Magellan Financial Group
Annual Report 2014

Plain-text annual report

2014 [ANNUAL REPORT] FOR THE YEAR ENDED – 30 JUNE 2014  Contents CHAIRMAN’S REPORT ............................................................................................................................. 4 CHIEF EXECUTIVE OFFICER’S ANNUAL LETTER ........................................................................................ 5 DIRECTOR’S REPORT ............................................................................................................................. 13 AUDITOR’S INDEPENDENCE DECLARATION .......................................................................................... 31 CONSOLIDATED STATEMENT OF PROFIT OR LOSS ............................................................................... 32 CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME ................................................... 33 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ........................................................................ 34 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ......................................................................... 35 CONSOLIDATED STATEMENT OF CASH FLOWS ..................................................................................... 36 NOTES TO THE FINANCIAL STATEMENTS .............................................................................................. 37 1 Summary of significant accounting policies ........................................................................... 37 2 Segment information .............................................................................................................. 48 3 Earnings per share .................................................................................................................. 51 4 Dividends ................................................................................................................................ 52 5 Income tax .............................................................................................................................. 53 6 Revenue .................................................................................................................................. 54 7 Receivables ............................................................................................................................. 55 8 Financial assets ....................................................................................................................... 56 9 Property, plant and equipment .............................................................................................. 58 10 Payables and provisions ......................................................................................................... 58 11 Contributed equity ................................................................................................................. 59 12 Share purchase plan ............................................................................................................... 61 13 Parent entity information ....................................................................................................... 64 14 Interests in subsidiaries and other entities ............................................................................ 65 15 Related party transactions ..................................................................................................... 65 16 Statement of cash flows reconciliation .................................................................................. 67 17 Capital and financial risk management .................................................................................. 68 18 Contingent assets, contingent liabilities and commitments .................................................. 75 19 Auditor’s remuneration .......................................................................................................... 76 20 Events subsequent to reporting date ..................................................................................... 76 DIRECTORS’ DECLARATION ................................................................................................................... 77 INDEPENDENT AUDITOR’S REPORT ...................................................................................................... 78 CORPORATE INFORMATION ................................................................................................................. 80 SHAREHOLDER INFORMATION ............................................................................................................. 81 MAGELLAN FINANCIAL GROUP LIMITED CHAIRMAN’S REPORT Dear Shareholders At Magellan Financial Group (“Magellan”) our long term vision is to create a world class funds management business. We are at the early stages of this journey. Over the past year we are pleased to report that we have made strong progress. Our financial results continue to be excellent and we have further deepened and broadened our client relationships, and added to our team’s skills. The Chief Executive Officer’s annual letter, and the financial statements that follow, provide important information in relation to our business and should be read carefully. We are also very pleased about the continuing positive development of our culture. At Magellan we strive to act rationally and fairly, whilst being realistic and pragmatic. We understand it is inevitable that we will make mistakes, and indeed making mistakes is a necessary part of learning. Further, we recognise that thinking in risk adjusted terms requires judgement and thereby inherently involves taking risks. The objective of course is to survive and flourish over time, and as Yogi Berra beautifully puts it, not to make the “wrong mistake”! Our business and our investment processes led by Hamish Douglass are focussed on medium-term outperformance and continue to evolve and improve. The combination of accumulating knowledge, and an expanding group of highly talented people, are important foundations for our firm. We will continue to invest in our people and processes. We look to treat each of our main constituents – clients (and their advisors), employees and shareholders – fairly. We understand that to provide excellent long-term results for our shareholders, we must develop a motivated world class team to provide excellent overall service and results for our clients. We look to act internally and externally in a partnership oriented way. For example, our distribution efforts centre on relationships, and we encourage all our team members to be and act like owners. We will continue to broaden and deepen Magellan’s business over time. We are mindful of balancing the needs and opportunities of our current core activities with those of our eventual new initiatives. Magellan will inevitably evolve, but in a measured way. This year has also seen several changes to the Board, with Naomi Milgrom AO, and Chris Mackay stepping down. We are delighted that two high calibre directors, Karen Phin and Robert Fraser, have joined our Board and we are already benefitting from their perspectives. We thank Naomi for her very valuable input over the past seven years, and also Chris for his continuing insights and on-going contribution as our Special Advisor. While we are pleased and proud of our growth and the outcomes we have achieved for our clients over the past seven years, we recognise that much still needs to be done. Our whole team is excited by the challenges and opportunities that lie ahead. We look forward to seeing you at the Annual General Meeting as our journey continues. Dr Brett Cairns Chairman 4 MAGELLAN FINANCIAL GROUP LIMITED CHIEF EXECUTIVE OFFICER’S ANNUAL LETTER Dear Shareholders, I am delighted to write to you as a shareholder in Magellan Financial Group Limited (“the Group”) for the year ended 30 June 2014. OVERVIEW OF RESULTS The Group had a successful year which was characterised by continued strong growth in funds under management (which increased from $14.7 billion to $23.5 billion for the 12 months to 30 June 2014) and the strong growth both in earnings and interim and final dividends. For the year ended 30 June 2014: - - the Group’s net operating profit after tax increased by 25% to $82.9 million ($66.6 million in 2013). The year ended 30 June 2013 included a realised after tax gain on the in-specie distribution of the Group’s holding in Magellan Flagship Fund Limited (MFF) of approximately $18.1 million. Excluding the gain on the in-specie distribution, the Group’s net operating profit after tax was $48.5 million in 2013, representing a year on year increase of 71%. fully diluted earnings per share increased by 22% to 48.9 cents (40.0 cents in 2013). Excluding the gain on the in- specie distribution, the Group’s fully diluted earnings per share was 29.2 cents in 2013, representing a year on year increase of 67%. The Directors have declared a final fully franked dividend of 21.8 cents per ordinary share in respect of the 2014 financial year (16.5 cents per ordinary share final dividend in 2013). A fully franked interim dividend of 16.5 cents per share was paid in March 2014 (5.0 cents per ordinary share interim dividend in April 2013). The Directors have confirmed the policy of paying a dividend of 75% to 80% of the net profit after tax (NPAT) of the Group’s funds management business, with the calculation to include any crystallised performance fees. Performance fees fluctuate materially from period to period. The payment of dividends by the Group will be subject to available franking credits and corporate, legal and regulatory considerations. The Directors have also reviewed the timetable for payment of dividends and consider it is in the interest of shareholders to pay dividends promptly following the release of the financial results. This year the final dividend will be paid on 1 September 2014, which is earlier than the payment date for last year’s final dividend of 11 October 2013. The following table summarises the Group’s profitability over the past two financial years: Revenue Expenses Profit before tax expense Tax expense Profit after tax expense Key Statistics Earnings per share (cents per share) Diluted earnings per share (cents per share)2 Diluted earnings per share (cents per share) excluding gain on in-specie distribution2 Dividend (interim and final)(cents per share, fully franked)3 Effective tax rate 30 June 2014 $’000 148,109 37,630 110,479 (27,540) 82,939 53.3 48.9 48.9 38.3 24.9% 30 June 20131 $’000 120,906 25,904 95,002 (28,402) 66,600 43.6 40.0 29.2 21.5 29.9% Change % 22% 45% 16% (3%) 25% 22% 22% 67% 78% 1 Includes gain on the in-specie distribution as a result of the disposal of the Group’s investment in MFF in February 2013 2 Fully diluted earnings per share 3 Excludes the in-specie distribution representing 9.16 cents per share in the year ended 30 June 2013 5 MAGELLAN FINANCIAL GROUP LIMITED CHIEF EXECUTIVE OFFICER’S ANNUAL LETTER As at 30 June 2014, the Group is in a strong financial position: - - the Group had investment assets (cash and cash equivalents and other financial assets) of approximately $208.4 million (30 June 2013: $153.0 million) and shareholders’ funds of approximately $206.6 million (30 June 2013: $153.0 million); and the Group’s NTA per share (diluted for MFG 2016 Options and the conversion of the Class B Shares) was approximately $1.24 (30 June 2013: $1.02). Over the 2014 financial year, there have been a few changes to the Group’s Board of Directors. On 30 September 2013, Chris Mackay stepped down as Executive Chairman of the Group and Dr. Brett Cairns was appointed as Non-Executive Chairman. Mr Mackay has been appointed as Special Adviser to both the Group’s Board and Chief Executive Officer. In April 2014, Ms Naomi Milgrom AO retired from the Group’s Board and Ms Karen Phin and Mr Robert Fraser were appointed as Non-Executive directors. Funds Management Business For the year ended 30 June 2014, despite the significant reduction in performance fees, the Group’s funds management business generated revenues of approximately $139.1 million ($86.8 million for 2013) and had expenses of approximately $36.6 million ($25.2 million for 2013), which resulted in a profit before tax of $102.5 million ($61.6 million for 2013). The following table summarises the profitability of the funds management business over the past two financial years: 30 June 2014 $’000 30 June 2013 $’000 Change % Revenue Management fees Performance fees Service fees Consulting fees Interest & other income Expenses Employee expense US marketing and consulting fees4 Other expense Profit before tax expense Key Statistics Average funds under management (A$ million) Average number of employees Employee expenses / total expenses Cost / income Cost / income, excl. performance fees Net assets ($’000) 132,567 2,117 3,918 - 533 139,135 23,599 3,127 9,890 36,616 102,519 19,104 64 64.4% 26.3% 26.7% 34,931 137% (93%) n/a n/a (53%) 60% 35% 96% 60% 45% 66% 104% 25% 56,007 28,449 - 1,200 1,130 86,786 17,427 1,598 6,182 25,207 61,579 9,351 51 69.1% 29.0% 43.2% 40,609 (14%) 4 Pursuant to the agreement, Frontier Partners Inc. is entitled to receive 25% of net management fees from Frontegra MFG Funds and 20% of management and performance fees from institutional mandate clients in North America. 6 MAGELLAN FINANCIAL GROUP LIMITED CHIEF EXECUTIVE OFFICER’S ANNUAL LETTER Management fee revenues increased as a result of higher average funds under management over the period due to strong net inflows and investment performance. Employee expense increased by 35% over the previous corresponding period to $23.6 million in the year ended 30 June 2014. This increase was due to a 25% increase in the average number of employees and an increase in remuneration levels. At 30 June 2014 there were 69 employees across the Investment, Distribution, and Business Support and Control teams, a net increase of 11 during the year. Our new hires included three analysts added to the Investment team, two Distribution professionals and six in our Business Support and Control team (including a dedicated Company Secretary, a Head of Investor Relations and senior personnel in the Finance and Compliance teams). We are extremely pleased with the quality of the people we have hired and the development of the teams. Overall the funds management business showed solid improvement in the cost to income ratio (excluding performance fees), reducing from 43.2% in the 2013 financial year to 26.7% in 2014. During the 2015 financial year, we are planning to further increase the size of the Investment team to develop additional capability and to provide flexibility for extensions of our investment products in the years ahead. We are also planning to make a number of hires in our Distribution and Business Support and Control teams. We expect that total employee expenses for the 2015 financial year will increase in the range of 30-35%, relative to 2014, due to the increase in the average number of employees and increased remuneration levels. The following table sets out total employee numbers over the past three financial years. Employee Summary Investment - Professional - Administration Distribution - Professional - Administration Business Support & Control - Professional - Administration Total Average number of employees 30 June 2014 30 June 2013 30 June 2012 24 2 26 15 3 18 22 3 25 69 64 22 2 24 14 1 15 17 2 19 58 51 14 2 16 12 1 13 13 2 15 44 38 7 MAGELLAN FINANCIAL GROUP LIMITED CHIEF EXECUTIVE OFFICER’S ANNUAL LETTER At 31 July 2014, the Group had funds under management of approximately $24.8 billion, split between global equities (83%) and infrastructure equities (17%). This compares with funds under management of $23.5 billion at 30 June 2014 and $14.7 billion at 30 June 2013. The increase in funds under management was driven by net inflows of $7.1 billion and investment performance of $1.7 billion for the year ended 30 June 2014. The following table sets out the composition of funds under management: Funds Under Management (FUM) A$ million Retail Institutional Australia/New Zealand - - North America - Rest of World Total FUM Percentage Retail Institutional Australia/ New Zealand - - North America - Rest of World Total FUM 31 July 2014 30 June 2014 30 June 2013 30 June 2012 6,629 6,693 4,542 1,750 3,006 4,915 10,233 18,154 24,783 2,889 4,690 9,241 16,820 23,513 2,424 2,891 4,838 10,153 14,695 1,924 306 26 2,256 4,006 27% 28% 31% 44% 12% 20% 41% 73% 100% 12% 20% 40% 72% 100% 16% 20% 33% 69% 100% 48% 7% 1% 56% 100% FUM subject to Performance Fees (%) 35% 37% 39% 53% Institutional FUM (%) - Active - Enhanced Beta Breakdown of FUM (A$ million) - Global Equities - Infrastructure Equities Average Base Management fee (bps) excluding Performance Fees(5) 82% 18% 81% 19% 80% 20% 35% 65% 20,529 4,254 19,443 4,070 12,088 2,607 2,357 1,649 65 66 71 It should be noted that our retail business has higher fees than our institutional business and our infrastructure enhanced beta product has lower fees than other institutional mandates. We consider that the theoretical capacity of our global equities and infrastructure strategies is approximately US$50 billion. This is split approximately US$40 billion for our global equities strategies and US$10 billion for our infrastructure strategies. We carefully take into account the investment universe, the market capitalisation established for the strategy and liquidity requirements in ascertaining the theoretical capacity of each of our strategies. This theoretical capacity is not static and should be approximately indexed to changes in the values of world equity markets over time. For example if world equity markets increased by 7% per annum over the next five years our theoretical capacity should increase to approximately US$70 billion while maintaining the same investment opportunity set. (5) Calculated using Management Fees (excluding Performance Fees) for the prior twelve month period divided by the average of month end FUM over the same period 8 MAGELLAN FINANCIAL GROUP LIMITED CHIEF EXECUTIVE OFFICER’S ANNUAL LETTER As mentioned previously we intend to increase the size of our Investment team in 2015 and this may lead to the development of new but related global equity products in the future. These would be incremental to the theoretical capacity of the Group’s existing products. We further note that at 31 July 2014, the Group was managing around A$24.8 billion (equating to approximately US$23.0 billion) and the above capacity numbers are purely theoretical and should in no way be taken as a forecast or indication as to the level of funds under management the Group may have in the future. Retail Funds Under Management At 30 June 2014, the Group had total retail funds under management of $6.7 billion. We experienced total net retail inflows of $2.1 billion for the 12 months to 30 June 2014, compared with $1.8 billion for the previous financial year. The Group experienced average monthly retail net inflows of approximately $177 million over the 12 months to 30 June 2014, compared with $149 million over the previous corresponding period. The Magellan Global Fund and the Magellan Infrastructure Fund continue to enhance their reputations with research houses and major financial planning groups in Australia and New Zealand. We have an outstanding team of business development managers, led by Frank Casarotti, with offices in Sydney, Melbourne, Brisbane and Auckland. Both these funds have established strong performance records. The following table sets out the investment performances of the Magellan Global Fund and the Magellan Infrastructure Fund since their inception, and of the Magellan High Conviction Strategy since it was seeded on 1 January 2013, followed by its official launch on 1 July 2013. Investment Performance for the period to 30 June 2014(6) 1 Year 3 Years p.a. 5 Years p.a. Since Inception p.a. Magellan Global Fund MSCI World NTR Index ($A) MSCI World Minimum Volatility NTR Index ($A) S&P 500 TR Index ($A) Dow Jones Industrials Index TR ($A) Magellan Infrastructure Fund UBS Dev Infra & Utilities NTR Index Hedged ($A) Magellan High Conviction Strategy 11.7% 20.3% 11.9% 20.8% 12.1% 22.0% 24.6% 16.2% 22.7% 16.6% 15.9% 21.6% 18.4% 15.6% 14.4% - 16.6% 11.5% 10.3% 15.2% 14.2% 18.7% 13.8% 9.7% 1.9% 2.9% 4.6% 4.5% 6.8% 5.0% - 30.6% We invest our clients’ money with the purpose of preserving capital and an expectation of returns that outperform our stated benchmarks over the medium term. To achieve these objectives the Group has developed a global equity investment strategy that focuses on quality/low volatility and we have clearly communicated the nature of this approach to our clients. We believe the results to date have been good with the investment performances near the top of their peer groups when measured over 3 and 5 years. Given our medium term focus, however, it is not unreasonable to expect some periods when the funds will lag their benchmarks. Further, given our strategic focus on quality/low volatility investments, it can also reasonably be expected that returns may underperform broader based benchmarks in strongly rising markets due to the cap on volatility. Over the cycle, however, we believe the strategy will produce an appropriate risk adjusted outperformance while maintaining our focus on capital preservation, particularly in adverse market conditions. These are key tenets of the Group’s approach that we believe are well understood by the adviser community and our clients. (6) Calculations are based on exit price with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and entry fees (if applicable). Annualised performance is denoted with “p.a.” for the relevant period. 