into ASX listed funds like the Magellan Global Trust or the Magellan High Conviction Trust has resulted in materially more than two dollars of shareholder value to date. We have only scratched the tip of an iceberg on the potential of our partnership thinking and I would envisage us making more investments in the future.”

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019