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Magellan offers ‘free’ units & rules out retirement income product to disrupt Challenger Ltd

Magellan Financial Group Ltd (ASX: MFG) shares are in a trading halt this morning as the international equities manager plans to raise $275 million from institutional investors at $55.20 per share, which represents a 4.5% discount to the dividend adjusted five-day VWAP of $57.78 on August 12.

“Funds raised under the Placement will be used to meet the expected costs associated with the Magellan High Conviction Trust initial public offering, approximately $50 million to support a new retirement product which is currently under development, seed other investment strategies and to strengthen Magellan’s balance sheet to provide significant flexibility to continue to invest in future growth opportunities,” according to the company. 

New “High Conviction” Fund

Today, Magellan announced its plan to list its existing Magellan High Conviction Trust that currently holds 8-12 global stocks that include the likes of Facebook, VisaSAP, and Apple Inc

It evidently expects to raise a lot of new money for its Trust as it will offer eligible existing investors the opportunity to subscribe for up to $50,000 worth of units. It will throw in an additional 7.5% in equivalent free units as an incentive to subscribers.

Non-investors will have the opportunity to subscribe with an additional 2.5% of units thrown in for free.

Magellan claims the 2.5% bonus is possible as it’s cutting brokers and financial advisers out of the offer and 2.5% is the typical fee these brokers and advisers would otherwise have gobbled up.

The ‘freebie’ unit offer makes sense as Magellan instead gets to keep the equivalent 2.5% as part of its fee-earning total funds under management. 

Magellan did not outline how much it expects to raise but given its growing profile, the generous incentives on offer, and impressive track record of the Trust (a 16.6% annualised return since 2013) it’s likely to be an amount up to $1 billion. 

It currently has around 70,000 ‘eligible investors’ across its funds and group, so if we estimate that half of all unit holders subscribe for half the available amount (35,000 x 25,000) it will raise $875 million before additional contributions from non unit holders.

As such an amount up to $1 billion looks realistic, although one factor limiting the amount raised is that the Trust can only invest in up to 12 companies to mean it will likely be mega-cap focused only. A $1 billion may be a tad optimistic then, especially if subscription number assumptions are too high. 

Overall a raising around $1 billion would add up to around $80 million in “freebie costs” before the operational costs and fees associated with the raising. 

Magellan can generate a significant return on investment for every dollar it spends so we can see why it wants to raise the $275 million. 

It’s also worth flagging the 1.5% base management fee (plus a 10% hurdle-related performance fee) on the Trust, which is higher than the industry average and would represent $15 million a year in annual revenue on an estimated $1 billion in FUM.

Income product?

Magellan is also keeping its cards close to its chest over its plans to offer a revolutionary “retirement income product” that it’s setting aside $50 million for.

It is reportedly still talking to regulators and stakeholders about its secretive project that is apparently still at least 6 months away. 

The company has ruled out speculation that it will be an “annuity” style product like that offered by Challenger Ltd (ASX: CGF). This is on the grounds that annuities are capital intensive and would bulldoze its capital-light, high profit margin business model. 

Short of some sort of financial alchemy it’s likely the product will be a variant on a high-income “multi asset” fund that will be seeded with the $50 million or more.

It may also involve a partnership or two potentially with a big bank like Commonwealth Bank of Australia (ASX: CBA) or even a large super fund. 

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Tom Richardson owns shares of Apple, Facebook, Magellan Financial Group, and Visa.

 You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Apple, Facebook, and Visa. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia has recommended Apple and Facebook. 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.

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