9 MAGELLAN FINANCIAL GROUP LIMITED CHIEF EXECUTIVE OFFICER’S ANNUAL LETTER The table above also highlights that even when viewed over a single year, the varying nature of what appears to be somewhat similar indices can produce vastly different outcomes. For example, the past year has seen the Magellan Global Fund produce returns broadly in line with the Dow Jones Industrials and the MSCI World Minimum Volatility NTR indices, which themselves have underperformed the more broadly constructed MSCI World NTR and S&P 500 TR indices. We also note that the Magellan Global Fund’s yearly performance is in line with its stated objective of an average return of 9%, net of fees, across the investment cycle. Lastly, the Fund has exhibited an historical tracking error, relative to the MSCI World NTR index, of approximately 7.9%, which is broadly in line with the outcome for this particular year. We are delighted that the Group continues to build adviser support. This has been based on a relationship approach and a clear understanding of the strategy that underpins the funds. We estimate the total number of advisers using the Magellan Global Fund/Colonial First State Magellan Global Fund Option (“MGF”) has increased from approximately 5,600 to approximately 7,500 over the past year. The Group has also made substantial progress over the past 3-6 months in penetrating the bank/AMP aligned advice markets and we expect to gain traction in these channels over the coming year. The retail component of the MGF had funds under management of approximately $6.1 billion as at 30 June 2014. MGF experienced total retail net inflows of $1.8 billion and average monthly retail net inflows of approximately $154 million over the 12 months to 30 June 2014. This compares to MGF’s total net inflows of $1.7 billion and the average monthly retail net inflows of $140 million over the 12 months to 30 June 2013. The following chart sets out the monthly retail net inflows into MGF over the past 3 years: Magellan Global Fund(7) FUM & Monthly Retail Net Inflows 250 $M 200 150 100 50 - $M 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Magellan Global Fund & CFS Flows - LHS Magellan Global Fund & CFS FUM - RHS Retail inflows have generally been seasonal (January, June and July tend to be the weakest months) and can be lumpy, due to events such as winning a new dealer group that transitions funds to the Group. On 1 July 2013 the Group launched three new funds for Australian and New Zealand investors. Complementing our existing funds, we launched the Magellan Global Fund (Hedged), a currency hedged offering of our Global Equity Strategy, and the Magellan Infrastructure Fund (Unhedged). We also launched a new investment product, the Magellan High Conviction Fund. This fund is a highly concentrated global equity strategy (8-12 stocks) and is managed by myself, (7) FUM & Flows includes Colonial First State Magellan Global Option from April 2011 – retail only 10 MAGELLAN FINANCIAL GROUP LIMITED CHIEF EXECUTIVE OFFICER’S ANNUAL LETTER as Lead Portfolio Manager. We have been pleased with investor and adviser interest in the Magellan High Conviction Fund, with funds under management of $129 million at 30 June 2014. The Group remains optimistic that there continues to be significant potential to attract new inflows into global equities from Australian retail investors. As stated above we have made substantial progress in penetrating the bank/AMP aligned advice markets over the past 3-6 months and expect to gain traction in these channels over the coming year. We are also actively working on an ASX listed version of the Magellan Global Fund which, if successful, should be attractive to self directed, self managed superannuation investors. Institutional Funds Under Management At 30 June 2014, the Group had total institutional funds under management of $16.8 billion from more than 80 clients(8). We experienced institutional net inflows of $5.0 billion for the 12 months to 30 June 2014. This included average monthly net inflows from existing global equity institutional flow accounts(9) of approximately $162 million over the 12 months to 30 June 2014, compared with $48 million in 2013. In order to manage the capacity of our global equities strategies we have advised the Group’s institutional clients that we intend to close our existing Global Equity Strategy to new separate accounts (minimum investment size US$200 million) on 31 October 2014 and also intend to close the UCITS and US pooled vehicles to new investors on 31 December 2014. From these dates we will be opening a sister global equity strategy, Magellan Global Plus, to institutional investors. The Magellan Global Fund and Colonial First State Magellan Global Fund Option will both remain open to Australian and New Zealand advisers and retail investors. Magellan Global Plus applies a very similar strategy to our existing Global Equity Strategy, but it invests in companies with a minimum market capitalisation of US$25 billion, as opposed to the Global Equity Strategy whose minimum is US$10 billion. We have had positive discussions with prospective investors in relation to the Magellan Global Plus Strategy. Our stated capacity of US$50 billion across the Group’s global equities and infrastructure strategies includes both the Global Equity and Global Plus strategies. The pipeline of prospective institutional investors considering our Global Equity and Global Plus strategies is solid. We are pleased with the development of the Group’s institutional funds management business, particularly in the United States and United Kingdom. We particularly value our relationship with Frontier Partners and the depth of client relationships and the prospective client pipeline. For the 12 months to 30 June 2014, we experienced institutional net inflows of $1.0 billion from clients in the United States, bringing the total funds under management to approximately $4.0 billion ($2.5 billion at 30 June 2013). We have identified Canada as a priority market moving forward. At 30 June 2014, we had $706 million in funds under management from Canadian clients and we are building a pipeline of prospective clients. Our UK business continues to go from strength to strength. At 30 June 2014, the Group had total funds under management of approximately $7.9 billion from clients in the UK ($4.8 billion at 30 June 2013). For the 12 months to 30 June 2014, we experienced net inflows of $2.5 billion. Our important relationship with St. James’s Place continues to grow. At 30 June 2014, this account has grown to $4.8 billion from $3.7 billion at 30 June 2013. We have continued to see good inflows into the UK infrastructure fund that replicates the Magellan Core Infrastructure (Enhanced Beta) Strategy. This fund has grown to $2.2 billion at 30 June 2014 from $1.0 billion at 30 June 2013. We continue to make steady progress in the Asia-Pacific region. At 30 June 2014, the Group had total funds under management of approximately $2.9 billion from Australian institutional investors. We remain focused on specific target markets in our region, primarily Australia and Singapore. In August 2013, MFG Global Fund (a UCITS fund offered to institutional clients in our target markets, outside Australia and the United States) was approved by the Central Bank of Ireland. We are pleased with the client interest in this fund and at 30 June 2014 had funds under management of approximately $1.2 billion. (8) The number of clients include separately managed accounts and institutional investors in local and offshore vehicles (9) Includes St. James’s Place, Frontegra MFG Global Equity Fund - US Mutual Fund, MFG Global Fund (UCITS) and three other undisclosed accounts. 11 MAGELLAN FINANCIAL GROUP LIMITED CHIEF EXECUTIVE OFFICER’S ANNUAL LETTER Investments in Magellan’s Funds and Principal Investments At 30 June 2014 the Group had total net Principal Investments of $119.7 million (net of tax liabilities, settlement receivables/payables and accruals), compared with net Principal Investments of approximately $85.5 million at 30 June 2013. The Group’s Principal Investments include investments in Magellan Funds, listed shares, a number of small unlisted investments and surplus cash after allowing for the Group’s working capital requirements. We intend to allocate any surplus cash generated by the Group, after allowing for dividends of 75%-80% of the earnings from the Funds Management business, to Principal Investments. Over time we aim to earn satisfactory returns for shareholders through the sensible deployment of the Group’s capital, while maintaining capital strength to underpin the business. The Board has established a pre-tax hurdle of 10% per annum over the business cycle for the Principal Investments. We intend for the Group to maintain a very strong balance sheet including a high level of liquidity to ensure our business will withstand almost any market condition or unforeseen event. The Group’s Principal Investments portfolio has returned pre-tax 13.1%, 23.3% and 18.7% per annum over the last 1, 3 and 5 years respectively. Excluding the effect of the Group’s investment in MFF, which was disposed of by way of in- specie distribution to shareholders in February 2013, the portfolio returned pre-tax 8.5% per annum over the period 1 July 2007 to 30 June 2014. The inception date of 1 July 2007 has been chosen to reflect the first purchase date of the investments in the Magellan Global Fund and Magellan Infrastructure Fund. The following table sets out a summary of the Group’s Principal Investments at 30 June 2014: MFG Group’s Principal Investments A$ million Cash Magellan Unlisted Funds(A) Listed shares Listed subordinated bank notes Other(B) Total Deferred tax liability(C) Payables – outstanding settlements Net Principal Investments 30 June 2014 0.3 115.5 10.1 - 3.5 129.4 (9.7) - 119.7 30 June 2013 0.4 73.1 21.6 4.3 2.8 102.2 (7.9) (8.8) 85.5 Net Principal Investments per share (cents)(D) 70.9 52.6 (A) Magellan Unlisted Funds includes the Magellan Global Fund, Magellan Infrastructure Fund, Magellan Global Fund (Hedged), Magellan Infrastructure Fund (Unhedged), Magellan High Conviction Fund and the Frontegra MFG Funds. (B) Other comprises distributions receivable and unlisted funds and shares. (C) Deferred tax liability arising from changes in the fair value of financial assets and net capital losses carried forward. (D) Based on the aggregate of 158,842,157 ordinary shares on issue at 30 June 2014 and 10,119,516 ordinary shares being the ordinary shares into which the 10,200,000 Class B Shares would be entitled to convert into at 30 June 2014. At 30 June 2013, it is based on 152,782,876 ordinary shares and 9,732,697 ordinary shares into which the 10,200,000 Class B Shares would have been entitled to convert at 30 June 2013. I would like to thank all my colleagues at Magellan for the outstanding job they have done over the years. It is a privilege to work with such an incredibly focussed and talented team of people. Thank you for your ongoing interest and support of Magellan Financial Group Limited. Yours faithfully, Hamish M Douglass Managing Director and Chief Executive Officer 14 August 2014 12 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 The Directors of Magellan Financial Group Limited (the “Company” and “MFG”) submit their financial report for the Company and its controlled entities which together form the consolidated entity (the “Group”) in respect of the year ended 30 June 2014. 1. Operations and Activities 1.1 Company Overview The Company is a listed public company and incorporated in Australia. The Group’s main operating company is Magellan Asset Management Limited (MAM). The shares and options of the Company are publicly traded on the Australian Securities Exchange under ASX Codes: MFG and MFGOC respectively. The Company also has on issue unlisted Class B shares. The Company’s principal place of business is Level 7, 1 Castlereagh Street, Sydney, New South Wales, 2000. 1.2 Principal Activity The principal activity of the Group is funds management with the objective of offering international investment funds to high net worth and retail investors in Australia and New Zealand, and institutional investors globally. 1.3 Dividends and Distributions During the year, dividends amounting to $50,921,000 were paid representing 33.0 cents per share (June 2013: $26,196,000 comprising $12,219,000 representing 8.0 cents per share and an in-specie distribution of $13,977,000 representing 9.16 cents per share (refer to note 4(iii) in the financial statements for further details)). Since the end of the year, the Directors have declared a final fully franked dividend of 21.8 cents per ordinary share in respect of the year ended 30 June 2014 (June 2013: 16.5 cents per share), which represents approximately $34,628,000. The Directors have affirmed the policy of paying a dividend of 75% to 80% of the net profit after tax (NPAT) of the Group’s funds management business, with the NPAT calculation to include any crystallised performance fees, which may fluctuate materially from period to period. The payment of dividends by the Group will be subject to available franking credits and corporate, legal and regulatory considerations. 1.4 Review of Operations Financial Results for the year The Group’s net profit after tax for the year ended 30 June 2014 was $82,939,000 compared with net profit after tax of $66,600,000 for the prior year. Total operating expenses of $37,630,000 compared with total operating expenses of $25,904,000 for the previous corresponding year. The Group is in a strong financial position with an extremely strong balance sheet and at 30 June 2014 reported: - - investment assets (including cash and fixed and variable rate debt investments) of $208,431,000 (June 2013: $152,972,000) and shareholders’ funds of $206,587,000 (June 2013: $153,039,000) ; and NTA per share of $1.24 (June 2013:$1.02) diluted for MFG 2016 Options and the conversion of the Class B Shares. Refer to the Chief Executive Officer’s Annual Letter for further information, including details on the Group’s strategy and future outlook. Likely Developments and Expected Result of Operations 1.5 The Group will continue to pursue its financial objectives which are to increase the profitability of the Group over time by increasing the value and performance of funds under management and seeking to grow the value of the Group’s investment portfolio. Additional comments on expected results of operations of the Group are included in this report under the review of operations at section 1.4 and the Chief Executive Officer’s Annual Letter for further information. 13 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 Significant changes in the State of Affairs 1.6 There were no significant changes in the state of affairs of the Group that occurred during the year not otherwise disclosed in this report or the financial statements. Events Subsequent to the end of the Financial Year 1.7 On 14 August 2014, the Directors declared a franked final dividend of 21.8 cents per ordinary share in respect of the year ended 30 June 2014. Other than the above, the Directors are not aware of any other matter or circumstance not otherwise dealt with in this report that has significantly affected or may significantly affect the operations of the Group, the result of those operations or the state of affairs of the Group in subsequent financial periods. Environmental Regulation 1.8 The Group is not subject to any particular or significant environmental regulation under Commonwealth, State or Territory legislation. 1.9 Unissued Shares MFG 2016 Options As at the date of this report, there were 1,898,524 unexercised MFG 2016 Options to take up one new ordinary share each in the Company at an exercise price of $2.6411 per share (1,898,524 unexercised MFG 2016 Options at 30 June 2014). The options expire on 30 June 2016. Refer to note 11(d)(ii) for further details on the MFG 2016 Options, including the terms and conditions applying to their exercise. Refer to section 3.6 in the Remuneration Report for the MFG 2016 Options exercised and held by the Directors and Key Management Personnel of the Group. The MFG 2016 Options are not entitled to dividends or distributions and ordinary shares issued on exercise of the options rank equally with all other ordinary shares from the date the ordinary shares are issued. MFG Class B Shares As at the date of this report, Mr Douglass held 10,200,000 MFG Class B Shares which have no entitlement to dividends and convert into the Company’s ordinary shares on 21 November 2016 in accordance with a conversion formula (June 2013: 10,200,000 MFG Class B Shares). Refer to note 11(d)(iii) for further details. The service conditions attached to the conversion of the MFG Class B shares into MFG ordinary shares were satisfied on 1 July 2012. 14 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 2. Directors and Officers Directors 2.1 The following persons were Directors of the Company during the year and up to the date of this report: Name Brett Cairns Hamish Douglass Robert Fraser Paul Lewis Karen Phin Chris Mackay Naomi Milgrom AO Directorship Chairman - Non-executive Director Chief Executive Officer and Managing Director Non-executive Director Non-executive Director Non-executive Director Chairman and Executive Director Non-executive Director Appointed 22 Jan 2007 21 Nov 2006 23 Apr 2014 20 Dec 2006 23 Apr 2014 21 Nov 2006 20 Dec 2006 Resigned - - - - - 30 Sep 2013 23 Apr 2014 On 30 September 2013, Dr Brett Cairns replaced Mr Chris Mackay who stepped down as Executive Chairman on the same day. Mr Mackay was appointed a Special Advisor to both the Board and CEO and in that role provides ongoing counsel to the Group. For further details refer to note 15(c)(i). 2.2 Secretaries The following persons were Company Secretaries of the Company during the year and up to the date of this report: Name Geoffrey Stirton Nerida Campbell Leo Quintana There are no other officers of the Company. 2.3 Information on Directors and Officers Appointed 20 Mar 2014 20 Nov 2006 29 Feb 2008 Resigned - 20 Mar 2014 20 Mar 2014 Brett Cairns Non-executive Director, Chairman of Board and Remuneration and Nominations Committee, and member of the Audit and Risk Committee Brett was formerly co-head of the Capital Markets Group within Structured Finance at Babcock & Brown, which he joined in 2002. Brett was a former Managing Director and Head of Debt Capital Markets for Merrill Lynch in Australia where he worked from 1994 to 2002. Prior to joining Merrill Lynch, Brett spent 3 years with Credit Suisse Financial Products, the then derivatives bank of the Credit Suisse group. Hamish Douglass Managing Director and Chief Executive Officer Hamish is a member of the Australian Government’s Foreign Investment Review Board (FIRB), a member of the Australian Government’s Financial Literacy Board, former Acting President of the Australian Government’s Takeovers Panel and former Co-Head of Global Banking at Deutsche Bank, Australasia. He was a Director of Magellan Flagship Fund Limited from September 2006 until 6 February 2013. 15 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 2.3 Information on Directors and Officers (continued) Paul Lewis Non-executive Director and member of the Audit and Risk Committee and Remuneration and Nominations Committee Paul was Managing Partner and Chief Executive – Asia, based in Hong Kong from 1992 – 2004, for PA Consulting Group, at the conclusion of which PA had offices in Hong Kong, Beijing, Tokyo, Bangalore, Singapore, Kuala Lumpur and Jakarta. Paul led major assignments in financial services – retail banking, life insurance and stock exchanges, energy, manufacturing, telecommunications, rail, air, container shipping and government. Paul also served on senior advisory panels with ministerial representation in Hong Kong, Malaysia and Indonesia, and from 2003 to 2010 was a member of British Telecom’s Global Advisory Board. Paul is currently Chair of NAB’s Private Wealth Advisory Council, Chairman of PSP International, Chairman of Growth Mantra, Deputy Chairman of the Australian British Chamber of Commerce, and a board member of IPScape Limited and Cure Cancer Australia Foundation. Robert Fraser Non-executive Director, Chairman of Audit and Risk Committee and member of Remuneration and Nominations Committee (appointed 23 April 2014) Robert is a company director and corporate adviser with over 25 years of investment banking experience, specialising in mergers and takeovers, corporate and financial analysis, capital management and equity capital markets. He is presently the Managing Director of TC Corporate Pty Limited, the corporate advisory division of Taylor Collison Limited stockbrokers of which he is a Director and principal. Robert has a Bachelor of Economics and Bachelor of Laws (Hons) degrees from the University of Sydney and is also qualified as a licensed business broker and licensed real estate agent. Robert currently serves on the Boards of ARB Corporation Limited, F.F.I. Holdings Limited and Gowing Bros Limited and in the past three years has been a director of Symex Holdings Limited (January 2011 to February 2012). Karen Phin Non-executive Director and member of the Audit and Risk Committee and Remuneration and Nominations Committee (appointed 23 April 2014) Karen has over 18 years’ capital markets experience advising a range of top Australian companies on their capital management and funding strategies. Until recently, Karen was Managing Director and Head of Capital Management Advisory at Citi in Australia and New Zealand. From 1996 – 2009, she worked at UBS where she was also a Managing Director and established and led the Capital Management Group. Prior to joining Citi, Karen spent 12 months at ASIC as a Senior Specialist in the Corporations group. Karen is currently on the Finance Committee of the Royal Australasian College of Physicians and is a member of the ASX Tribunal. Karen has a Bachelor of Arts/Law (Honours) from the University of Sydney. Geoffrey Stirton Company Secretary (appointed 20 March 2014) Geoffrey Stirton joined the Company in March 2014. Geoffrey was most recently Group Company Secretary at The Trust Company and has also held Group Secretary roles at Investa Property Group and MLC Limited. He has over 20 years experience in financial services in various company secretarial, finance and management roles. Geoffrey holds a Bachelor of Commerce degree from the University of NSW, is a Chartered Accountant, a Fellow of the Governance Institute of Australia and a Fellow of the Australian Institute of Company Directors. 16 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 2.4 Directors’ Meetings The number of Board meetings, including meetings of Board Committees, held during the year ended 30 June 2014 and the number of those meetings attended by each Director is set out below: Remuneration and Nominations Committee was formed on 20 February 2014. (A) (B) Mr Douglass resigned as a member of the Audit & Risk Committee on 5 June 2014. Mr Douglass otherwise attended all other meetings as a guest. (C) Mr Fraser and Ms Phin were appointed on 23 April 2014 (D) Mr Mackay resigned on 30 September 2013 (E) Ms Milgrom AO resigned on 23 April 2014 Directors’ Interests 2.5 On 1 October 2013, Mr Mackay entered into a consultancy agreement with Magellan Asset Management Limited (a wholly owned entity of MFG) after being appointed Special Advisor to both the Board and CEO of Magellan Financial Group Limited. Under this agreement Mr Mackay is paid consultancy fees of $250,000 per annum. Refer to section 3.5 of the Remuneration Report for further details. Apart from the above, no other Director has or has had any interest in a contract entered into up to the date of this Directors’ Report with the Company or any related entity other than as disclosed in this report. 17 HeldAttendedHeldAttendedHeldAttendedB Cairns555522H Douglass(B)5555--P Lewis555522R Fraser(C)111111K Phin(C)111111C Mackay(D)21----N Milgrom(E)43--11BoardAudit & Risk Committee while a Directorwhile a memberRemuneration & Nominations Committee (A)while a member MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 2014 Remuneration Report (Audited) This Remuneration Report outlines the remuneration arrangements of the Group for the year ended 30 June 2014. It details the remuneration arrangements for Key Management Personnel (KMP) of the Group who are defined as those persons and corporate entities having authority and responsibility for planning, directing and controlling activities of the Group, directly or indirectly. In the 2014 financial year, the KMP for the Group included the Non-executive Directors, Executive Director and the Group’s senior executives with authority for the planning, directing and controlling of the activities of the Group, as set out below: (A) Dr Cairns replaced Mr Mackay as Chairman on 30 September 2013. The Board does not grant options to KMP or employees of the Group under its remuneration policy. The Remuneration Report has been prepared and audited against the disclosure requirements of the Corporations Act 2001. Remuneration of Non-executive Directors 3.1 The Board reviews and determines the remuneration of the Non-executive Directors and may utilise the services of external advisors. The Board’s remuneration policy is designed to attract and retain appropriately experienced, skilled and qualified personnel in order to achieve the Group’s objectives. The remuneration of the Non-executive Directors is not linked to the performance or earnings of the Group. The Non-executive Directors are eligible to participate in the Company’s Share Purchase Plan (SPP) which is described in section 3.2 of the Remuneration Report. Remuneration of two of the Non-executive Directors’ includes share based payment amounts that represent the non-cash expense to the Group of providing interest free loans under the SPP. The Company has reimbursed or borne expenses incurred by the Non-executive directors in the discharge of their duties of $1,989 (June 2013: $13,344). 