Shades of red: Magellan bleeds funds, shares fall further

But Magellan’s problems are in a league of their own. It is having to manage through these economic uncertainties, which are not of its own making, at the same time as navigating a series of negative shocks resulting from its own goals.

Magellan’s largest misjudgment is historical. It allowed its company’s brand to be inextricably caught up with the brand of its co-founder Hamish Douglass.

This went beyond key man risk – it was a one-man show. Magellan’s other mistake was its failure to explain the reasons for the sudden departure of its chief executive Brett Cairns in December.

When Douglass took a medical leave of absence last month the ramifications were enormous. There were some investors who were forced to remove Magellan as a manager – triggered by mandates that required Douglass to remain in his role as chief investment officer.

Financial advisers that funnel retail clients into funds are heavily influenced by ratings agencies such as Morningstar and Lonsec which have downgraded Magellan.

Magellan – without Douglass – has moved into damage control mode. Mackay and his management team have flown to the US and Europe to speak with wealth managers to secure their mandates and presumably to reassure them that the new team represents safe hands.

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Mackay will be hoping some clients will return to Magellan when Douglass does. That said, the company has given no indication of when that might be and in what capacity.

But the bigger issue for Mackay is that he needs to sell Magellan’s returns on the money it invests. It is this underperformance that is Mackay’s biggest problem.

The flagship Magellan Global Fund has posted a 7.1 per cent negative return for the month of February – which amounted to underperforming its benchmark by 1.7 per cent for the month.

It has underperformed by 0.8 per cent over three months, 3.4 per cent over six months and 8.3 per cent over the year.

Sure, the investment community greeted the appointment of Mackay to fill Douglass’ position as a positive given he was well known and well regarded in financial circles, but he will need to demonstrate an investment strategy that will reverse Magellan’s underperformance.

His role as a circuit breaker to arrest the slide in funds under management and Magellan’s share price cannot get traction if it is not accompanied by an improvement in returns.

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