Magellan Financial Group
Annual Report 2022

Plain-text annual report

Magellan Financial Group Limited Annual Report 2022 ABN 59 108 437 592 Five year summary Group Results Total Revenue Total Expenses Net Profit Before Tax Net Profit After Tax Adjusted Revenue and Other Income1 Adjusted Expenses1 Adjusted Net Profit Before Associates1 Adjusted Net Profit After Tax1 Effective Tax Rate Funds Under Management2 Average Funds Under Management Closing Funds Under Management Funds Under Management comprises: Retail Institutional Average Base Management Fee (per annum)3 Average AUD/USD Exchange Rate Funds Management Business1 Total Revenue Total Expenses Net Profit Before Tax Net Profit Before Tax and Performance Fees1 Employee Expenses / Total Expenses Cost to Income Ratio (expense/revenue) Cost to Income Ratio (excluding performance fees) Assets Total Assets Net Assets Net Tangible Assets Per Share 30 June 2022 30 June 2021 30 June 2020 30 June 2019 30 June 2018 553,530 116,582 495,986 383,011 647,251 132,082 393,132 399,733 22.8 715,012 336,048 337,243 265,156 697,944 110,451 454,201 412,419 21.4 94,251 61,291 103,680 113,902 22,169 39,122 62 0.7257 609,137 127,090 482,047 470,575 68.2 20.9 21.3 30,883 83,019 61 0.7469 662,594 106,115 556,479 526,405 65.6 16.0 16.8 693,952 178,874 515,078 396,214 692,941 119,751 438,299 438,299 23.1 95,458 97,184 26,769 70,415 62 0.6716 674,811 116,799 558,012 477,048 63.2 17.3 19.7 617,387 124,050 493,337 376,947 577,251 104,024 364,225 364,225 23.6 75,819 86,718 23,216 63,502 62 0.7155 561,326 101,537 459,789 376,182 61.8 18.1 21.3 452,598 181,988 270,610 211,791 452,598 101,010 268,897 268,897 21.7 59,034 69,509 19,182 50,327 65 0.7752 428,705 97,275 331,430 291,841 53.4 22.7 25.0 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 % $m $m $m $m bps $ $'000 $'000 $'000 $'000 % % % $'000 $'000 $ 1,241,401 1,026,760 4.95 1,216,166 989,434 4.77 1,123,873 1,045,927 5.08 800,291 734,022 3.44 674,943 620,433 2.92 Shareholder Value Basic Earnings Per Share Diluted Earnings Per Share Adjusted Basic and Diluted Earnings Per Share1 Total Dividends Per Share comprises: Interim and Final Dividends Per Share Performance Fee Dividend Per Share Franking cents cents cents cents cents cents % Other Information Number of Employees Average Number of Employees 206.9 206.9 215.9 179.0 175.1 3.9 77 135 137 144.6 144.6 224.9 211.2 199.7 11.5 75 139 135 218.3 218.3 241.5 214.9 184.5 30.4 75 131 128 213.1 213.1 205.9 185.2 151.8 33.4 75 125 125 122.0 122.0 154.9 134.5 119.6 14.9 100 124 116 1 Adjustments are made for strategic, non-recurring, non-cash or unrealised items to provide additional meaningful information (refer to section 1.4.1 of the Directors’ Report and note 2 in the financial statements for the breakdown of these items). 2 As reported in the Group’s funds under management ("FUM") announcements published on the Australian Securities Exchange ("ASX"). 3 Calculated using management fees (excluding services and performance fees) for the relevant year divided by the average of month end FUM over the same year. Where accounting classifications have changed, or where changes in accounting policy are adopted retrospectively, comparatives have been revised and may differ from results previously reported. The above Consolidated Statement of Profit or Loss and Comprehensive Income and Consolidated Statement of Financial Position extracts are derived from the published financial statements. This table includes non-IFRS information as defined in section 1.4.2 of the Directors’ Report. The annual financial report has been prepared in accordance with Australian Accounting Standards and the Corporations Act 2001. MFG has also released information to the ASX in compliance with the continuous disclosure requirements of the ASX Listing Rules and these announcements are available at www.asx.com.au (MFG's ASX code: MFG). Contents Chairman's Letter Chief Executive Officer's Letter Performance Overview Directors’ Report Remuneration Report Auditor's Independence Declaration Financial Statements Consolidated Statement of Profit or Loss and Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements 1. Basis of Preparation Results for the Year 2. 3. 4. 5. 6. Segment Information Earnings Per Share Revenue Taxation Reconciliation of Operating Cash Flows Investments 7. 8. 9. Financial Assets Associates Intangibles Operating Assets and Liabilities 10. 11. 12. 13. 14. Loans and Receivables Leases Payables Employee Benefits Financial Liabilities Capital and Financial Instrument Risk Management 15. 16. 17. 18. 19. 20. 21. 22. Capital Management Contributed Equity Reserves Employee Share Option Plan Dividends Subsidiaries Related Parties Financial Instrument Risk Management Other Items 23. 24. 25. 