18 NamePositionTerm as KMPIndependent Non-Executive DirectorsBrett Cairns(A)ChairmanFull YearPaul LewisDirectorFull YearRobert FraserDirector23 Apr 2014 - 30 Jun 2014Karen PhinDirector23 Apr 2014 - 30 Jun 2014Former DirectorsChris MackayExecutive Director 1 Jul 2013 - 30 Sep 2013Naomi Milgrom AONon-executive Director1 Jul 2013 - 23 Apr 2014Executive DirectorHamish DouglassManaging Director & CEOFull YearGroup ExecutivesNerida CampbellChief Operating OfficerFull YearFrank CasarottiHead of DistributionFull YearGerald StackHead of ResearchFull Year MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 2014 Remuneration Report (Audited) (continued) Remuneration of Executive Directors and Other Key Management Personnel 3.2 The Board’s remuneration policy is designed to attract and retain appropriately experienced, skilled and qualified personnel in order to achieve the Group’s objectives. Executive Directors The Executive Directors’ remuneration is determined by the Board, which may utilise the services of external advisors. In respect of the year ended 30 June 2014 it comprised fixed compensation and in respect of Mr Douglass only, a variable compensation amount in the form of a short term incentive payment. Fixed compensation is structured as a total employment cost package, which may be received as a combination of cash, non-cash benefits and superannuation contributions. The amount of fixed compensation was not dependent on the satisfaction of a performance condition, or the performance of the Group, the Company’s share price, or dividends paid by the Company. The amount of variable compensation paid to Mr Douglass in respect of the year ended 30 June 2014 was determined with reference to Mr Douglass’ achievement of agreed criteria and performance metrics. Mr Mackay resigned on 30 September 2013 and was not entitled to receive a short term or long term incentive in respect of the year ended 30 June 2014. Details of the employment agreements of the Executive Directors are described later in this report. Group Executives (Other Key Management Personnel) The Other KMP’s remuneration comprises fixed and variable remuneration that takes into account the individual’s experience, abilities, achievements, and contribution to the Group. Other KMP’s fixed compensation is structured as a total employment cost package, which may be received as a combination of cash, non-cash benefits and superannuation contributions. Fixed compensation is reviewed annually to ensure that it is competitive and reasonable, however there are no guaranteed increases to the fixed compensation amount. Other KMP fixed compensation has increased by 23% (June 2013: 30%) reflecting partly the increased responsibilities of Other KMP in line with the Group’s continued growth, and partly an alignment closer to market rates. Other KMP fixed compensation for 2015 has not been increased. The Board considers that a focus on short term indicators for the determination of short term variable compensation, such as movements in the Company’s share price, may encourage performance that is not in the best interests of the Group and its shareholders. The Board is more concerned that Other KMP are motivated to build investment returns for investors in the funds managed by the Group and to build shareholder wealth over the long term. The Board believes that the participation in the Group’s SPP by Other KMP closely aligns their interests with the long term interests of shareholders. The Chief Executive Officer determines the amount of variable compensation to be paid to Other KMP, taking into consideration the individual’s performance and contribution during the year. The cash bonuses of Other KMP, excluding Mr Stack, are discretionary and may be in the range of 0 - 100% of fixed compensation. Mr Stack’s cash bonus is determined as 10% of net revenues earned by the Group in respect to the investment strategies for which he is portfolio manager, less an internal allocation of costs. The variable component of the Other KMP is not dependent on the satisfaction of performance conditions (except as noted for Mr Stack), the Company’s share price, or dividends paid by the Company. Other KMP are eligible to participate in the Group’s SPP which is described later in this report. Other KMP remuneration includes share based payment amounts that represent the non-cash expense to the Group of providing interest free loans under the SPP. 19 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 2014 Remuneration Report (Audited) (continued) 3.2 Remuneration of Executive Director and Other Key Management Personnel (continued) Share Purchase Plan (SPP) The Group has in place a SPP that provides financial assistance to Non-executive Directors and employees (‘Participants’), by way of an interest free fully recourse loan, to invest in shares in the Company. The issue price of shares under the SPP is the weighted average sale price of the shares on the ASX over the five trading days immediately preceding the day the offer is made. Details of the closing price of the Company’s shares as at 30 June in each year since inception of the Company are provided below together with the issue price of shares under the SPP: 30 June 2007 30 June 2008 30 June 2009 30 June 2010 30 June 2011 30 June 2012 30 June 2013 30 June 2014 MFG share closing price $2.20 $0.53 $0.55 $1.13 $1.32 $2.15 $9.64 $10.93 SPP offer date 10 September 2007 20 October 2008 8 September 2009 10 November 2010 2 March 2011 30 September 2011 12 March 2013 29 October 2013 SPP offer issue price of MFG shares $1.66 $0.52 $0.78 $1.35 $1.75 $1.20 $7.33 $10.02 The Directors believe that the KMP and employee participation in the SPP closely aligns their interests with the interests of the shareholders of the Group. Further details of the SPP are provided in note 12 to the financial statements. Directors’ fees The Non-executive and Executive Directors’ base remuneration is reviewed annually and set out in section 3.3 of the Remuneration Report. Retirement benefits for Directors No retirement benefits (other than superannuation) are provided to Directors. 20 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 3.3 (a) 2014 Remuneration Report (Audited) (continued) Details of Remuneration The total amount paid or payable to KMP of the Group is detailed below: (A) The cash bonus amount includes the current year cash bonus and deferred components of the prior year bonus which have been paid over the course of the current year (refer to further details at 3.3(b)). (B) Includes long service entitlements accrued during the year. Upon Mr Mackay’s resignation as MFG Chairman and from MAM on 30 September 2013, Mr Mackay was no longer eligible for the long service leave. As a result, the long service leave entitlement that had accrued to Mr Mackay at 30 September 2013 was forfeited. (C) Share based payments represent the expense of providing interest free loans to Participants in the Share Purchase Plan (see section 3.2 of the Remuneration Report in the Directors’ Report). These are non cash items. Refer note 16(b). (D) Mr Fraser and Ms Phin were appointed on 23 April 2014 and remuneration is shown for the period 23 April 2014 to 30 June 2014. (E) Ms Milgrom resigned on 23 April 2014. Ms Milgrom’s remuneration for the year ended 30 June 2014 is shown for the period 1 July 2013 to 23 April 2014. (F) Mr Mackay resigned on 30 September 2013. Mr Mackay’s remuneration for the year ended 30 June 2014 is shown as a pro-rata for the period 1 July 2013 to 30 September 2014. A payment was made to Mr Mackay upon his resignation as Chairman of MFG and an employee of MAM on 30 September 2013, acknowledging his compliance, up to that time, with the investment restrictions in his employment agreement with MAM, as a discretionary payment determined by the MFG Board. Mr Mackay was not entitled to receive a short-term or long-term incentive in respect of the year 30 June 2013. Mr Mackay’s 2013 cash bonus of $100,000 comprises the deferred component of a bonus awarded in respect to the year ended 30 June 2012. (G) Mr Casarotti disposed of 150,000 MFG shares held under the SPP and fully discharged the loan made to him by MFG under the SPP during the year ended 30 June 2013. (H) Includes $100,000 accrued in the current year in relation to the investment restriction contract with Mr Douglass (June 2013: $100,000). For further details refer to note 18(b)(i). 21 Post-Long-OtherTotalemploymentterm BenefitsBenefitsBenefitsSalaryCash Bonus(A)SuperannuationOther(B)(C)$$$$$$Independent Non-Executive DirectorsBrett Cairns2014122,426 - 11,324 - 14,331 148,081 201318,349 - 1,651 - 14,331 34,331 Paul Lewis201483,750 - - - 14,331 98,081 201320,000 - - - 14,331 34,331 Robert Fraser(D)201416,499 - 1,526 - - 18,025 2013- - - - - - Karen Phin(D)201413,894 - 1,285 - - 15,179 2013- - - - - - Naomi Milgrom AO(E)201415,256 - 1,411 - - 16,667 20139,174 - 826 - - 10,000 Executive DirectorsH Douglass(H)20141,232,225 1,225,000 17,775 130,103 100,000 2,705,103 2013383,530 725,000 16,470 34,101 100,000 1,259,101 C Mackay(B)(F)2014433,056 - 4,444 - 125,000 562,500 2013583,530 100,000 16,470 51,884 - 751,884 Other KMP - Group ExecutivesN Campbell2014407,225 350,000 17,775 54,207 18,340 847,547 2013333,530 325,000 16,470 38,839 18,290 732,129 F Casarotti(G)2014407,225 350,000 17,775 49,581 - 824,581 2013333,530 325,000 16,470 35,049 167,580 877,629 G Stack2014407,225 921,469 17,775 50,732 38,228 1,435,429 2013333,530 524,207 16,470 35,993 34,651 944,851 20143,138,781 2,846,469 91,090 284,623 310,230 6,671,193 20132,015,173 1,999,207 84,827 195,866 349,183 4,644,256 Short Term BenefitsTotal KMP MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 2014 Remuneration Report (Audited) (continued) 3.3 (b) Details of Remuneration (continued) The components of the total cash bonus paid or conditionally payable to KMP of the Group is detailed below: (A) The bonus earned in respect of the current year which is paid in cash (payable in the following September). (B) The conditional deferred cash bonus for the year ended 30 June 2013 has been paid in twelve equal instalments in the year ended 30 June 2014. The conditional deferred cash bonus of the 30 June 2012 bonus was paid in twelve equal instalments during the year ended 30 June 2013. (C) The conditional deferred cash bonus for the year ended 30 June 2014 is payable in twelve equal instalments in the year ending 30 June 2015. Entitlement to the short term incentive amounts is dependent on the KMP being employed by the Group at the time of the payment. The conditional deferred cash bonus for the year ended 30 June 2013 was paid in twelve equal instalments during the year ended 30 June 2014. Refer to note 1(r) for the accounting policy on the conditional deferred cash bonus component of the annual bonus. The total conditional deferred cash bonus payable for the Group for the year ended 30 June 2014 is $3,516,000 (June 2013: $2,750,000), which includes the conditional deferred cash bonus payable for KMP of $1,432,500 (June 2013: $1,192,853) in the above table. 22 Cash Bonus (A)Conditional Deferred Cash Bonus paid (B)TotalConditional Deferred Cash Bonus payable (C)$$$$Executive DirectorsH Douglass2014650,000 575,000 1,225,000 600,000 2013625,000 100,000 725,000 575,000 Other KMP - Group ExecutivesN Campbell2014200,000 150,000 350,000 150,000 2013200,000 125,000 325,000 150,000 F Casarotti2014200,000 150,000 350,000 150,000 2013200,000 125,000 325,000 150,000 G Stack2014603,616 317,853 921,469 532,500 2013387,400 136,807 524,207 317,853 20141,432,500 20131,192,853 Short Term Benefit - Cash BonusTotal KMP MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 2014 Remuneration Report (Audited) (continued) Service Agreements 3.4 Remuneration and other terms of employment for the Independent Non-executive Directors are formalised in service agreements with the Company. The following table outlines the Non-executive Directors fees for the Board and Committees of both Magellan Financial Group and Magellan Asset Management Limited for the year ended 30 June 2014: (A) Fees are inclusive of base fees and superannuation. Brett Cairns Non-executive Director, Chairman of Board and Remuneration & Nominations Committee, and member of the Audit and Risk Committee   Commenced on 22 January 2007 Term of appointment is 3 years following which the Director seeks re-election by shareholders of the Company Paul Lewis Non-executive Director, member of the Remuneration & Nominations and Audit and Risk Committees (Chairman of Audit and Risk Committee up to 22 April 2014)  Commenced on 20 December 2006  Term of appointment is 3 years following which the Director seeks re-election by shareholders of the Company Robert Fraser Non-executive Director, Chairman of Audit and Risk Committee (from 23 April 2014) and member of Remuneration & Nominations Committee   Commenced on 23 April 2014 Term of appointment is 3 years unless the Director is not re-elected by shareholders of the Company Karen Phin Non-executive Director, member of Remuneration & Nominations Committee and Audit and Risk Committees   Commenced on 23 April 2014 Term of appointment is 3 years unless the Director is not re-elected by shareholders of the Company Naomi Milgrom AO Non-executive Director  Commenced on 20 December 2006 and resigned 23 April 2014 23 PositionFees ($)(A)Board (Group)Chairman150,000 Non-Executive Director70,000 Audit & Risk CommitteeChairman25,000 Member10,000 Remuneration & NominationsChairman- CommitteeMember- MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 2014 Remuneration Report (Audited) (continued) Employment Agreements 3.5 The Executive Directors and Other KMP are engaged under employment agreements with Magellan Asset Management Limited (MAM), a controlled entity of the Company. Hamish Douglass, Managing Director and CEO The Director is employed under a contract with MAM, with effect from 1 March 2008 and which will continue indefinitely until terminated. Under the terms of the contract, which applied for the year to 30 June 2014, Mr Douglass: - received fixed compensation structured as a total employment cost package of $1,250,000 per annum, inclusive of statutory superannuation contributions, received as a combination of cash, non-cash benefits and superannuation contributions. Fixed compensation is subject to review on 1 July 2016 - is eligible to receive in respect of each of the three (3) financial years to 30 June 2014, 30 June 2015 and 30 June 2016, variable compensation being a maximum short term incentive amount of up to but not exceeding 100% of his fixed compensation for that financial year. The amount of the short term incentive received is wholly based on the investment performance of the Group’s “Global Equity Strategy” applying the following performance metrics and relative weighting set out in the table below. The Board, in consultation with the Director, have determined the underlying quantitative measures for each of the performance metrics that apply, which are subject to review at 1 July 2016. STI Payment Performance Weighting Percentage Paid/Performance Measures Criteria Metrics Ranking of Magellan Global Fund in Peer Group (rolling 3 years as at 30 June each year) 33.3% The percentage paid is in the range of 0% to 100% dependent on the ranking quartile band achieved. Mr Douglass received 100% of this component in 2014. Absolute Performance (Gross Return) 33.3% The percentage paid is in the range of 0% to 100% dependent on the absolute performance achieved exceeding pre-determined levels. Investment Performance of the Global Equity Strategy of Magellan Global Fund (rolling 3 years as at 30 June each year) Relative gross investment performance of Magellan Global Fund against its Benchmark Index (rolling 3 years as at 30 June each year ) Mr Douglass received 100% of this component in 2014. 33.3% The percentage paid is in the range of 0% to 100% dependent on pre-determined relative performance differences above the Benchmark Index. Mr Douglass received 100% of this component in 2014. In respect of year ended 30 June 2014, Mr Douglass will receive a total short term incentive of $1,250,000 payable as a cash bonus of $650,000 in September 2014 and a deferred cash bonus of $600,000 payable over the course of the year ending 30 June 2015 – refer note 3.3(b). Mr Douglass’ entitlement to the short term incentive amounts is dependent on him being employed by the Group at the time of the payment. 24 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 3.5 2014 Remuneration Report (Audited) (continued) Employment Agreements (continued) Hamish Douglass, Managing Director and CEO Should the Director’s employment cease by reason of the retirement, death, total and permanent disability, ill health or the genuine redundancy, the Board may at its sole discretion allow a short term incentive amount to be paid in whole or in part. The previous investment restrictions along with the terms applying to the payment of $500,000 to the Director in consideration for compliance with the investment restrictions are unchanged, except the period of restraint from soliciting employees and clients has been increased to 12 months after termination of employment. Mr Douglass also holds MFG Class B shares which have no entitlement to receive a dividend and which convert into MFG ordinary shares on the first business day after 21 November 2016 in accordance with a conversion formula. The service conditions attached to the conversion of the MFG Class B shares to MFG ordinary shares were satisfied on 1 July 2012. In the prior year, different terms of contract existed and these are described below. In the year ended 30 June 2013, the Director: - - - - received fixed compensation structured as a total employment cost package of $400,000 per annum, inclusive of superannuation, received as a combination of cash, non-cash benefits and superannuation contributions received variable compensation of a total amount of $1,200,000 comprising the maximum annual short term incentive amount of $800,000 being 200% of his fixed compensation, and an additional discretionary amount of $400,000 approved by the MFG Board as MFG’s diluted earnings per share for the year ended 30 June 2013 had exceeded 20 cents per share The Director’s annual short term incentive amount was based on the following three key criteria and relative weight distributions: Key Criteria MFG Group performance and profitability Investment Performance of the Global Equity Strategy Other Criteria as determined by the MFG Board in its absolute discretion Weighting 50% 40% 10% Specific pre-determined performance metrics for the above were set by the MFG Board. has undertaken to MAM that for the period up to and including 1 July 2017, neither he nor his associates will, within Australia and New Zealand, invest in a business which in the reasonable opinion of MAM is primarily engaged in the business of funds management, other than an investment in MFG, Magellan Flagship Fund Limited, MAM and related entities, and any managed investment scheme in which MAM acts as trustee or responsible entity. These restrictions will cease to apply prior to 1 July 2017 if a third party acquires control of MAM or MFG, or if the employment contract is terminated for any reason. The restrictions do not apply in respect of any investment in: (a) shares in a company; (b) (c) other interests in an entity, interests in a managed investment scheme; or which represent less than 10% of the issued shares in that company, interests in that managed investment scheme or other interests in that other entity respectively. 25 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 3.5 2014 Remuneration Report (Audited) (continued) Employment Agreements (continued) Hamish Douglass, Managing Director and CEO In consideration for complying with this investment restriction MAM shall pay the Director an amount of $500,000 on or before 15 July 2017 and: - - - may terminate the contract at any time by giving not less than 3 months written notice to the Investment Manager and the Investment Manager may terminate the contract by providing 12 months written notice or providing payment in lieu of that notice. may have his contract terminated by the Investment Manager at any time without notice if serious misconduct has occurred. is restrained from soliciting employees and clients of the Investment Manager for a period of 3 months after termination of employment. Chris Mackay, Chairman and Executive Director (up to 30 September 2013) During the year, Mr Mackay was employed under a contract with MAM, which had effect from 1 March 2008 and which continued until terminated on 1 October 2013, when Mr Mackay resigned from MAM. Under the terms of the contract, which applied for the period 1 July 2013 to 30 September 2013, Mr Mackay: - received a fixed compensation structured as a total employment cost package of $1,250,000 per annum (inclusive of superannuation) effective from 1 July 2013, received as a combination of cash, non-cash benefits and superannuation contributions; - had no entitlement to receive short term or long term incentive payments; - received a discretionary payment of $125,000 determined by the MFG Board on his resignation as Chairman of MFG and an employee of MAM on 30 September 2013 in acknowledgement of his, and his associates’, compliance for the period up to and including 30 September 2013, with restrictions placed on the investment in any outside business engaged in funds management, other than an investment in MFG, the Magellan Flagship Fund Limited, MAM and related entities, and any managed investment scheme in which MAM acted as trustee or responsible entity. The investment restrictions ceased when the employment contract was terminated on 1 October 2013. During the year ended 30 June 2014, Mr Mackay entered into a consultancy agreement with MAM after being appointed Special Advisor to both the Board and CEO of MFG. Under this agreement, which was effective from 1 October 2013, Mr Mackay is entitled to consultancy fees of $250,000 per annum, payable quarterly in advance. The agreement is to continue indefinitely until terminated. Other Key Management Personnel – Group Executives Other KMP have rolling employment contracts with MAM and these may be terminated by providing three months written notice. On termination, the Other KMP are required to repay any loan amounts outstanding in respect to shares acquired under the Company’s Share Purchase Plan in accordance with the SPP terms and conditions. There are no provisions for any termination payments other than for unpaid remuneration and accrued annual leave to be paid to Other KMP. 26 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 2014 Remuneration Report (Audited) (continued) Options and Shareholdings 3. 3.6 The number of ordinary shares, Class B shares and MFG 2016 Options held during the year by each KMP, including their personally-related parties, is set out below. (A) Refer to note 11(d)(ii) for the key terms and conditions of the MFG 2016 Options. (B) There were no additions or disposals of Class B shares during the year (June 2013: nil). Refer to note 11(d)(iii) for the key terms and conditions of the MFG Class B Shares. (C) The ordinary shares were not issued in connection with Mr Fraser’s or Ms Phin’s appointment as Director on 23 April 2014 and the above balances are shown for the period since their appointment as a director of the Company. (D) Mr Casarotti disposed of 150,000 MFG shares held under the SPP and fully discharged the loan made to him by MFG under the SPP during the year ended 30 June 2013. (E) Mr Mackay and Ms Milgrom AO resigned as a Director on 30 September 2013 and 23 April 2014 respectively and the above balances are shown for the period that they were a director of the Company. 27 OpeningAdditions/ExercisedOpeningAdditions/ExercisedClosingbalance(disposals)optionsbalance(disposals)optionsbalance(E)1 July 20121 July 201330 June 2014Independent Non-Executive DirectorsBrett Cairns - Ordinary shares1,095,481 - - 1,095,481 (100,000)11,467 1,006,948 - MFG 2016 Options(A)11,467 - - 11,467 - (11,467)- Paul Lewis - Ordinary shares2,000,747 - - 2,000,747 (60,138)5,790 1,946,399 - MFG 2016 Options(A)5,790 - - 5,790 - (5,790)- Robert Fraser - Ordinary shares(C)- - - 501,358 - - 501,358 - MFG 2016 Options- - - - - - - Karen Phin - Ordinary shares(C)- - - 16,192 - - 16,192 - MFG 2016 Options- - - - - - - Naomi Milgrom AO(A)(E) - Ordinary shares6,182,360 - - 6,182,360 (654,509)- 5,527,851 - MFG 2016 Options(A)16,532 - - 16,532 - - 16,532 Executive DirectorsHamish Douglass - Ordinary shares10,519,917 - - 10,519,917 - 297,792 10,817,709 - Class B shares(B)10,200,000 - - 10,200,000 - - 10,200,000 - MFG 2016 Options(A)297,792 - - 297,792 - (297,792)- Chris Mackay - Ordinary shares18,077,777 - - 18,077,777 - - 18,077,777 - MFG 2016 Options(A)(E)2,644,354 - - 2,644,354 - - 2,644,354 Other KMP - Group Senior ExecutivesNerida Campbell - Ordinary shares660,019 - - 660,019 - 39,600 699,619 - MFG 2016 Options(A)39,600 - - 39,600 - (39,600)- Frank Casarotti - Ordinary shares(D)806,927 (150,000)- 656,927 - - 656,927 - MFG 2016 Options(A)- - - - - - - Gerald Stack - Ordinary shares390,963 - - 390,963 20,000 - 410,963 - MFG 2016 Options(A)- - - - - - - MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 2014 Remuneration Report (Audited) (continued) Unitholdings in Magellan Unlisted Funds 3.7 The number of units held during the year by each KMP, including their personally-related parties, in funds managed by the Group, are: (A) Includes the reinvestment of 30 June 2012 and 30 June 2013 distributions in the years ended 30 June 2013 and 30 June 2014 respectively. (B) In addition to the above holdings, Mr Douglass and Mr Casarotti selected the Magellan Global Fund product via their superannuation funds and currently have holdings of 403,233 and 169,824 units at a value of $445,814 and $291,146 respectively as at 30 June 2014 (June 2013: 385,356 and 155,739 units at a value of $387,206 and $239,837 respectively). (C) Mr Mackay resigned as director on 30 September 2013 and the transactions and balances above relate to the period 1 July 2013 to 30 September 2013. Unless specified above, no other KMP held units in Magellan Unlisted Funds. 28 OpeningAdditions/OpeningAdditions/Closingbalance(disposals)balance(disposals)balance(C)1 July 2012(A)1 July 2013(A)30 June 2014Magellan Global FundDirectorsPaul Lewis337,975 6,086 344,061 7,376 351,437 Hamish Douglass(B)845,164 15,221 860,385 345,927 1,206,312 Chris Mackay(c)423,273 7,624 430,897 - 430,897 Other KMP - Group Senior ExecutivesNerida Campbell20,697 373 21,070 32,712 53,782 Gerald Stack52,914 953 53,867 1,155 55,022 Frank Casarotti(B)- - - - - Magellan Infrastructure FundDirectorsPaul Lewis36,983 1,422 38,405 1,219 39,624 Other KMP - Group Senior ExecutivesGerald Stack67,268 2,586 69,854 2,217 72,071 Magellan High Conviction FundDirectorsHamish Douglass- - - 1,482,751 1,482,751 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 3. 2014 Remuneration Report (Audited) (continued) Loans to KMP 3.8 Magellan Financial Group Limited has made full recourse interest free loans to Non-executive Directors and KMP in connection with shares acquired under the Company’s Share Purchase Plan (SPP). The terms and conditions of the loans, including repayment terms, are disclosed in section 3.2 of the Remuneration Report. 3.9 Link between performance and remuneration paid by the Group (A) Fixed compensation comprises salary, superannuation and accrued long service leave (B) Variable compensation comprises cash bonuses, share based payments and a discretionary payment to Mr Mackay in 2014 (C) Excluding in-specie distribution of 9.16 cents per share 29 SPP SharesOpeningLoansLoansacquired Loanmade(repaid)during yearBalanceFace valueCarrying valueNumber$$$$$DirectorsBrett Cairns2014- 1,135,000 - (410,500)724,500 613,727 2013- 1,215,000 - (80,000)1,135,000 970,354 Paul Lewis2014- 1,135,000 - (370,250)764,750 647,823 2013- 1,215,000 - (80,000)1,135,000 970,354 Other KMP - Group ExecutivesN Campbell2014- 181,831 - (101,000)80,831 90,887 2013- 223,238 - (41,407)181,831 166,705 F Casarotti2014- - - - - - 2013- 720,327 - (720,327)- - G Stack201420,000 319,972 150,300 (184,132)286,140 273,857 2013- 385,901 - (65,929)319,972 250,051 Closing Loan Balance20142013201220112010Total revenue ($'000)148,109 120,906 35,846 18,314 12,578 Total expenses ($'000)37,630 25,904 16,693 10,244 7,161 Net operating profit ($'000)82,939 66,600 13,660 5,792 3,719 Basic earnings per share (cents per share)53.3 43.6 9.0 3.9 2.6 Diluted earnings per share (cents per share)48.9 40.0 8.5 3.7 2.5 Dividends paid (cents per share)(C)33.0 8.0 3.0 - - Closing share price (ASX code: MFG) 10.93$ 9.64$ 2.15$ 1.32$ 1.13$ Total KMP remuneration:- fixed compensation ($)(A)3,514,4942,295,866818,750805,000767,700- variable compensation ($)(B)3,156,6992,348,390590,1979,443198,4346,671,1934,644,2561,408,947814,443966,134 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ REPORT for the year ended 30 June 2014 4. Other Indemnification and Insurance of Directors and Officers 4.1 The Company insures the Directors and Officers of the Group in office to the extent permitted by law for losses, liabilities, costs and charges in defending any legal proceedings arising out of their conduct while acting in the capacity of Directors and Officers of the Group, other than conduct involving a wilful breach of duty in relation to the Group. During the year, the Group paid insurance premiums to insure the Directors and Officers of the Company. The terms of the contract prohibit the disclosure of the premiums paid. 4.2 Auditor Ernst & Young continues in office in accordance with section 327 of the Corporation Act 2001. Non-audit Services 4.3 During the year, Ernst & Young, the Group’s auditor, has performed other services in addition to its statutory duties. Details of the amounts paid or payable to the auditor are set out in note 19 to the financial report. The Directors, in accordance with advice received from the Audit & Risk Committee, are satisfied that the provision of those non-audit services during the year by the auditor is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied, considering the nature and quantum of the non-audit services that the provision of non-audit services by the Auditor, as set out below, did not compromise the Auditor independence requirements of the Corporations Act 2001 for the following reasons:   all non-audit services have been reviewed by the Audit & Risk Committee to ensure that they do not impact the impartiality and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. Auditor’s Independence Declaration 4.4 A copy of the Auditor’s Independence Declaration as required under section 307C of the Corporations Act 2001 is set out on page 30. Rounding of Amounts 4.5 The Company is of a kind referred to in the Australian Securities & Investments Commission’s Class Order 98/0100 (as amended) and consequently amounts in the Directors’ Report have been rounded off to the nearest thousand dollars in accordance with that Class Order, or in certain cases, the nearest dollar. This report is made in accordance with a resolution of the Directors. Brett Cairns Chairman Sydney 14 August 2014 30 MAGELLAN FINANCIAL GROUP LIMITED AUDITOR’S INDEPENDENCE DECLARATION 31 MAGELLAN FINANCIAL GROUP LIMITED CONSOLIDATED STATEMENT OF PROFIT OR LOSS for the year ended 30 June 2014 The Consolidated Statement of Profit or Loss is to be read in conjunction with the accompanying notes to the Financial Statements. 32 30 June30 June20142013Note$’000$’000RevenueManagement fees6(a)132,567 56,007 Performance fees6(c)2,117 28,449 Service fees6(b)3,918 - Consulting fees - 1,200 Interest income2,003 2,965 Dividend and distribution income 3,995 2,308 Net changes in fair value of held for trading financial assets - 3,698 Net gain/(loss) on sale of available-for-sale financial assets6(e) 4,221 24,805 Net foreign exchange gain/(loss)(725) 1,459 Other 13 15 Total revenue 148,109 120,906ExpensesEmployee expenses23,87017,509Fund administration and operational costs4,1491,861US marketing/consulting fee expense3,1271,598Marketing expense 1,741 1,122 Travel and entertainment expense893908Occupancy expense724587Legal and professional fees480467Auditor's remuneration19485262Depreciation expense9(a)116104Other 2,045 1,486 Total expenses 37,630 25,904Operating profit before income tax expense 110,479 95,002Income tax expense5(a)(27,540)(28,402)Net operating profit for the year 82,939 66,600Basic earnings per share (cents per share)353.3 cents43.6 centsDiluted earnings per share (cents per share)348.9 cents40.0 centsConsolidated MAGELLAN FINANCIAL GROUP LIMITED CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME for the year ended 30 June 2014 The Consolidated Statement of Other Comprehensive Income is to be read in conjunction with the accompanying notes to the Financial Statements. 33 30 June30 June20142013$’000$’000Net operating profit for the year82,939 66,600Other comprehensive incomeItems that may be reclassified to profit and loss in future yearsNet changes in the fair value of available-for-sale financial assets8(c) 10,076 31,093 Net (gain)/loss on sale of available-for-sale financial assets recycled through profit or loss6(e)(4,221)(24,805)Income tax benefit/(expense) on the above item5(a)(1,759)(1,852)Other comprehensive income for the year, net of tax 4,096 4,436Total comprehensive income for the year 87,035 71,036NoteConsolidated MAGELLAN FINANCIAL GROUP LIMITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 30 June 2014 The Consolidated Statement of Financial Position is to be read in conjunction with the accompanying notes to the Financial Statements. 34 30 June30 June20142013$’000$’000AssetsCurrent assetsCash and cash equivalents16(c)82,868 38,096 Financial assets8(a)302 14,685 Receivables7 23,431 35,181 Loans - share purchase plan 121,783 1,489 Prepayments252 326 Total current assets 108,636 89,777Non-current assetsFinancial assets8(b)125,558100,488Loans - share purchase plan 12 2,271 2,835 Property, plant and equipment9386341Total non-current assets 128,215 103,664Total assets236,851193,441LiabilitiesCurrent liabilitiesPayables10 11,471 17,331 Income tax payable 10,538 16,839 Total current liabilities 22,009 34,170 Non-current liabilitiesDeferred tax liabilities5(c) 7,460 5,721 Provisions10 795 511 Total non-current liabilities 8,255 6,232 Total liabilities 30,264 40,402 Net assets 206,587 153,039EquityContributed equity11 93,812 76,378 Available for sale reserve 25,516 21,420 Retained profits 87,259 55,241 Total attributable to members of the Group 206,587 153,039Total equity206,587153,039NoteConsolidated MAGELLAN FINANCIAL GROUP LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2014 The Consolidated Statement of Changes in Equity is to be read in conjunction with the accompanying notes to the Financial Statements. 35 Contributed EquityRetained ProfitsAvailable for Sale ReserveTotal2014$’000$’000$’000$’000Equity - 1 July 2013 76,378 55,241 21,420 153,039 Net profit for the year - 82,939 - 82,939 Other comprehensive income - - 4,096 4,096 Total comprehensive income for the year - 82,939 4,096 87,035 Transactions with owners in their capacity as owners:Issue of securities: - under employee share purchase plan (SPP)11(a) 1,682 - - 1,682 - on exercise of MFG 2016 Options11(a) 15,511 - - 15,511 - transaction costs arising on share issue11(a)(31) - - (31)Dividends paid4 - (50,921) - (50,921)SPP expense for the year11(a) 272 - - 272Total transactions with equity holders in their capacity as equity owners17,434(50,921) - (33,487)Equity - 30 June 201493,81287,25925,516206,587Equity - 1 July 2012 115,395 14,837 16,984 147,216 Net profit for the year - 66,600 - 66,600 Other comprehensive income - - 4,436 4,436 Total comprehensive income for the year - 66,600 4,436 71,036 Transactions with owners in their capacity as owners:Issue of securities: - under employee share purchase plan (SPP)11(a) 765 - - 765 - on exercise of MFG 2016 Options11(a) 292 - - 292 Dividends paid4 - (12,219) - (12,219)In-specie distribution4,11(a)(40,772)(13,977) - (54,749)SPP expense for the year11(a) 698 - - 698Total transactions with equity holders in their capacity as equity owners(39,017)(26,196) - (65,213)Equity - 30 June 201376,37855,24121,420153,039NoteAttributable to Equity Holders of the Consolidated Entity MAGELLAN FINANCIAL GROUP LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 30 June 2014 The Consolidated Statement of Cash Flows is to be read in conjunction with the accompanying notes to the Financial Statements. 36 30 June30 June20142013$’000$’000Cash flows from operating activitiesManagement, service and consulting fees received 128,664 49,616 Performance fees received 23,792 10,999 Interest received 1,618 1,947 Proceeds from sale of held for trading financial assets - 23 Dividends and distributions received362 952 Tax paid(33,801)(11,583)Payments to suppliers and employees (inclusive of GST)(33,801)(20,701)Net cash inflows/(outflows) from operating activities16(a) 86,834 31,253Cash flows from investing activitiesProceeds from sale of available-for-sale financial assets6,43211,312Payments for available-for-sale financial assets(28,835)(14,541)Net matured term deposits classified as loans and receivables14,35215,754Net cash flows from foreign exchange transactions(713)(11)Payments for property, plant and equipment9(a)(217)(173)Net cash inflows/(outflows) from investing activities(8,981)12,341Cash flows from financing activitiesProceeds from issue from securities 15,978 501 Proceeds from repayment of SPP loans 1,872 3,698 Dividends paid4(50,921)(12,219)Net cash inflows/(outflows) from financing activities(33,071)(8,020)Net increase / (decrease) in cash and cash equivalents44,78235,574Effects of exchange rate movements on cash and cash equivalents(10) 1,470 Cash and cash equivalents at the beginning of the year 38,096 1,052 Cash and cash equivalents at the end of the year16(c) 82,868 38,096 NoteConsolidated MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies This financial report is for Magellan Financial Group Limited (the “Company”) and its controlled entities (the “Group”) for the year ended 30 June 2014. The report was authorised for issue in accordance with a resolution of the Directors on 14 August 2014. The principal accounting policies adopted in the preparation of this financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of Preparation (a) The financial report is a general purpose financial report which is presented in Australian dollars and has been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and other mandatory professional reporting requirements. The Company is a for-profit entity for the purpose of preparing this financial report. Compliance with IFRS The financial report complies with Australian Accounting Standards (AASB) and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Historical cost convention This financial report has been prepared on a going concern basis and under the historical cost convention except for assets and liabilities which are measured at fair value. Changes in accounting policy, accounting standards and interpretations The accounting policies adopted are consistent with those of the previous financial year and corresponding reporting period except for the adoption of the new standards and amendments which became mandatory for the first time this reporting period commencing 1 July 2013. (i) New and amended standards and interpretations In the current year, the Group and Company adopted the following new and amended Australian Accounting Standards and interpretations as of 1 July 2013:  AASB 10: Consolidated Financial Statement (AASB 10), AASB 11: Joint Arrangements (AASB 11), AASB 12: Disclosure of Interests in Other Entities, AASB 127: Separate Financial Statements (AASB 127), AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7: Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards AASB 10 (issued August 2011) replaced the guidance on control and consolidation in AASB 127 and in Interpretation 112 Consolidation – Special Purpose Entities. The Group reviewed its investments in other entities to assess whether the conclusion to consolidate is different under AASB 10 and AASB 11 than under AASB 127 and AASB 131. No differences were identified and therefore no adjustments to any of the carrying amounts in the financial statements are required as a result of the adoption of AASB 10 or AASB 11. Refer to note 1(b) for the revised accounting policy on the principles of consolidation. AASB 12 requires disclosures relating to the Group’s interests in subsidiaries, joint arrangements, associates and structured entities. It requires information about joint arrangements, associates, structured entities and subsidiaries with non-controlling interests. As the Group does not have any joint arrangements, associates, investments in structured entities or non-controlling interests that are material to the Group, the adoption of AASB 12 has not resulted in any significant change in disclosures, which have been included in note 14. 37 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies (continued) (a) (i)   Basis of Preparation (continued) New and amended standards and interpretations (continued) AASB 13: Fair Value Measurement (AASB 13) and AASB 2011-8: Amendments to Australian Accounting Standards arising from AASB 13 AASB 13 provides guidance for determining the fair value of assets and liabilities. It does not change when the Group is required to use fair value, but, rather, provides guidance on how to determine fair value when fair value is required. It has also expanded the disclosure requirements for all assets and liabilities carried at fair value. The Group reviewed its policies for measuring fair values of assets and liabilities and the adoption of AASB 13 has not resulted in any change in the fair value measurements of the assets and liabilities of the Group, however additional disclosures have been included in note 17(h). AASB 119 Employee Benefits (Revised 2011) (AASB 119) and AASB 2011-10: Amendments to Australian Accounting Standards arising from AASB 119 AASB 119 Employee Benefits revised the definition of short-term and long-term employee benefits and requires all employee benefits to be calculated and classified based on when the employee benefit is expected to be taken rather than when it vests. Discounting is to be applied to all long-term benefits. The adoption of AASB 119 did not result in a material impact on the Group’s financial performance or financial position. None of the other new standards or interpretations adopted from 1 July 2013 affected any of the amounts or the disclosures in the current or prior year. Accounting Standards and interpretations issued but not yet effective (ii) The Australian and International Accounting Standards issued but not yet mandatory for the 30 June 2014 reporting period have not been adopted by the Group or Company in the preparation of this financial report. The assessment of the impact of the new standards and interpretations which may have a material impact on the Group are set out below:   AASB 9: Financial Instruments (AASB 9) and AASB 2012-6: Amendments to Australian Accounting Standards – Mandatory Effective Date of AASB 9 and Transition Disclosures (effective 1 July 2018) AASB 9 contains new requirements for classification, measurement and de-recognition of financial assets and liabilities, replacing the recognition and measurement requirements in AASB 139 Financial Instruments: Recognition and Measurement. Under the new requirements the four current categories of financial assets discussed at note 1(j) will be replaced with two measurement categories: fair value and amortised cost. Financial assets will only be able to be measured at amortised cost where very specific conditions are met. At 30 June 2014, the Group continues to evaluate the disclosure requirements of this standard but does not anticipate it will have a material financial impact as the carrying values of its investments approximate fair value. However the adoption of the standard is expected to result in a change in the presentation of fair value movements within the Consolidated Statement of Profit or Loss and the Consolidated Statement of Other Comprehensive Income and also impact the type of information disclosed in the notes to the financial statements. IFRS 15: Revenue from Contracts with Customers (effective 1 July 2017) (IFRS 15) IFRS 15 supercedes the revenue recognition guidance in AASB 118 Revenue, AASB 111 Construction Contracts and related interpretations. The core principle in IFRS 15 requires revenue recognition to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled to receive. IFRS 15 has not yet been issued as an Australian Accounting Standard but this is expected to occur shortly. At 30 June 2014, the Group continues to evaluate the impacts of IFRS 15 however additional information disclosed in the notes to the financial statements is expected to be required. 38 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies (continued) Principles of Consolidation (b) The consolidated financial report of the Group comprises the assets and liabilities of all controlled entities and the results of all controlled entities for the year. The Company and its controlled entities are collectively referred to in this financial report as the ‘Group’ or the ‘consolidated entity’. Controlled entities i) Controlled entities are entities over which the Group has control, which is when the Group is exposed, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. When the Group has less than a majority of the voting or similar rights of an entity, the Group also considers the following when assessing whether it has the power of control over the entity: contractual arrangements with the other voting holders of the entity, rights arising from other contractual arrangements and the Group’s voting rights and potential voting rights. Controlled entities are fully consolidated from the date control commenced and deconsolidated from the date that control ceased. Refer to note 14 for all controlled entities. All inter-entity balances and transactions between entities in the Group, including unrealised profits or losses, have been eliminated in full on consolidation. Accounting policies of the controlled entities have been changed where necessary to ensure consistency with those policies adopted by the Group. Associates ii) An associate is an entity over which the Group is determined to have significant influence and that is neither a subsidiary nor a joint venture. The Group generally deems it has significant influence if it has greater than a 20% share in the entity. Investments in associates are accounted for using the equity method of accounting in the consolidated financial statements. Under the equity method, the investment in an associate is carried in the Consolidated Statement of Financial Position at cost plus post acquisition changes in the Group’s share of net assets of the associate. Where an associate was previously a controlled entity of the Group, the deemed cost for the purpose of applying the equity method is the fair value on the date that the Group ceased to have a controlling interest. After application of the equity method, the Group determines whether it is necessary to recognise any impairment loss with respect to the Group’s net investment in associates. The Group’s share of an associate’s post-acquisition profit or loss is recognised in profit or loss, and its share of post-acquisition movements in reserves, including its available for sale reserve, is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends received or receivable from an associate are recognised in the Statement of Profit or Loss and Statement of Other Comprehensive Income as income, while in the consolidated financial statements they reduce the carrying value of the investment. Changes in ownership interests iii) When the Group ceases to have control, joint control or significant interest, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities, which means that amounts previously recognised in other comprehensive income are reclassified to profit or loss. 39 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies (continued) Business Combinations (c) The purchase method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Where listed equity instruments are issued in a business combination, the fair value of the instruments is the published closing market bid price as at the date of the exchange. Where unlisted equity instruments are issued in a business combination, the fair value of the instruments will be determined by the Directors using an appropriate valuation methodology. Acquisition costs arising on the issue of equity instruments are recognised directly in equity. Except for non-current assets or disposal groups classified as held-for-sale (which are measured at fair value less costs to sell), all identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of the business combination over the net fair value of the Group’s share of the identifiable net assets acquired is recognised as goodwill. If the cost of the acquisition is less than the Group’s share of the net fair value of the identifiable net assets of the controlled entity, the difference is recognised as a gain in profit or loss, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of the consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the Company’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Segment Reporting (d) An operating segment is a distinguishable component of the Group that is engaged in business activities from which the Group earns revenues and incurs expenses, whose operating results are regularly reviewed by the Group’s chief operating decision maker in order to make decisions about the allocation of resources to the segment and assess its performance, and for which discrete financial information is available. The chief operating decision maker has been determined as the Chief Executive Officer, Mr Hamish Douglass. Foreign Currency Translation (e) The functional and presentation currency of the Company and its controlled entities as determined in accordance with AASB 121: The Effects of Changes in Foreign Exchange Rates is the Australian dollar. Transactions denominated in foreign currencies are translated into Australian dollars at the foreign currency exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to Australian dollars at the Reuters London 4pm exchange rates at balance date. The fair values of financial assets are determined using the Reuters London 4pm exchange rates at balance date. Foreign currency exchange differences relating to financial assets are included in net changes in fair value in the Consolidated Statement of Profit or Loss. All other foreign currency exchange differences are presented separately in the Consolidated Statement of Profit or Loss as net gains/losses on foreign exchange. Revenue Recognition (f) Management fees Management fees arise from providing:  investment management services as investment manager and sub-advisor to the funds and external wholesale client mandates set out at note 2; and  Trustee and Responsible Entity services where the Company acts as Trustee and Responsible Entity to the funds as set out in note 2. Management fee revenue, which is based on a percentage of the fund’s or mandate’s portfolio value, is recognised in the Consolidated Statement of Profit or Loss as it is earned and calculated in accordance with the Investment Management Agreements, mandates and Constitutions of the funds as set out in note 2. 40 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies (continued) Revenue Recognition (continued) (f) Service fees Service fees arise from providing investment research and administrative services to Magellan Flagship Fund Limited (MFF). Service fee revenue is calculated at 1.25% per annum (excluding GST, payable quarterly in arrears) of the market value of all assets less total indebtedness of MFF divided by the weighted average number of MFF shares on issue during the quarter and multiplied by the lesser of (i) the number of shares on issue at 30 June 2013 or (ii) the weighted average number of shares on issue during the relevant quarter. The service fees are reduced by an amount equivalent to MFF’s Managing Director and Portfolio Manager’s base remuneration of $1,000,000 per annum inclusive of superannuation (capped amount) and associated payroll related costs; and travel and incidental expenses up to an amount of $120,000 per annum. Service fee revenue is recognised in the Statement of Profit or Loss as it is earned and calculated in accordance with the Services Agreement. Performance fees The Group may earn performance fees from its retail funds, from some institutional mandates and MFF. Where a performance fee is applicable to an institutional client mandate, the base management fee will generally be lower than earned from mandates where no performance fee applies. The Group’s entitlement to performance fees for any given performance period is dependent on the portfolio outperforming certain hurdles, which may be index relative hurdles, absolute return hurdles or a combination of both. Performance fees are generally subject to either a high water mark arrangement or a deficit clause, which ensures that fees are not earned more than once on the same performance. The Group’s entitlement to performance fees from MFF is dependent on MFF’s total shareholder return exceeding 10% per annum, compounded annually, over prescribed performance periods. Performance fees are recognised in the Consolidated Statement of Profit or Loss only when the Group’s entitlement to the fee becomes certain, which is at the end of the relevant performance period. Performance periods for the Group’s performance fee arrangements range from three months to four years. Refer to note 6 for further details on the management, service and performance fees. Consulting fees Consulting fee income is recognised when the Group is entitled to it, which is determined by the terms and conditions of the contractual arrangement. Interest income Interest income is recognised on an accruals basis using the effective interest rate method. Dividend and distribution income Dividend and distribution income is recognised when it is declared. Net gain or loss on sale The gain or loss on disposal of assets is calculated as the difference between the carrying amount of the asset at the date of disposal and the net proceeds from disposal and is included in the Consolidated Statement of Profit or Loss and Consolidated Statement of Other Comprehensive Income in the year of disposal. Expenses (g) Expenses are recognised in the Consolidated Statement of Profit or Loss on an accruals basis. Directors’ fees (including superannuation) and related employment taxes are included as an expense in the Consolidated Statement of Profit or Loss as incurred. Information regarding the Directors’ remuneration is included in section 3.3 of the Remuneration Report. 41 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies (continued) Income Tax (h) The income tax expense/benefit is the tax payable/receivable on the current year’s taxable income based on the current income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Taxable profit differs from net profit as reported in the Consolidated Statement of Profit or Loss and Consolidated Statement of Other Comprehensive Income as items of income or expense are taxable or deductible in years other than the current year and in addition some items are never taxable or deductible. Deferred tax assets and liabilities are recognised for all deductible temporary differences and unused tax losses carried forward to the extent that it is probable that future taxable amounts will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised only to the extent that it is probable that future taxable profits will allow the deferred tax asset to be recovered. Current tax and deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of balance date. Tax Consolidation - Australia Magellan Financial Group Limited (MFG) and its wholly owned Australian controlled entities formed a tax consolidated group for the purpose the tax consolidation legislation, on 1 July 2007. MFG is the head entity of the tax consolidated group. Under the tax consolidation legislation, the head entity and each controlled entity continues to account for its own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition, MFG also recognised the current tax assets or liabilities and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. On forming the tax consolidation group, each entity in the tax consolidated group entered into a tax sharing agreement, which limits the joint and several liability of the wholly owned entities in the case of a default of the head entity, MFG. The Company has also entered into a tax funding agreement under which the wholly owned entities fully compensate MFG for any current tax payable assumed and are compensated by MFG for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to MFG under the tax consolidation legislation. The funding amount is determined by reference to the amounts recognised in the financial report. Assets and liabilities arising under the tax funding agreement with the tax consolidated entities are recognised as related party receivables or payables and these amounts are due upon demand from MFG or the relevant entity. MFG may also require payment of interim funding amounts to assist with its obligations to pay tax instalments and the funding amounts are also recognised as related party receivables or payables. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly owned tax consolidated entities. 42 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies (continued) (h) Income Tax (continued) Offshore Banking Unit Magellan Asset Management Limited, a controlled entity of MFG, and a member of MFG’s tax consolidation group, was declared an Offshore Banking Unit (OBU) on 31 July 2013. Under current Australian tax legislation, assessable offshore banking (OB) income derived from the Group’s OB funds management and advisory activities provided to clients outside of Australia and New Zealand, net of costs, is subject to a concessional tax rate of 10%. Revenues earned from non-resident clients that are invested in the Group’s Global Equities strategy meet the current definition of assessable OB income. The amount of assessable OB income, net of costs, in a financial year that will be subject to the 10% concessional tax rate is determined with reference to the current legislation’s definitions of assessable OB income, exclusive OB deductions and general OB deductions. For further details refer to note 5(d). Goods and Services Tax (GST) (i) Revenue, expenses and assets (with the exception of receivables) are recognised net of the amount of GST, except when GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of that purchase or as an expense. Receivables and payables are stated inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included in the Consolidated Statement of Financial Position as a receivable or payable. Cash Flows are included in the Consolidated Statement of Cash Flows on a gross basis. The GST component of cash flows arising from financing activities which are recoverable from, or payable to the taxation authority, is presented as operating cash flows. Financial Assets and Liabilities (j) The Group classifies its financial assets into one of the four following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. Designation is re-evaluated at each financial year end, but there are restrictions on reclassifying to other categories. Financial liabilities are classified as financial liabilities at amortised cost. Classification of financial assets and liabilities depends on the purpose for which the assets and liabilities were acquired. The Group’s classifications are set out below: Financial asset/liability Cash Receivables Financial assets Payables Classification Valuation basis Fair value through profit or loss Loans and receivables Loans and receivables Available-for-sale Held for trading Financial liability at amortised cost Fair value Amortised cost Amortised cost Fair value Fair value Amortised cost Refer to note 1(k) Refer to note 1(l) Refer to note 1(n) Refer to note 1(n) Refer to note 1(n) Refer to note 1(q) Derecognition of Financial Assets and Financial Liabilities Financial assets and financial liabilities are derecognised when the Group no longer controls the contractual rights that comprise the financial instrument which is normally the case when the instrument is sold. Cash and Cash Equivalents (k) Cash includes cash at bank and deposits. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. Term deposits with a term of 90 days or less from the date of inception are classified as cash equivalents. For term deposits with a term of greater than 90 days refer also to note 1(n)(iii). 43 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies (continued) Receivables (l) Receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for uncollectible amounts. This is the original invoice amount rendered for management, administration and performance fees, less a provision for any uncollected debt. Collectability of receivables is reviewed regularly and bad debts are written off when identified. A specific provision for doubtful debts is made where there is objective evidence that the Group will not be able to collect the original receivable amount. Financial difficulties of the debtor or default payments are considered objective evidence of impairment. The amount of the impairment loss is the receivable carrying amount compared with the present value of estimated future cash flows, discounted at the original effective interest rate. Derivatives (m) Derivatives are categorised as held-for-trading financial assets and are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event, the timing of the recognition in profit or loss depends on the nature of the hedge relationship. Derivatives are recognised as assets when their fair value is positive and as liabilities when their fair value is negative. Financial Assets (n) The Company’s financial assets comprise and are classified as follows: Classification Type of Financial asset Listed shares Available-for-sale Subordinated bank notes Available-for-sale Available-for-sale Unlisted funds Available-for-sale Unlisted shares Loans and receivable Term deposits Valuation basis Fair value Fair value Fair value Fair value Amortised cost Refer to note 1(n)(i) Refer to note 1(n)(i) Refer to note 1(n)(i) Refer to note 1(n)(i) Refer to note 1(n)(iii) Available-for-Sale Financial Assets i) Available-for-sale financial assets are assets that are not classified in any other financial asset category. These assets are carried at fair value. Changes in the fair value of available-for-sale financial assets are recognised in the available for sale reserve in the Consolidated Statement of the Financial Position and included in Consolidated Statement of Profit or Loss and Consolidated Statement of Other Comprehensive Income until the asset is disposed or impaired. When available-for-sale financial assets are sold or impaired, cumulative gains recognised in the available for sale reserve are recognised in the Consolidated Statement of Profit or Loss. Cumulative losses are recognised in the available for sale reserve to the extent that they reverse previously recorded gains, and when previously recorded gains have been reversed in full, any impairment loss below original cost (when significant and prolonged) is recognised in the Consolidated Statement of Profit or Loss. In assessing whether an available-for-sale asset is impaired, the Board considers a number of quantitative and qualitative factors, including the current market price of the asset, research performed internally by experienced equity analysts, and, where appropriate, external research that provides guidance on the long-term underlying value of the asset. Available-for-sale financial assets are classified as non-current assets unless management intends to dispose of the assets within 12 months of balance date. Purchases and Sales of Financial Assets ii) All purchases and sales of financial assets are recognised on the trade date, being the date that the Group commits to purchase or sell the asset. Purchases or sales of financial assets are purchases or sales under contracts that require delivery of the assets or settlement within the period generally established by regulation or convention in the market place. 44 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies (continued) Purchases and Sales of Financial Assets (continued) ii) Payments and receipts relating to the purchase and sale of investment securities are classified as cash flows from operating activities, as movements in the fair value of these securities represent the Group’s main income generating activity. Loans and Receivables iii) Term deposits with a term greater than 90 days from the date of inception are classified as loans and receivables. The deposits are initially recognised at fair value and then carried at amortised cost using the effective interest rate method. They are classified as current assets where the term to maturity from balance date is less than 12 months and as non-current assets where the term to maturity is greater than 12 months. Changes in the fair value of investments are recognised in the Consolidated Statement of Profit or Loss. When investments are disposed the net gain or loss on sale is recognised in the Consolidated Statement of Profit or Loss at the date of sale. Held-for-Trading Financial Assets iv) Held-for-Trading Financial Assets are short-term trading securities which are carried at fair value. Changes in fair value are recognised in the Consolidated Statement of Profit or Loss. Impairment of Assets (o) All non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Where an indicator or objective evidence of impairment exists, an estimate of the asset’s recoverable amount is made. An impairment loss is recognised in the Consolidated Statement of Profit or Loss for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Property, Plant and Equipment (p) Property, plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to its acquisition. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset. Depreciation and amortisation Depreciation is calculated on a straight-line basis over the estimated useful life of the assets as follows: Furniture, fittings and leasehold improvements Computer equipment - over three to five years - over three to five years The assets’ residual values and useful lives are reviewed at each balance date. An asset’s carrying amount is written down to recoverable amount where an indicator of impairment or objective evidence exists. An impairment loss is recognised in the Consolidated Statement of Profit or Loss where the asset’s carrying amount is greater than its estimated recoverable amount. An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the Consolidated Statement of Profit or Loss. Payables (q) Payables comprise trade creditors and accrued expenses owing by the Group at balance date which are unpaid. Trade creditors represent liabilities for goods and services received by the Group prior to the end of the year that remain unpaid at balance date. They are unsecured and usually paid within 30 days of recognition. Payables are recognised at amortised cost at the point where the Group becomes obliged to make payments in respect of the purchase of these goods and services. 45 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies (continued) Payables (continued) (q) A dividend payable to shareholders of the Group is recognised for the amount of any dividend declared, determined or publicly recommended by the Directors on or before balance date but not paid at balance date. Employee Expenses and Entitlements (r) Wages, salaries and annual leave Liabilities for wages and salaries (including non-monetary benefits) and annual leave are recognised in payables within accrued employee entitlements and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave that are expected to be settled within 12 months from balance date are recognised in respect of employees’ services up to balance date and included as current liabilities in the Consolidated Statement of Financial Position. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable. Employee benefit on-costs are included in accrued employee entitlements in the Consolidated Statement of Financial Position and employee expenses in the Consolidated Statement of Profit or Loss when the employee entitlements to which they relate are recognised. Bonus plan A liability is and an expense is recognised for the bonus plan where the Group is contractually obliged or where there is past practice that has created a constructive obligation to pay the relevant bonuses. The cash bonus is paid within three months of balance date. The conditional deferred cash bonus is paid in twelve equal instalments in the following financial year and payment of the deferred cash bonus is conditional on an eligible employee being employed at the time of payment. The deferred cash bonus for each month is expensed in the Consolidated Statement of Profit or Loss as incurred. Long service leave Liabilities for long service leave are recognised when employees reach a qualifying period of continuous service and are measured at the amount expected to be settled within 12 months from balance date. Any amount which is expected to be payable after 12 months from balance date is classified as a non-current liability and measured as the present value of expected future payments. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service and discounted using market yields at balance date on national government bonds with terms to maturity that match, a closely as possible, the estimated future cash outflows. Share Purchase Plan (s) The Company has in place a Share Purchase Plan (SPP) for employees and Non-executive Directors (‘Participants’) to purchase shares in the Company (see Directors Report – Remuneration Report – Share Purchase Plan). The Company provides financial assistance to Participants, by way of an interest free loan. Loans to Participants are initially recognised at fair value, which is determined by discounting loans to their net present value using the risk-free interest rate at the time the loan is granted and an estimated repayment schedule. Following initial recognition, they are carried at amortised cost using the effective interest rate method, adjusted for changes in the projected repayment schedule. Changes in the carrying value of these are recognised in ‘interest income’ in profit or loss. The cost of providing the benefit to Participants is recognised as an employee benefits expense in profit or loss on a straight line basis over the expected life of the loan, in accordance with AASB 2: Share Based Payments. Details of the loans outstanding at balance date, and of the changes in carrying value of the loans and employee benefits expense recognised in profit or loss are provided in note 12. 46 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 1. Summary of Significant Accounting Policies (continued) Leases (t) Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Net rental payments for operating leases are recognised as an expense in the Consolidated Statement of Profit or Loss on a straight-line basis over the period of the lease. Contributed Equity (u) The Group’s ordinary shares, MFG 2016 Options and Class B Shares are classified as equity and recognised at the value of consideration received by the Group. Incremental costs directly attributable to the issue of new shares are recognised in equity as a deduction, net of tax. Earnings Per Share (v) Basic earnings per share is calculated as net profit/(loss) after income tax expense for the year divided by the weighted average number of ordinary shares on issue. Diluted earnings per share is calculated by adjusting the basic earnings per share to take into account the effect of any costs associated with dilutive potential ordinary shares and the weighted average number of additional ordinary units that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. Refer to note 3 for further details. Rounding of Amounts (w) The Group is of a kind referred to in the Australian Securities & Investments Commission’s Class Order 98/0100 (as amended) and amounts in the financial statements have been rounded off to the nearest thousand dollars in accordance with that Class Order, or in certain cases, the nearest dollar. Parent Entity Financial Information (x) The financial information for the parent entity, MFG, (disclosed in note 13) has been prepared on the same basis as the Group’s consolidated financial statements, except for investments in subsidiaries which are accounted for at cost in the financial statements of MFG. Critical Accounting Estimates and Judgements (y) The preparation of the financial statements requires the Directors to make judgements, estimates and assumptions that affect the amounts reported in the financial statements. The Directors base their judgements and estimates on historical experience and various other factors they believe to be reasonable under the circumstances, but which are inherently uncertain and unpredictable, the result of which forms the basis of the carrying values of assets and liabilities. As such, actual results could differ from those estimates. The main area where a higher degree of judgement or complexity arises or areas where assumptions and estimates are significant to the Group and Company’s financial statements is the valuation of unlisted investments. The valuation techniques used, which involves estimates, are discussed in detail at note 17(h). Apart from the above and as the Company’s cash and cash equivalents are provided by strongly rated financial institutions, none of the other assets or liabilities are subject to significant judgement or complexity due to the timing of when revenues or expenses are accrued and recognised. 47 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 2. Segment Information The Group’s business activities are organised into the following reportable operating segments for internal management purposes: Funds Management The funds management activities of the Group, which are undertaken by the controlled entity, Magellan Asset Management Limited (MAM), comprise acting as:  Trustee, Responsible Entity and Investment Manager for the following managed investment schemes offered primarily to Australian and New Zealand investors: o Magellan Global Fund o Magellan Global Fund (Hedged) o Magellan Infrastructure Fund o Magellan Infrastructure Fund (Unhedged); and o Magellan High Conviction Fund (collectively, the Unlisted Funds);      Trustee and Investment Manager for the Magellan Core Infrastructure Fund (MCIF), which is an unregistered managed investment scheme offered to Australian wholesale investors; Investment Manager for the MFG Global Fund, a fund authorised under the European Communities (Undertakings for Collective Investment in Transferable Securities (UCITS)) and offered to global institutional clients; Sub-adviser to the Frontegra MFG Global Equity Fund and the Frontegra MFG Core Infrastructure Fund, which are offered to wholesale investors in the United States; Investment Manager for the Magellan Flagship Fund Limited (MFF) until 30 September 2013 and investment research and administrative services provider to MFF from 1 October 2013 (refer to note 6(b) for further details); and Investment Manager or Sub-adviser to other external wholesale client mandates. Principal Investments The principal investment portfolio is comprised of the Company’s investments in the Unlisted Funds, the Frontegra MFG Funds and in a select portfolio comprising Australian and international listed companies, cash, and other investments, and net deferred tax assets/liabilities arising from changes in fair value of these investments. Corporate This includes interest income on the Company’s Share Purchase Plan (SPP) loans and cash and term deposits, corporate costs, cash (including term deposits), all current tax liabilities and deferred tax assets/liabilities excluding those arising from changes in the fair value of financial assets. 48 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 2. Segment Information (continued) (a) Segment financial results The operating results of the Group’s operating segments, excluding income tax expense, are as follows: 49 Funds ManagementPrincipal InvestmentsCorporateConsolidatedJune 2014$’000$’000$’000$’000RevenueManagement fees 132,567 - - 132,567 Performance fees 2,117 - - 2,117 Service fees 3,918 - - 3,918 Interest income 541 56 1,406 2,003 Dividend and distribution income - 3,995 - 3,995 Net gain/(loss) on sale of available-for-sale financial assets - 4,221 - 4,221 Net foreign exchange gain/(loss)(10)(715) - (725)Other 2 - 11 13 Total revenue 139,135 7,557 1,417 148,109 ExpensesEmployee benefits expense 23,356 - 242 23,598 Employee benefits expense - SPP 243 - 29 272 Other expenses 13,017 62 68113,760 36,616 62 952 37,630 Operating profit before income tax expense 102,519 7,495 465 110,479 Other comprehensive incomeNet changes in fair value of available-for-sale financial assets - 10,076 - 10,076 Net (gain)/loss on sale of available-for-sale financial assets recycled through profit or loss - (4,221) - (4,221)Other comprehensive income for the year, before tax - 5,855 - 5,855 Total comprehensive income for the year, before tax 102,519 13,350 465 116,334 June 2013RevenueManagement fees 56,007 - - 56,007 Performance fees 28,449 28,449 Consulting fees 1,200 1,200 Interest income 447 7 2,511 2,965 Dividend and distribution income - 2,308 - 2,308 Net changes in fair value of financial assets - 3,698 - 3,698 Net gain/(loss) on sale of available-for-sale financial assets - 24,805 - 24,805 Net foreign exchange gain/(loss) 683 776 - 1,459 Other - 15 - 15 Total revenue 86,786 31,609 2,511 120,906 ExpensesEmployee benefits expense 16,758 - 53 16,811 Employee benefits expense - SPP 669 - 29 698 Other expenses 7,780 - 615 8,395 25,207 - 697 25,904 Operating profit before income tax expense 61,579 31,609 1,814 95,002 Other comprehensive incomeNet changes in fair value of available-for-sale financial assets - 31,093 - 31,093 Net (gain)/loss on sale of available-for-sale financial assets recycled through profit or loss - (24,805) - (24,805)Other comprehensive income for the year, before tax - 6,288 - 6,288 Total comprehensive income for the year, before tax61,579 37,897 1,814 101,290 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 2. Segment Information (continued) (b) Segment Assets and Liabilities The assets and liabilities of the Group’s segments are as follows: The Group’s net investment into its funds management business activities is: (A) The Funds Management segment maintains a minimum of $20,000,000 in liquid assets (including cash and cash equivalents to meet regulatory and operating requirements) (June 2013: $10,000,000). (B) Eliminations include adjustments and eliminations for inter-segment transactions and netting of items on the Consolidated Statement of Financial Position. (C) On 2 August 2013, the subordinated loan was repaid following receipt of consent by ASIC. Refer to note 15(d)(iii). 50 Funds Management(A)Principal InvestmentsCorporateEliminations(B)Consolidated30 June 2014$’000$’000$’000$’000$’000Cash and cash equivalents 26,293 281 56,294 - 82,868 Financial assets - term deposits 302 - - - 302 Financial assets - investments - 125,558 - - 125,558 Receivables and other assets 20,515 3,532 22 - 24,069 Loans - SPP - - 4,054 - 4,054 Total assets 47,110 129,371 60,370 - 236,851 Payables & provisions 12,179 6 81 - 12,266 Tax liabilities - 9,745 8,253 - 17,998 Total liabilities 12,179 9,751 8,334 - 30,264 Net assets 34,931 119,620 52,036 - 206,587 30 June 2013Cash and cash equivalents 9,096 376 28,624 - 38,096 Financial assets - term deposits 5,966 - 8,719 - 14,685 Financial assets - investments - 100,488 - - 100,488 Receivables and other assets 34,475 1,328 1,195 (1,150)35,848 Loans - SPP - - 4,324 - 4,324 Total assets 49,537 102,192 42,862 (1,150)193,441 Payables & provisions 8,928 8,806 1,258 (1,150)17,842 Tax liabilities - 7,921 14,639 - 22,560 Total liabilities 8,928 16,727 15,897(1,150)40,402 Net assets 40,609 85,465 26,965 - 153,039 30 June30 June20142013$’000$’000Capital invested in controlled entity12,500 12,500 Subordinated loan to controlled entity(C)- 1,150 Total net investment12,500 13,650 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 3. Earnings per Share (EPS) Reconciliation of earnings used in calculating earnings per share Weighted average number of securities The reconciliation of the weighted average number of shares on a fully diluted basis used to calculate diluted EPS is below: (A) During the year ended 30 June 2014, the MFG share price was above the MFG 2016 Options exercise price. The MFG 2016 Options are considered to be potential ordinary shares for the purposes of the diluted earnings per share calculation and have been included in the determination of diluted earnings per share to the extent they are dilutive. (B) The Class B shares (refer to note 11(d)(iii)) are considered to be potential ordinary shares for the purposes of the diluted earnings per share calculation and have been included in the determination of diluted earnings per share to the extent they are dilutive. The equivalent number of Class B shares for the purposes of calculating the diluted earnings per share has been determined as the weighted average number of ordinary shares into which the Class B shares would convert applying a conversion factor of 0.0637028, and assuming the 1,898,524 MFG 2016 Options had been exercised at 1 July 2014. 51 30 June30 June20142013Basic earnings per shareNet profit attributable to shareholders ($'000)82,939 66,600 Weighted average number of shares for basic EPS ('000)155,675 152,624 Basic earnings per share (cents)53.3 43.6 Diluted earnings per shareNet profit attributable to shareholders ($'000)82,939 66,600 Weighted average number of shares for diluted EPS ('000)169,772 166,409 Diluted earnings per share (cents)48.9 40.0 ConsolidatedNet profit after income tax expense used in the calculation of basic and diluted earnings per share ($'000)82,939 66,600 Weighted average number of ordinary shares on issue used in calculating basic EPS ('000)155,675 152,624 Add adjustments: - equivalent number of unexercised MFG 2016 Options(A)3,861 3,943 - equivalent number of Class B shares(B)10,236 9,842 Weighted average number of shares used in calculating diluted EPS ('000)169,772 166,409 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 4. Dividends Notes (i) Declared and paid during the year Fully franked interim dividend - 16.5 cents per ordinary share: paid 10 March 2014 Fully franked final dividend - 16.5 cents per ordinary share: paid 11 October 2013 Fully franked interim dividend - 5.0 cents per ordinary share: paid 10 April 2013 Fully franked final dividend - 3.0 cents per ordinary share: paid 19 October 2012 Total dividends paid during the year 30 June 2014 $’000 30 June 2013 $’000 25,712 25,209 - - 50,921 - - 7,635 4,584 12,219 In-specie distribution Fully franked dividend component of in-specie distribution - 9.16 cents per ordinary share: paid 19 February 2013 4(iii) Total dividends and in-specie distributions - 50,921 13,977 26,196 Dividend declared (ii) On 14 August 2014, the Directors declared a fully franked final dividend of 21.8 cents per share in respect of the year ended 30 June 2014 (June 2013: 16.5 cents per share). The amount of the declared dividend expected to be paid on 1 September 2014, but not recognised as a liability, is approximately $34,628,000. In-specie distribution (iii) On 14 December 2012, the Company announced an in-specie distribution to MFG shareholders which involved distributing MFG’s holdings of shares and options in Magellan Flagship Fund Limited (MFF). This distribution, which was approved by shareholders at an extraordinary general meeting on 5 February 2013, involved distributing 50,109,307 MFF shares and 16,627,507 MFF options and represented approximately 3.29 MFF shares and 1.09 MFF options for every 10 MFG ordinary shares held by shareholders on the record date of 13 February 2013. The distribution was completed on 19 February 2013. The capital reduction amount was approximately $54,749,000 equating to $0.3589 per MFG ordinary share, which was determined using the average of the volume weighted average price (VWAP) for MFF shares of $1.0176 and MFF options of $0.2210 for the five trading days immediately preceding the distribution date. The in-specie distribution of the MFF shares and MFF options to MFG shareholders resulted in a realised gain of approximately $25,778,000 before income tax. Imputation credits (iv) The balance of the imputation credit account at the end of the year adjusted for imputation credits that will arise from the payment of the amount of the provision for income tax is as follows: Imputation credits at balance date Imputation credits that will arise from payment of income tax payable Total imputation credits available for subsequent reporting periods based on a tax rate of 24.9% (June 2013 – 30%) 14,624 7,288 2,640 16,938 21,912 19,578 The payment of the dividend declared by the directors on 14 August 2014 will reduce the franking account balance shown above by approximately $14,840,000. 52 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 5. Income Tax (a) Reconciliation of income tax expense The income tax expense for the year can be reconciled to the accounting net profit as follows: (b) Components of income tax expense Income tax attributable to net profit from ordinary activities comprises: (c) Net deferred tax asset/(liability) (i) Deferred tax liability balances comprise temporary differences attributable to: (ii) Reconciliation of deferred tax liability is as follows: 53 30 June30 June20142013Notes$’000$’000Operating profit before income tax expense 110,479 95,002 Prima facie income tax expense at 30% (33,144)(28,501)Effect of amounts which are non-deductible/(assessable) in calculating taxable income: - effect of concessional tax rate on offshore banking unit (OBU)5(d) 5,524 - - over/(under) provision of prior year tax64(73) - imputed interest and expense relating to share purchase plan 35135 - tax effect of franked dividends/distributions received - 15 - non-assessable income and non-deductible expenses(19)22Income tax expense reported in the Consolidated Statement of Profit or Loss(27,540)(28,402) - changes in fair value of available-for-sale financial assets(3,023)(9,352) - sale of available-for-sale financial assets recycled through profit or loss1,2647,500Income tax expense reported in the Consolidated Statement of Other Comprehensive Income(1,759)(1,852)Current income tax benefit/(expense)(27,604)(29,447)Deferred income tax benefit/(expense) - 1,118 Over/(under) provision of prior year income tax64(73)Income tax expense reported in the Consolidated Statement of Profit or Loss(27,540)(28,402)Amounts recognised in Consolidated Statement of Profit or Loss: - changes in the fair value of financial assets(9,745)(7,921) - accruals 2,285 2,200 Total net deferred tax liabilities(7,460)(5,721)Opening balance(5,721)200Movement in temporary differences during the year: - net capital losses carried forward - (1,286) - changes in the fair value of financial assets(1,818)(5,792) - other791,157Closing balance - net deferred tax liabilities(7,460)(5,721) MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 5. Income Tax (continued) (d) Offshore Banking Unit MAM was declared an Offshore Banking Unit (OBU) on 31 July 2013 (refer to note 1(h) for further details). In the year ended 30 June 2014, the Company’s effective tax rate was 24.9% (June 2013: 30%), which is below the Australian company tax rate of 30% primarily as a result of the income, net of costs, of the OBU attracting a concessional tax rate of 10%. The income tax expense of the OBU recognised in the Consolidated Statement of Profit or Loss is as follows: (A) no prior year comparatives have been included as MAM was declared an OBU in the current financial year. e) Tax consolidation During the year, income tax liabilities of $25,441,000 (June 2013: $19,900,000) were assumed by MFG, the head entity of the tax consolidated group. Payments totalling $34,103,000 (June 2013: $12,716,000) were made to MFG from the other entities in the tax consolidated group under the tax funding agreement during the year. At 30 June 2014, $503,000 remains receivable from other entities in the tax consolidated group. Refer to notes 1(h) and 15(d)(ii) for further details on the tax consolidated group and transactions. 6. Revenue (a) Management Fees The management fees received/receivable during the year were: 54 30 June2014(A)$’000Operating profit before income tax expense 110,479 Prima facie income tax expense at 30%(33,144)less: effect of concessional tax rate of OBU comprising: - effect of concessional tax rate of 10% on OBU net profit 5,980 - effect of lower tax rates on deferred tax assets/liabilities at 31 July 2013 on declaration of OBU(456)less: over/(under) provision of prior year tax64less: imputed interest and expense relating to share purchase plan 35less: non-assessable income and non-deductible expenses(19)Income tax expense recognised in Consolidated Statement of Profit or Loss (27,540)Group's effective tax rate24.9%30 June30 June20142013Note$’000$’000Magellan Global Fund 63,408 29,902 Magellan Global Fund Hedged 136 - Magellan High Conviction Fund 1,511 - Magellan lnfrastructure Fund 4,819 2,812 Magellan lnfrastructure Fund Unhedged 353 - Magellan Core Infrastructure Fund 1,045 936Magellan Flagship Fund6(b) 1,431 4,656 MFG Global Fund 3,644 - Frontegra MFG Funds 3,251 752 Other mandates 52,969 16,949Total management fees during the year132,56756,007 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 6. Revenue (continued) (b) Service fees From 1 October 2013, MAM provided investment research and administrative services to Magellan Flagship Fund (MFF), a listed investment company, and earned service fees of $3,918,000 for the year ended 30 June 2014. Refer to note 1(f) for further details. MAM acted as the Investment Manager for MFF for the period 1 July 2013 to 30 September 2013. The management fees earned for this period are included in note 6(a). (c) Performance fees During the year ended 30 June 2014, performance fees were also earned on the following funds and mandates as the market index and relative hurdles were met: (d) Management, service and performance fees by geographic location The geographical breakdown of the management, service and performance fees is as follows: (e) Net gain/(loss) on sale on available-for-sale financial assets 7. Receivables 55 30 June30 June20142013Note$’000$’000Magellan Global Fund 26 16,613 Magellan High Conviction Fund 1,070 - Magellan lnfrastructure Fund 286 706 Other funds and mandates735 11,130 Total performance fees during the year2,11728,449Australia94,233 71,678 United States15,126 7,438 United Kingdom & Ireland25,154 5,191 Canada3,404 149 Asia685 - Total management, service and performance fees138,60284,456Net gain/(loss) from: - in-specie distribution of listed shares - MFF4(iii)- 22,080 - disposal of listed subordinated bank notes8(b)91 - - disposal of units in unlisted investments3,799 381 - disposal of other listed investments331 2,344 Total net gain/(loss) on sale of available-for-sale financial assets 4,221 24,805Fees receivable 19,827 33,856Distributions receivable - Unlisted Funds 3,466 1,286Other 138 39Total receivables 23,431 35,181 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 8. Financial Assets (a) Current (b) Non-current (A) (B) includes a term deposit of $297,000 (June 2013: $297,000) held with an Australian bank which is pledged against a bank guarantee in respect of the Group’s future lease obligations. In the event that the Group does not meet its lease payments, the bank has the right to apply the Group’s deposit in settlement of the amount paid by the bank under the guarantee. Refer to note 18 for detail on the Group’s leases. the listed subordinated bank notes were fully disposed during the year. Refer to note 6(e) for the net gain/(loss) on sale of this investment. (C) Magellan Global Fund (Hedged)(MFGH), Magellan Infrastructure Fund (Unhedged) (MIFU) and Magellan High Conviction Fund (MHCF) (the Funds) were launched on 28 June 2013 and seeded by the Company. On 1 July 2013, the Funds were open to external investors and the net fund inflows from external investors have decreased the Group’s investment from 100% at 30 June 2013 to 1.5% in MGFH, 2.5% in MIFU and 15.4% in MHCF at 30 June 2014. As a result, the Group has classified these investments as available-for-sale financial assets at 30 June 2014. Refer to further details at note 14. 56 30 June30 June20142013$’000$’000Financial assets classified as loans and receivablesTerm deposits(A) 302 14,685Total current financial assets30214,685Available-for-sale financial assetsInvestments in listed shares (by domicile of primary stock exchange) - United States 7,463 18,575 - Switzerland 727 733 - France 764 436 - Netherlands 140 131 - United Kingdom 668 1,660 - Germany 324 - Investments in listed subordinated bank notes - Australia(B) - 4,262Total listed investments 10,086 25,797Investments in unlisted funds - Magellan Global Fund78,697 58,230 - Magellan Global Fund (Hedged)(C)565 500 - Magellan Infrastructure Fund2,360 1,970 - Magellan Infrastructure Fund (Unhedged)(C)1,810 1,498 - Magellan High Conviction Fund(C)19,436 200 - Frontegra MFG Global Equity Fund8,383 7,459 - Frontegra MFG Core Infrastructure Fund3,881 3,259 - Other165 1,400 Investments in unlisted shares - Other175 175 Total unlisted investments 115,472 74,691Total non-current financial assets 125,558 100,488 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 8. Financial Assets (continued) Reconciliations (c) The movement in the carrying value of the Group’s financial assets is as follows: (A) On 17 October 2012, the Company received 16,627,507 listed options in Magellan Flagship Fund for nil consideration. The options were classified as held for trading, and fully disposed of during the year ended 30 June 2013 as part of an in-specie distribution to the Company’s shareholders. (B) At 30 June 2013, the Group and Company held an investment in MHCF of $200,000. On 1 July 2013, the Company seeded a further investment in MHCF by way of an in-specie transfer of a portion of its investment in listed shares and associated dividend receivables, and cash into MHCF totalling $12,515,000. This is disclosed above as acquisitions and also disposals – in-specie transfer. 57 30 June30 June20142013$’000$’000CurrentBalance at 1 July14,68530,565 Disposals- (3,698)Cash placed on term deposit7,260 14,685Matured term deposits(21,643)(30,565)Net changes in fair values of investments(A)- 3,698 Balance at 30 June 302 14,685Non-currentBalance at 1 July100,488107,595 Acquisitions - in-specie transfer(B)12,51524,343 Acquisitions - other27,380- Disposals - in-specie transfer(B)(12,515)(62,543)Disposals - other(12,386)- Net changes in fair values of investments10,07631,093 Balance at 30 June125,558100,488 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 9. Property, Plant and Equipment Reconciliation (a) Reconciliations of the carrying amount for each class of property, plant and equipment at the beginning and end of the financial year are set out below: Property, plant and equipment is held by MAM. 10. Payables and Provisions 58 LeaseholdOfficeTotalLeaseholdOfficeTotalImprove-Equipment,Improve-Equipment,mentsFixture &mentsFixture &FittingsFittings$’000$’000$’000$’000$’000$’000At cost2159701,1851189291,047less: accumulated depreciation and impairment losses115684799113593706Total property, plant & equipment 100 286 386 533634130 June 201430 June 2013Carrying amount at beginning of year53363415267272Additions971202171172173Disposals - (56)(56) - - - Depreciation expense(2)(114)(116)(1)(103)(104)Carrying amount at end of year100286386533634130 June30 June20142013$’000$’000Trade payable and accruals 1,219 1,060Settlements payable - shares purchased - 8,816Accrued employee entitlements 6,995 5,303US marketing/consulting costs payable 837 1,217GST payable 2,395 918Fringe benefits tax payable 25 17 Total payables 11,471 17,331Employee entitlements - long service leave 595 411Provision for investment restriction contract18(b) 200 100Total provisions 795 511 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 11. Contributed Equity 59 30 June30 June20142013$’000$’000Ordinary shares93,81276,378MFG 2016 options- - Class B shares- - Total contributed equity93,81276,37830 June30 June30 June30 June2014201320142013Number of sharesNumber of shares'000'000$’000$’000(a) Ordinary SharesOpening balance152,783152,55876,378115,395Shares issued on exercise of MFG 2016 Options5,87311115,511292Shares issued under SPP1861141,682765SPP expense for year - - 272698less: capital component of in-specie distribution - - - 40,772less: transaction costs arising on share issue - - 31 - Total ordinary shares158,842152,78393,81276,378(b) MFG 2016 OptionsOpening balance7,7717,882 - - Shares issued from exercise of options(5,873)(111) - - Total listed options - MFG 2016 Options1,8987,771 - - (c) Class B SharesOpening balance10,20010,200 - - Closing balance - Class B Shares10,20010,200 - - MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 11. Contributed Equity (continued) (d) Terms and Conditions Ordinary shares (i) Fully paid ordinary shares entitle the holder to receive dividends declared and proceeds on winding up the Company in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person, or by proxy, at a meeting of the Company. MFG 2016 Options (ii) MFG 2016 Options (‘Options’) expire on 30 June 2016 but can be exercised during any two month period commencing two business days following the announcement of the Group’s full and half year results in each year prior to the expiry date, except for the final exercise period which commences on the date that is two business days after the release of the results for the half year to 31 December 2015 and ends on 30 June 2016. Upon exercise of the Option, the option holder is issued one new ordinary share in the Company. The in-specie distribution on 19 February 2013 (refer to note 4(iii) for further details) had the effect of reducing the exercise price of the MFG 2016 Options by $0.3589 per MFG Option. The adjusted exercise price of each Option at 30 June 2014 is $2.6411 (June 2013: $2.6411). Options are not entitled to dividends or distributions. Ordinary shares issued on exercise of the options rank equally with all other ordinary shares from the date of issue. An ordinary share issued on exercise of an option is only entitled to receive a dividend or distribution where the option was exercised and the ordinary share is issued on or before the record date for that distribution. Ordinary shares issued pursuant to the exercise of an option will not be issued until after the record date for any dividend or distribution payable in respect of the half year period immediately prior to the exercise period during which that option was exercised. The holder of an option may only participate in new issues of the Company if the holder exercises that option and becomes the holder of ordinary shares on or prior to the record date for the new issue of ordinary shares. Class B shares (iii) The Class B Shares were issued to Mr Hamish Douglass with certain service conditions which were satisfied on 1 July 2012. Incorporating the effect of the in-specie distribution made to the Company’s shareholders on 19 February 2013, the Class B Shares will convert into the number of ordinary shares equal to 0.0637028 times the number of ordinary shares of the Company on issue on 21 November 2016 (up to a maximum of 170,000,000 ordinary shares). The conversion of the Class B Shares will occur on 21 November 2016. The maximum number of ordinary shares that will be issued on conversion of all Class B Shares is 10,829,476. Prior to the in-specie distribution on 19 February 2013, the conversion factor was 0.06 times and the maximum number of ordinary shares that would have been issued on conversion was 10,200,000. Mr Douglass holds 10,200,000 Class B Shares which at 30 June 2014 were entitled to convert into 10,119,516 ordinary shares of the Company on 21 November 2016. Based on the Company’s ordinary shares on issue and assuming all Options were fully exercised as at 30 June 2014, the 10,200,000 Class B Shares would be entitled to convert to 10,239,631 ordinary shares being equal to 0.0637028 times 160,740,681 securities which would have been on issue at 30 June 2014 (comprising 158,842,157 ordinary shares on issue and 1,898,524 Options). The Class B shares have no entitlement to receive dividends and until the Class B Shares are converted into ordinary shares they confer no rights to participate in any bonus issue or subscribe for new securities in the Company unless the Directors determine otherwise in accordance with the Terms of Issue of the Class B Shares. 60 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 12. Share Purchase Plan (SPP) The Group has put in place a Share Purchase Plan (the ‘Plan’ or ‘SPP’) for its employees and Non-executive Directors (‘Participants’). The Plan provides assistance to Participants to invest in shares in the Company in order to more closely align the interests of Participants with the interests of the shareholders of the Group. At 30 June 2014, 3,303,658 ordinary shares were held by the Participants under the SPP (June 2013: 4,767,558). Employees are invited to apply for a specified number of fully paid ordinary shares in the Company. Subject to the Listing Rules, the Directors have overall discretion in relation to the Plan and may vary the rules. The Directors have currently determined that the number of Company shares that may be offered is limited to: i) shares with a market value equal to a multiple of one times the employee’s after-tax bonus for the financial year (ended 30 June) prior to the financial year in which the offer is made; and ii) such further number of shares as requested and approved by the Board, subject to:  where the total amount of the financial assistance being provided to an employee Participant will exceed $750,000 or will exceed three times the amount of an employee Participant’s annual base salary inclusive of superannuation, the prior approval of the Board is required; and the maximum amount of financial assistance that may be provided by the Company to an individual employee is $1,000,000.  and, in each case: iii) subject to a maximum of $750,000 worth of shares per employee in each financial year, other than in the case of a new employee where the Board may resolve, in its absolute discretion, to offer initially additional shares to the new employee; and iv) the aggregate maximum number of shares issued under each offer under the Plan will not exceed 5% of the total number of shares on issue at the time of the offer provided that the Company may issue additional Company shares in any subsequent offer up to, but not exceeding, the number of shares that it has bought back in the period since the last offer of shares under the Plan. No performance hurdles attach to the invitation to participate in, or the issue of shares under, the Plan. The Directors can resolve to vary the timing of these invitations. The issue price for the shares is the fair market value of the shares at the offer date. This is calculated using the volume weighted average price of traded shares in the 5 business days prior to the offer date. Participants may be required to make an upfront contribution of up to 25% of the issue price at the time of issue. The remaining amount of the issue price is funded by way of a full recourse interest free loan from the Company. Participants are required to apply an amount equal to 25% of their after tax annual cash bonus each year to repay the loan until the loan has been fully repaid. The maximum term of the loan for employee Participants is 10 years. Any outstanding balance at the end of 10 years must be repaid by the employee. Although employees are not entitled to repay their loan early, the Board may from time to time permit an early repayment under certain circumstances. Loans to Participants under the Plan are secured on the shares issued to that Participant. The shares are not transferable until the loan is fully paid. Once the loan has been fully repaid, the shares issued under the Plan are freely transferable. Dividends are payable on the shares issued under the Plan on the same basis as all other issued fully paid ordinary shares, and the amount of the dividends are applied to repay the loan until the loan has been fully repaid. The shares issued under the Plan have the same rights to participate in any entitlements or bonus issues and otherwise rank equally with all other issued ordinary shares. 61 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 12. Share Purchase Plan (SPP) (continued) Upon request from the Company, the outstanding loan amount must be repaid in full immediately without further demand or notice upon the earliest of: i) any breach by the Participant of the Share Purchase Plan Rules (the ‘Plan Rules’) where the breach is not remedied within 7 days of the Company's notice to the Participant to do so; or ii) an application being made to a court for an order, or an order being made, that the Participant be made bankrupt (or any similar event in any jurisdiction as determined by the Board in its discretion). If a Participant ceases to be an employee whilst a loan to that Participant is outstanding, the Participant must: i) ii) repay the total amount owing under the loan within 3 months (or, in the event that a Participant has died, within 6 months), or such longer period determined by the Board in its discretion, of the participant ceasing to be an employee and, upon payment of such amount the holding lock and any security over the shares issued under the Plan will be released and the Participant shall be entitled to retain his or her shares issued under the Plan; or require the shares issued under the Plan to be bought back or sold by the Company and must pay to the Company the balance (if any) of the total amount owing outstanding under the loan after the application of the proceeds of sale. The carrying value of loans outstanding at balance date was: Current: due within 1 year Non-current: due later than 1 year and within 10 years 30 June 2014 $ ’000 30 June 2013 $ ’000 1,783 2,271 4,054 1,489 2,835 4,324 During the year ended 30 June 2014, 160,138 ordinary shares under the SPP were disposed of by Participants (June 2013: 284,893 ordinary shares under the SPP were disposed of by Participants) and from these disposals, proceeds of $145,500 (June 2013: $1,708,000) were applied directly to repay Participants loans. Total SPP loan cash repayments during the year were $1,872,000 (June 2013: $3,698,000). Shares are issued to Participants at an issue price equal to the fair market value of the shares at offer date calculated using the volume weighted average price of traded shares in the five business days prior to the offer date. Offer date 10 September 2007 20 October 2008 8 September 2009 10 November 2010 2 March 2011 21 September 2011 12 March 2013 29 October 2013 5-day weighted average share price $1.66 $0.52 $0.78 $1.35 $1.75 $1.20 $7.33 $10.02 The value of shares securing the loans to Participants at balance date applying the Company’s 30 June 2014 closing market price of $10.93 was $36,109,000 (June 2013: $46,000,000). No amounts are past due or considered impaired as the SPP provides that any shortfall between the loan amount and the value of the shares is recoverable from the Participants. 62 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 12. Share Purchase Plan (SPP) (continued) The following information has been used to determine the carrying value of the loans as at: September 2007 tranche Face value of loans Estimated weighted average duration of loans Imputed interest rate October 2008 tranche Face value of loans Estimated weighted average duration of loans Imputed interest rate September 2009 tranche Face value of loans Estimated weighted average duration of loans Imputed interest rate November 2010 tranche Face value of loans Estimated weighted average duration of loans Imputed interest rate September 2011 tranche Face value of loans Estimated weighted average duration of loans Imputed interest rate March 2013 tranche Face value of loans Estimated weighted average duration of loans Imputed interest rate October 2013 tranche Face value of loans Estimated weighted average duration of loans Imputed interest rate 30 June 2014 30 June 2013 $1,600,000 $2,600,000 2.3 years 7.0% 1.4 years 7.0% $4,500 2.0 years 5.0% $34,000 1.6 years 5.3% $100,000 1.2 years 5.0% $500,000 1.1 years 5.3% $600,000 1.1 years 5.5% $700,000 1.9 years 5.5% $300,000 1.5 years 4.0% $300,000 2.5 years 4.0% $500,000 2.4 years 3.4% $600,000 3.5 years 3.4% $1,400,000 4.0 years 3.4% - - - The amounts recognised in the Consolidated Statement of Profit or Loss in respect of the SPP loans are: Interest income Employee benefits expense Net credit in Consolidated Statement of Profit or Loss 30 June 2014 $ ’000 388 (272) 116 30 June 2013 $ ’000 1,148 (698) 450 Both the change in the carrying value of the loans recorded in interest income and the cost of providing the benefit to Participants recorded in employee benefits expense are non cash items and therefore are not reflected within the Group’s Consolidated Statement of Cash Flows. Over the life of the loans the amounts credited to interest income and the amounts recognised as employee benefits expense will exactly offset each other. Refer to note 1(s) for further details. 63 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 13. Parent Entity Information The accounting policies of the parent entity, Magellan Financial Group Limited, which have been applied in determining the financial information shown below, are the same as those applied in the Group’s consolidated financial statements. Refer to note 1 for a summary of the significant accounting policies relating to the Group. The individual financial report for the parent entity shows the following aggregate amounts: (a) Summary financial information Guarantees entered into by the Parent Entity (b) The parent entity has issued a letter of comfort to a client of its controlled entity, MAM, whereby it undertakes to provide support and assistance as required to ensure MAM complies with the financial conditions of its Australian Financial Services Licence. Contingencies and Commitments of the Parent Entity (c) At 30 June 2014, the parent entity has no contingent assets, contingent liabilities or commitments. 64 30 June 201430 June 2013$’000$’000Statement of Financial PositionAssetsCurrent assets 53,214 49,192 Non-current assets 140,368 115,862 Total Assets 193,582 165,054 LiabilitiesCurrent liabilities 10,634 25,752 Non-current liabilities 9,742 7,910 Total Liabilities 20,376 33,662 Net Assets 173,206 131,392 EquityContributed equity94,187 76,753 Available for sale reserve24,604 20,510 Retained profits54,415 34,129 Total Equity173,206 131,392 Net profit for the year after income tax expense71,207 54,085 Other comprehensive income, net of income tax expense4,096 4,436 Total comprehensive income for the year75,303 58,521 Statement of Profit or Loss and Other Comprehensive Income MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 14. Interests in Subsidiaries and Other Entities The Group’s subsidiaries at reporting date are set out below. They have share capital consisting solely of ordinary shares that are held directly by the Group, and the proportion of ownership interests held equals the voting rights held by the Group. The country of incorporation is also the principal place of business. The Group incorporates the assets, liabilities and results of all controlled entities in accordance with the accounting policy described in note 1(b). Change in the Group’s ownership interest in a subsidiary Magellan High Conviction Fund (MHCF), Magellan Global Fund (Hedged) (MFGH) and Magellan Infrastructure Fund (Unhedged) (MIFU) (the Funds) were launched on 28 June 2013 and seeded by the Company. On 1 July 2013, the Funds were open to external investors. As a result, the net FUM inflows from external investors have reduced the Group’s investment from 100% at 30 June 2013 to 1.5% in MGFH, 2.5% in MIFU and 15.4% in MHCF at 30 June 2014. Accordingly, the Group has classified these investments in the Funds as financial assets at 30 June 2014 (refer to note 8(b)). 15. Related Party Transactions Ultimate Parent Entity (a) Magellan Financial Group Limited is the ultimate parent entity. Transactions with Related Parties (b) Interests in controlled entities are set out in note 14. Key Management Personnel (c) (i) The Directors of the Company during the year and up to the date of this report were: Directors Name Brett Cairns Hamish Douglass Directorship Chairman - Non-executive Director Chief Executive Officer and Managing Robert Fraser Paul Lewis Karen Phin Chris Mackay Director Non-executive Director Non-executive Director Non-executive Director Chairman and Executive Director Naomi Milgrom AO Non-executive Director Appointed 22 Jan 2007 21 Nov 2006 Resigned - - 23 Apr 2014 20 Dec 2006 23 Apr 2014 21 Nov 2006 20 Dec 2006 - - - 30 Sep 2013 23 Apr 2014 65 Name of entityCountry of incorporation20142013Magellan Asset Management LimitedAustralia100%100%Magellan Capital Partners Pty LimitedAustralia100%100%Ownership interest held by GroupName of entityCountry of incorporation20142013Magellan High Conviction FundAustralia15.4%100%Magellan Global Fund (Hedged)Australia1.5%100%Magellan Infrastructure Fund (Unhedged)Australia2.5%100%Ownership interest held by Group MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 15. Related Party Transactions (continued) (c) Key Management Personnel (continued) Directors (continued) (i) On 30 September 2013, Dr Brett Cairns replaced Mr Chris Mackay, as Chairman of MFG, who stepped down as Executive Director on the same day, as Chairman. Mr Mackay was appointed a Special Advisor to both the Board and CEO and in that role provides ongoing counsel to the Group. As a result, Mr Mackay entered into a consultancy agreement with MAM after being appointed Special Advisor. Under this agreement, which was effective from 1 October 2013, Mr Mackay is entitled to consultancy fees of $250,000 per annum, payable quarterly in advance. The agreement is to continue indefinitely until terminated. Other Key Management Personnel (KMP) (ii) In addition to the Directors, the following persons also had authority for the strategic direction and management of the Group, directly or indirectly, during the financial year: Nerida Campbell Gerald Stack Frank Casarotti Chief Operating Officer Head of Research Head of Distribution Remuneration of KMP (iii) KMP of the Group received the following amounts during the year: Refer to section 3.3 of the Remuneration Report on page 20 for further details. Transactions with Other Related Parties (d) The following transactions occurred with related parties: (i) Dividends amounting to $65,211,000 representing $5.217 per share were paid by MAM to MFG during the year ended 30 June 2014 (June 2013: $2.502 per share representing $31,274,000). 66 30 June30 June20142013$$Short term benefits - Salary3,138,781 2,015,173 - Cash Bonus2,846,469 1,999,207 Post-employment benefits91,090 84,827 Long-term benefits284,623 195,866 Other benefits310,230 349,183 Total remuneration paid to KMP6,671,193 4,644,256 30 June30 June20142013Note$'000$'000Dividends received from MAM(i)65,211 31,274 Amounts receivable/(payable) under the tax funding agreement from controlled entities(ii)503 9,165 Amounts received/(paid) from/by MAM pursuant to tax funding agreement(ii)34,103 12,716 Subordinated loan to MAM(iii)- 1,150 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 15. Related Party Transactions (continued) Transactions with other related parties (continued) (d) (ii) During the year, MAM’s income tax liabilities of $25,441,000 (June 2013: $19,900,000) were assumed by MFG, the head entity of the tax consolidated group. Payments totalling $34,103,000 (June 2013: $12,716,000) were received by MFG and Magellan Capital Partners Pty Limited from MAM under the tax funding agreement during the year and $503,000 was receivable by MFG from MAM in respect of amounts arising from the transfer of MAM’s tax liability to the Company (June 2013: $9,165,000). Refer to note 1(h) for further details on the tax consolidated Group. (iii) The Company provided an interest-free subordinated loan of $1,150,000 to its wholly owned subsidiary, MAM, on 29 November 2006. Under the terms of MAM’s Australian Financial Services Licence (AFSL), the loan cannot be repaid without the prior consent of the Australian Securities & Investments Commission (ASIC). At 30 June 2013, ASIC consented to the repayment of the subordinated loan and MAM has since repaid the loan in full to the Company on 2 August 2013. 16. Statement of Cash Flows Reconciliation (a) Reconciliation of Net Operating Profit after Tax to Net Cash Flows from Operating Activities (b) Non-cash financing and investing activities 67 30 June30 June20142013Note$’000$’000Net operating profit after income tax expense82,93966,600Adjusted for:Net loss/(gain) on disposal of held for trading financial assets- (3,675)Net loss/(gain) on disposal of available-for-sale financial assets(4,221)(24,805)Net change in carrying value of held to maturity assets(2,139)- Dividends and distributions reinvested(1,431)(831)Depreciation116104Income tax paid(33,801)(11,583)Net foreign exchange (gain)/loss725(1,459)Imputed interest on loans under the SPP(388)(1,148)Employee expense on loans under SPP287698(Increase)/decrease in receivables13,883(25,416)(Increase)/decrease in prepayments74(162)Increase/(decrease) in net deferred tax liabilities1,761(4,248)Increase/(decrease) in payables28,93924,463Increase/(decrease) in income tax payable9012,715Net cash inflows from operating activities86,83431,253In-specie distribution 4(iii) - 13,977Issue of ordinary shares under SPP1,028765Imputed interest on loans under SPP(388)(1,148)Share based payments under SPP272698Acquisition of additional units in Magellan Unlisted Funds through distribution reinvestment1,431 - MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 16. Statement of Cash Flows Reconciliation (continued) Reconciliation of cash (c) Reconciliation of cash at the end of the year (as shown in the Statement of Cashflows) to the related item in the financial report Term deposits with maturity dates greater than 90 days from inception date are included in financial assets (refer note 8(a)). 17. Capital and Financial Risk Management Capital Management (a) The Group’s approach to capital management remained unchanged during the year, which was to ensure that it continues as a going concern, it has sufficient cash flow to meet its operating requirements, it is able to support the payment of dividends to shareholders in accordance with the Group’s dividend policy, and it retains the flexibility to retain capital if required for future business expansion. The Group’s capital consists entirely of shareholder equity. The Group has no external net borrowings at 30 June 2014 (June 2013: nil). The Directors believe that the Group’s core business, funds management, is scalable over time and the funds under management should continue to grow without the need to make material additional capital investment into the business. A controlled entity of the Company, Magellan Asset Management Limited (MAM), is subject to regulatory financial requirements by virtue of holding an Australian Financial Services Licence (AFSL). These regulatory requirements, which are determined by the Australian Securities & Investments Commission (ASIC), were amended for Responsible Entities of Registered Managed Investment Schemes from November 2013. During the year ended 30 June 2014, MAM maintained the required net tangible assets of 10% of the three year average of MAM’s revenues and satisfied the liquidity requirements of cash and cash equivalents which is 50% of the required net tangible assets, in accordance with ASIC Regulatory Guide 166. Notwithstanding the liquidity requirements of the AFSL, the Directors of MAM determined on 18 October 2013 that MAM would hold a greater amount of cash and cash equivalents being at least $20,000,000. Financial Risk Management (b) The activities of the Group expose it to various types of risks, both direct and indirect: liquidity risk, price risk, currency risk, interest rate risk and credit risk. Exposure to risk occurs through the impact of the Group’s net profit and total equity arising from: - changes in the value of the Group’s investment portfolios and changes in other financial assets and liabilities; and the effect of market foreign exchange rate movements on the Group’s funds under management and the consequential impact on the management and performance fees earned. - 68 30 June30 June20142013$’000$’000Cash at bank 82,868 38,096 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 17. Capital and Financial Risk Management (continued) Financial Risk Management (continued) (b) The Group’s investment assets comprise strategic investments in: - - - unlisted funds of which MAM, a wholly owned entity of the Group, is the Responsible Entity and Investment Manager (Magellan Unlisted Funds); a direct portfolio of investments; and two unlisted institutional mutual funds in the United States of America, being Frontegra MFG funds, of which MAM is the Investment Manager. The investment portfolios of the Magellan Unlisted funds and the Frontegra MFG funds are managed on a daily basis by MAM in accordance with the investment objectives and mandates of those funds. Further details of the risk management objectives and policies of those entities can be found in the annual report of the Product Disclosure Statement (PDS) of the Magellan Unlisted funds, and the prospectuses of the Frontegra MFG funds. Liquidity Risk (c) Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities on the due date or will be forced to sell financial assets at a value which is less than they are worth. The Group manages liquidity risk by maintaining sufficient cash reserves to cover its liabilities. On February 2013, the Board of MFG determined that the Group would maintain a minimum amount of $20,000,000 in cash and cash equivalents and a minimum amount of liquid assets equal to 0.5% of the Group’s funds under management subject to a maximum amount of $100,000,000. As at 30 June 2014, the Group had an obligation to settle trade creditors and other payables of $11,471,000 (June 2013: $17,331,000) within 30 days. In addition, the Group also has an obligation to pay the fully franked final dividend of 21.8 cents per share in respect of the year ended 30 June 2014 amounting to approximately $34,628,000 on 1 September 2014 (refer to note 4(ii)). The Group had cash (including term deposits maturing within 30 days) of $82,868,000 (June 2013: $38,096,000) and a further $23,431,000 (June 2013: $35,181,000) of receivables to cover these liabilities. At 30 June 2014, the Group reported current assets of $108,636,000 and current liabilities of $22,009,000 resulting in a net current asset surplus of $86,627,000. After taking into account the final dividend for the year ended 30 June 2014 totalling $34,628,000, this would result in a net current asset surplus of $51,999,000. Accordingly the Group has sufficient liquid funds and current assets to meet its current liabilities. Maturities of financial liabilities At 30 June 2014, the Group’s financial liabilities comprise trade creditors and payables which mature in 1 year or less (June 2013: 1 year or less). Price Risk (d) Price risk is the risk that the value of the Group’s direct and indirect investments in equities will increase or decrease as a result of changes in market prices, caused by factors specific to the individual stock or the market as a whole. Price risk exposure arises from the Group’s investments in listed equities, Magellan Unlisted Funds, the Frontegra MFG funds, and from the Group’s entitlement to investment management and performance fees on funds under management. All of the Group’s investments are carried at fair value with changes arising from available-for-sale investments reflected in other comprehensive income. Over the past 10 years, the annual movement in the MSCI World Net Total Return Index has varied between +31% and -30% (in AUD) and +33% and -21% 69 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 17. Capital and Financial Risk Management (continued) Price Risk (continued) (d) (in USD). The past performance of markets is not always a reliable guide to future performance, and the Company’s investment portfolio does not attempt to mirror the global indices, but this very wide range of historic movements in the indices provides an indication of the magnitude of equity price movements that might reasonably occur within the portfolio over a 12 month period. The impact of equity price movements, expressed in percentage terms, on the net profit reported by the Company, is reasonably linear. Impact arising from the Group’s own investments Each incremental increase of 5% in the market prices of the Group’s investments held at balance date would have had the following impact on net operating profit and equity: Assumptions and explanatory notes (i) the Group holds an investment in an unlisted fund that invests in unlisted equities. The fair value of this fund is determined by a Directors’ valuation. The underlying values of the unlisted equities are determined by the fund’s investment manager with reference to the projected cash flows of those businesses, which may or may not be correlated with changes in market prices of listed equities. No assessment has been made of the impact of changes in market prices on the fair value of the fund. (ii) a decrease of 5% in the market prices of the Group’s investments held at balance date would have an equal and opposite effect to the changes disclosed above. (iii) the Group recognises impairment losses on available-for-sale investments in accordance with the accounting policy disclosed in note 1(n)i). For the purposes for the sensitivity disclosed above, it has been assumed that a 5% change in market prices would have no impact on the assessment of whether individual assets are impaired. Impact arising on entitlements to management, service and performance fees Management and service fees The Group earns management fees on funds under management, which are based on a percentage of the value of the clients’ and the funds’ portfolios, and service fees from MFF based on an agreed methodology described in note 1(f). Management fees and service fees will be impacted by movements in the underlying prices in local currency, exchange rate movements, or a combination of both. Each incremental increase of 5% in the average value of funds under management of the Group, and the market value of MFF’s portfolio less borrowings, during the years ended 30 June 2014 and 30 June 2013 would have increased the base management fees recognised in net operating profit and equity as follows: Assumptions and explanatory notes (i) (ii) a decrease of 5% in the average value of funds under management of the Group and the market value of MFF’s portfolio less borrowings would have an equal and opposite effect to the changes disclosed above. changes in market prices may impact the inflows to, and outflows from, the Group’s funds under management. This impact has not been estimated. 70 30 June30 June20142013$’000$’000Impact on available for sale reserve, net of tax 4,715 3,517 Total impact on net operating profit and equity4,715 3,517 30 June30 June20142013$’000$’000Impact on net operating profit and equity for the year 4,978 1,959 Total impact on net operating profit and equity for the year4,978 1,959 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 17. Capital and Financial Risk Management (continued) Price Risk (continued) (d) Performance fees The Group earns performance fees from its funds, from some institutional client mandates and MFF to which it provides investment management services. Where a performance fee is applicable to an institutional client mandate, the base management fee will generally be lower than that earned from mandates where no performance fee applies. The Group’s entitlement to performance fees for any given performance period is dependent on the portfolio outperforming certain hurdles, which may be index relative hurdles, absolute return hurdles or a combination of both. Performance fees are generally subject to either a high water mark arrangement or a deficit clause, which ensures that fees are not earned more than once on the same performance. The Group’s entitlement to performance fees from MFF is dependent on MFF’s total shareholder return exceeding 10% per annum, compounded annually, over prescribed performance periods. These fees also accrue over different calculation periods, ranging from three months to four years. The fees recognised in the Consolidated Statement of Profit or Loss are characterised as follows: Currency Risk (e) Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group has direct exposure to currency risk on foreign currency denominated: - - - investments designated as available-for-sale (refer note 8); cash balances and term deposits (refer note 16(c) and note 8(a)); and payables and receivables, such as income receivable from foreign investments, outstanding settlements on purchase or sale of foreign investments and management and performance fees invoiced in foreign currency (refer notes 7 and 10). At 30 June 2014, had the Australian dollar strengthened by 10% relative to each currency to which the Group had significant exposure, with all other variables held constant, the impact on the Group’s equity and net profit would have been: A decrease of 10% in the Australian dollar relative to each currency would have an equal and opposite impact to those disclosed above. 71 30 June30 June20142013$’000$’000Based on performance relative to a market index - 5,702 Based on performance relative to a return hurdle 1,801 4,569 Based on performance relative to both a market index and a return hurdle 316 18,178 Total performance fees2,117 28,449 2014201320142013$’000$’000$’000$’000Assets denominated in:US dollars(383)(876)(1,346)(1,864)Euro - (7)(84)(36)Canadian dollars(63)(1) - (47)British pounds(94) - (46) - Swiss francs - - (50)(106)Increase/(decrease)Increase/(decrease)in net profitin equity30 June30 June MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 17. Capital and Financial Risk Management (continued) Currency Risk (continued) (e) The Group also has indirect exposure to foreign currency via its investments in unlisted funds. The Magellan Unlisted Funds are denominated in Australian dollars and the Frontegra MFG funds are US dollar denominated. The underlying investment portfolios of these funds comprise entities predominantly denominated in foreign currencies, and with extensive operating exposure to global currency fluctuations which will drive portfolio values. Changes in their fair value are therefore influenced by movements in currencies. The sensitivity analysis disclosed above disregards the impact on the foreign currency movement on the underlying portfolios. The Group’s management, service and performance fees are also indirectly exposed to fluctuations in foreign currency where the management, service and performance fees earned from funds under management and MFF are subject to adverse movements in the exchange rate of the Australian dollar relative to foreign currencies. For the year ended 30 June 2014, approximately 94% of the Group’s management, service and performance fees were indirectly exposed to movements in the Australian dollar relative to other currencies (June 2013: 93%). Interest Rate Risk (f) Interest rate risk is the risk that the fair value of a financial instrument will fluctuate due to changes in market interest rates. The Group’s exposure to interest rate risk relates primarily to cash and cash equivalents and also term deposits. Substantially all of the Group’s holdings of cash and cash equivalents are held with major Australian banks. Term deposits are of short duration and their fair value would not be materially affected by changes in interest rates. Sensitivity analysis Based on the cash and cash equivalents held by the Group at balance date, the sensitivity on the Group’s net operating profit and equity of a decrease of 50 basis points in floating interest rates, assuming all other variables remain constant is: An increase of 50 basis points in floating rate interest rates would have an equal but opposite effect on net operating profit and equity, Credit Risk (g) Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. Market prices generally incorporate credit assessments into valuations and risk of loss is implicitly provided for in the carrying value of financial assets and liabilities when valued at fair value. The maximum exposure to credit risk at balance date is therefore the carrying amount of financial assets recognised in the Consolidated Statement of Financial Position. The Group minimises concentrations of credit risk by ensuring cash balances and term deposits are held with and managed by counterparties that are reputable financial intermediaries with acceptable credit ratings determined by a recognised rating agency. In addition, credit limits are reviewed by management with reference to the counterparty’s latest credit rating and may be updated throughout the year. During the year ended 30 June 2014, the Group held cash and term deposits with Australian and international banks. The credit quality of Australian banks counterparties at 30 June 2014 was rated by Standard & Poor’s as being AA-, and by Moody’s as being Aa2 (AA- and Aa2 respectively at 30 June 2013). The credit quality of the international bank counterparty at 30 June 2014 was rated by Moody’s as Baa2 (Baa2 at 30 June 2013). 72 30 June30 June20142013$’000$’000Impact on net operating profit and equity 312 184 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 17. Capital and Financial Risk Management (continued) Credit Risk (continued) (g) The Company has entered into an International Prime Brokerage Agreement (IPBA) with Merrill Lynch International (MLI), a subsidiary of Bank of America. The services provided by MLI under the IPBA include clearing and settlement of transactions, securities lending and acting as custodian for the Company’s assets. Under an addendum to the IPBA, Merrill Lynch International (Australia) Limited may provide financing services to the Company. The IPBA with MLI is in a form that is typical of prime brokerage arrangements. Each of the Company’s securities held by MLI may be used by MLI for its own purposes. Securities of the Company utilised by MLI become the property of MLI and the Company has a right against MLI for the return of equivalent securities. In the event of MLI becoming insolvent the Company would rank as an unsecured creditor and the Company may not be able to recover such equivalent securities in full. Cash which MLI holds or receives on behalf of the Company is not segregated from MLI’s own cash and may be used by MLI in the course of its business. In the event of MLI becoming insolvent the Company would rank as an unsecured creditor and may not be able to recover the cash in full. The Group also manages credit risk by regularly monitoring loans and receivable balances throughout the year. A provision for doubtful debts is made where collection is deemed uncertain. At 30 June 2014, the provision for doubtful debts was nil (June 2013: nil). At 30 June 2014, the Group also had credit exposure to the Participants with loans under the SPP. At 30 June 2014, the outstanding balance on the loans totalled $4,054,000 (June 2013: $4,324,000). MFG ordinary shares of 3,303,658 were valued at $36,109,000 (June 2013: 4,767,558 MFG ordinary shares valued at $46,000,000) respectively were held as security for these loans. The loans were made to the Group’s employees and certain Non-executive Directors of the Company on a full recourse basis. Further information is provided in note 12. The Company in its capacity as Trustee and Responsible Entity of the following registered managed investment schemes has appointed The Northern Trust Company (NT) as custodian of Magellan Global Fund, Magellan Global Fund (Hedged), Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged), Magellan High Conviction Fund and Magellan Core Infrastructure Fund. The credit quality of NT’s senior debt is rated, as at 30 June 2014 by Standard and Poor’s as AA- and by Moody’s as Aa3 (AA- and Aa3 respectively at 30 June 2013). In acting as custodian, NT is required to comply with the relevant provisions of the Corporations Act, applicable ASIC regulatory guides and class orders relating to registered managed investment scheme property arrangements with custodians. At 30 June 2014 and 30 June 2013, the Group’s maximum exposure to credit risk is the carrying amount of the financial assets recognised in the Consolidated Statement of Financial Position. Ageing analysis of receivables At 30 June 2014, all of the Group’s receivables are due within 0 to 30 days (June 2013: 0 to 30 days). No amounts are impaired or past due at 30 June 2014 or 30 June 2013. 73 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 17. Capital and Financial Risk Management (continued) Fair Value Measurements (h) The Group classifies the fair value measurements of financial assets and financial liabilities using the three level fair value hierarchy set out below, to reflect the source of valuation inputs used when determining the fair value: - Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. The fair value of these investments is based on the closing bid price for the security as quoted on the relevant exchange. - - Level 2: valuation techniques using market observable inputs either directly or indirectly. The Group invests in unlisted funds which in turn invest in liquid securities quoted on major stock exchanges. The fair value is estimated using the redemption price provided by the unlisted fund. Level 3: valuation techniques using non-market observable inputs. The Group invests in unlisted funds which typically invest in unlisted entities, and has an investment in an unlisted company. The fair value is based on a Directors’ valuation. The table below presents the fair value measurement hierarchy of the Group’s financial assets and liabilities: (i) Unlisted Funds – Magellan and Frontegra MFG The fair value of investments in the Magellan Unlisted Funds operated by the Group and the Frontegra MFG funds is determined with reference to the redemption price at balance date. They are categorised as Level 2 in the fair value hierarchy on the basis that the inputs into the redemption unit price are directly observable from published price quotations. (ii) Unlisted Funds – Other Investments in Unlisted funds – Other comprise an investment in a single private equity fund. As there is no active market for these units, the fair value is a Directors’ valuation that is determined with reference to the unit price of the fund. A discount is applied to the fund’s redemption unit price, as determined by the fund’s investment manager, to reflect the illiquidity of the units. The Directors believe the estimated fair value, based on other unlisted fund’s valuation undertaken by that fund’s investment manager, and the discount assumptions applied, is reasonable and appropriate. (iii) Unlisted shares - Other Investments in Unlisted shares – Other comprises a shareholding in an unlisted funds management business. As there is no active market for the shares, the Directors have valued this investment at cost after giving consideration to that company’s most current unaudited net asset position. 74 30 June30 June20142013Note$’000$’000Assets measured at fair valueAvailable-for-sale financial assets- Level 1: listed shares and subordinated bank notes 10,08625,797- Level 2: unlisted funds – Magellan and Frontegra MFG(i)115,13273,116- Level 3: unlisted funds - other(ii)1651,400- Level 3: unlisted shares - other(iii)175175Total financial assets125,558100,488 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 17. Capital and Financial Risk Management (continued) Fair Value Measurements (continued) (h) There have been no transfers between any of the three levels in the hierarchy during the year and the Group’s policy is to recognise transfers into and out of fair value hierarchy levels as at the end of the year. The reconciliation of the fair value movements within level 3 is shown below: The fair value of all other financial assets and liabilities approximate their carrying values in the Consolidated Statement of Financial Position. 18. Contingent Assets, Contingent Liabilities and Commitments Lease Commitments (a) The Group has entered into non-cancellable operating leases for its office premises in Sydney, Melbourne, Brisbane and Auckland (New Zealand) and for office equipment. Contingent Assets and Contingent Liabilities (b) The Group has contingent liabilities of $300,000 (June 2013: $924,000) comprising: (i) $300,000 in relation to the investment restriction contract with Mr Hamish Douglass on 1 July 2012. Assuming the conditions of the contract are complied with, which requires Mr Douglass to remain in employment until 1 July 2017, the Group is required to pay Mr Douglass $500,000 on or before 15 July 2017 (refer to further details of the contract in section 3.5 in the 2014 Remuneration Report in the Directors’ Report). At 30 June 2014, $200,000 has been provided for in the Group’s Consolidated Statement of Financial Position (June 2013: $100,000) and as a result, the Group has a contingent liability of $300,000 (June 2013: $400,000); and there were no uncalled capital amounts on the investment in the unlisted fund held by the Group for the year ended 30 June 2014 (June 2013: $524,000). (i) The Group has no material contingent assets as at 30 June 2014 (June 2013: nil). Guarantees (c) For information about guarantees given by entities in the Group, including the Company, refer to note 13(b). 75 30 June30 June20142013Level 3$’000$’000Opening balance - 1 July1,5752,005Return of capital(2,264)(146)Net change in fair value1,029(284)Closing Balance - 30 June3401,57530 June30 June20142013$’000$’000Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows:Within one year669676Later than one year but no later than five years1,1721,787Total commitments1,8412,463 MAGELLAN FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2014 19. Auditor’s Remuneration Amounts received or due and receivable by the auditor of the Group, Ernst & Young: 20. Events Subsequent to Reporting Date On 14 August 2014, the Directors declared a franked interim dividend of 21.8 cents per share in respect of the year ended 30 June 2014 (refer to note 4(ii) for further details). Other than the above, the Directors are not aware of any other matter or circumstance not otherwise dealt with in this financial report that has significantly or may significantly affect the Group’s operations, the results of those operations or the Group’s state of affairs in future years. 76 30 June30 June20142013$$(a) Ernst & Young AustraliaAudit servicesStatutory audit and review of the financial reports: - the Company104,200 108,361 - the Unlisted Funds84,000 27,000 Other assurance services: - Regulatory required audits30,000 16,000 - Other37,000 20,000 255,200 171,361 Non-audit servicesTaxation services130,325 90,664 Total remuneration of Ernst & Young Australia385,525 262,025 (b) Related practices of Ernst & Young AustraliaAudit servicesStatutory audit of the financial reports: - MFG Investment Fund Plc - MFG Global Fund36,142 - 36,142 - Non-audit servicesTaxation services63,240 - Total remuneration of related firms of Ernst & Young Australia99,382 - Total auditor's remuneration484,907 262,025 MAGELLAN FINANCIAL GROUP LIMITED DIRECTORS’ DECLARATION In the Director’s opinion, a) the financial statements and notes set out on pages 31 to 75 are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2014 and of its performance for the financial year ended on that date; and (ii) complying with Accounting Standards, the Corporations Regulations 2001, International Financial Reporting Standards (IFRS) as disclosed in Note 1 and other mandatory professional reporting requirements, and b) there are reasonable grounds to believe the Company will be able to pay its debts as and when they become due and payable. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ending 30 June 2014. This declaration is made in accordance with a resolution of the Directors. Dr Brett Cairns Chairman Sydney, 14 August 2014 77 MAGELLAN FINANCIAL GROUP LIMITED INDEPENDENT AUDITOR’S REPORT 78 MAGELLAN FINANCIAL GROUP LIMITED INDEPENDENT AUDITOR’S REPORT 79 MAGELLAN FINANCIAL GROUP LIMITED CORPORATE INFORMATION Directors Brett Cairns - Chairman Hamish Douglass – Managing Director and CEO Paul Lewis Robert Fraser Karin Phin Company Secretary Geoffrey Stirton Registered Office Magellan Financial Group Limited Level 7, 1 Castlereagh Street Sydney NSW 2000 Telephone: +61 2 8114 1888 Fax: +61 2 8114 1800 Email: info@magellangroup.com.au Auditors & Tax Advisors Ernst & Young 680 George Street Sydney NSW 2000 Share Registrar Boardroom Pty Limited Level 7, 207 Kent Street Sydney NSW 2000 Telephone: +61 2 9290 9600 Fax: +61 2 9279 0664 Email: enquiries@boardroomlimited.com.au Securities Exchange Listing Australian Securities Exchange ASX code (ordinary shares): MFG ASX code (listed options): MFGOC Website http://www.magellangroup.com.au Corporate Governance Statement The Corporate Governance Statement for MFG can be found at the Corporate Governance tab at http://www.magellangroup.com.au 80 MAGELLAN FINANCIAL GROUP LIMITED SHAREHOLDER INFORMATION AS AT 12 AUGUST 2014 Distribution of Shareholders Analysis of the numbers of shareholders by size of holding at 12 August 2014 is presented below: Holding 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Total Number of holders with less than a marketable parcel of Ordinary Shares Number of Holders 2,968 3,518 726 795 112 8,119 103 Number of Ordinary Shares 1,697,399 8,797,978 5,469,055 22,193,695 120,684,030 158,842,157 1,175 Percentage of Shares on Issue 1.07 5.54 3.44 13.97 75.98 100.00 0.00 Twenty Largest Shareholders The names of the twenty largest shareholders of the Company as at 12 August 2014 are listed below: Holder Name Magellan Equities Pty Limited HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited JP Morgan Nominees Australia Limited Midas Touch Investments Pty Ltd National Nominees Limited UBS Wealth Management Australia Nominees Pty Ltd Nota Bene Investments Pty Ltd Emmanuel Capital Pty Ltd BNP Paribus Nominees Pty Ltd (DRP) Mr Christopher John Mackay Netwealth Investments Limited Mr David Doyle Aljamat Pty Ltd PAJ Lewis Superannuation Fund Pty Ltd Jash Pty Limited Mr Philip Alan Kenneth Naylor & Mrs Andrea Naylor Darian Investments Pty Limited Vahedin Pty Limited Mr Frank Casarotti Number of Ordinary Shares 17,953,167 12,338,728 11,730,299 10,112,242 10,059,300 7,265,161 6,049,822 5,351,497 2,900,000 2,434,561 2,232,022 1,788,389 1,500,000 1,310,000 996,399 969,742 750,000 724,006 721,655 656,927 Percentage of Shares on Issue 11.54 7.93 7.54 6.50 6.47 4.67 3.89 3.44 1.86 1.57 1.44 1.15 0.96 0.84 0.64 0.62 0.48 0.47 0.46 0.42 Total shares held by the twenty largest shareholders 97,843,917 62.89 Total ordinary shares on issue 158,842,157 81 MAGELLAN FINANCIAL GROUP LIMITED SHAREHOLDER INFORMATION AS AT 8 AUGUST 2014 Substantial Shareholders The substantial shareholders in the Company’s Register of Substantial Shareholders at 8 August 2014 are listed below: Shareholder Hamish Douglass, Midas Touch Investments Pty Ltd and associates(A)(B) Chris Mackay and associates(C) Number of Ordinary Shares 10,817,709 20,722,131 Percentage of Shares on issue 6.81 13.05 (A) Includes shares acquired after substantial shareholder notice lodged on 16 June 2009 – 9,408,448 shares. (B) Mr Douglass holds 10,200,000 Class B Shares which at 30 June 2014 were entitled to convert into 10,119,516 ordinary shares of the Company on 21 November 2016 (refer to note 11(d)(iii) for further details). (C) Includes options exercised after substantial shareholder notice lodged on 17 October 2013 – 19,671,947 shares Voting Rights Subject to the Company Constitution: a) at meetings of shareholders, each shareholder is entitled to vote in person, by proxy, by attorney or by representative; b) on a show of hands, each shareholder present in person, by proxy, by attorney or by representative is entitled to one vote; and c) on a poll, each shareholder present in person, by proxy, by attorney or by representative is entitled to one vote for every share held by the shareholder. In the case of joint holdings, only one joint holder may vote. Stock Exchange Listing The Company’s ASX code is “MFG” for its ordinary shares and “MFGOC” for the listed MFG 2016 Options. 82   

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