26. Commitments and Contingent Assets and Liabilities Parent Entity Information Auditor Remuneration and Independence Subsequent Events Directors’ Declaration Independent Auditor's Report Corporate Sustainability and Responsibility Report Corporate Information Shareholder Information 4 6 7 15 22 44 45 46 47 48 49 49 51 54 54 56 59 60 62 64 65 67 67 68 69 70 70 71 72 73 74 75 76 80 81 82 84 85 86 93 101 102 Chairman's Letter For the year ended 30 June 2022 Dear Shareholder, It is a pleasure to present the 2022 Annual Report, my first report to shareholders as Chairman of Magellan Financial Group Limited ("Magellan"). I joined the Magellan Board in March 2016 as a non-executive director and earlier this year I had the honour of being appointed your Chairman, following a period as Deputy Chairman from June 2019 to February 2022. I will surprise no one by saying that this year has been a challenging one for Magellan. Whilst our funds under management ("FUM") and financial results in the second half of the year reflect the challenges Magellan has faced, they also demonstrate the scale and resilience of our business. In a year of change and transformation for the company, our balance sheet has remained strong and our current levels of profitability provide an excellent platform from which to reinvest in the business and grow. There is, of course, much work to do in regaining the trust of our clients and shareholders but we are committed to rebuilding this trust and to returning value to Magellan's clients and shareholders. Looking to the Future Magellan remains very focused on our core funds management business. Our number one priority is to deliver on our clients’ investment objectives, which in turn will provide the foundation for revenue growth and returns for shareholders over the long term. We recognise that our Global Equities Strategy has underperformed relative to the market over the past 18 months and that we must do better. Magellan has built a reputation for protecting investor capital and generating wealth over the long-term and, whilst we will stay true to our investment philosophies and disciplined investment approach, we are extremely focused on sharpening our investment processes to deliver the investment performance for which we are known. As we focus on the future, it is important we look after our people who are Magellan’s number one asset. As a result, in March 2022, we announced a number of staff retention initiatives, which included a retention bonus plan, amendments to the terms of share purchase plan ("SPP") loans to employees, and the issue of options to employees at an exercise price of $35 per option with a five-year term, subject to standard conditions around vesting and continued employment. Having a strong balance sheet has allowed us to support and invest in our people through initiatives that also align with shareholder outcomes. This, in turn, has allowed employees to remain focused on our clients and the business during a period of change and uncertainty. I am proud of how our people have met the challenges of this year. Capital Management During the year, we delivered on a number of capital management initiatives which were announced in conjunction with our Interim Results in February 2022, the first of which was the implementation of an on-market buy-back of up to 10 million shares. The buy-back is now well underway, and we believe that this represents an effective way to enhance value for shareholders. In March 2022, we also announced a bonus issue of options to shareholders on a 1-for-8 basis for nil consideration. The options were issued with an exercise price of $35 per option and a five-year term. We believe that the bonus options, issued at no cost to shareholders, represent a potential source of value to shareholders. Finally, in line with our strategy (announced to the market in February 2022) to focus on our core funds management business, and not make further investments in Magellan Capital Partners, we sold our shareholding in Guzman y Gomez for cash consideration of $140 million, representing a 36.3% premium to our entry price in January 2021. Taken in totality, we believe these capital management initiatives are consistent with our aim to deliver capital efficiency, solid dividends and attractive returns to shareholders, and importantly, are evidence of our focus on our core funds management business. Leadership & Board Update As announced in May 2022, following an extensive search the Board appointed David George as Magellan's CEO and Managing Director. David joined us on 19 July 2022, and it is my great pleasure to welcome David to Magellan. David has deep funds management experience having spent the last 14 years with the Future Fund, and he brings an outstanding investment management pedigree, strong client service credentials and a fresh perspective to our team. David is a great fit for our business and an excellent leader for the next chapter of our growth. I sincerely thank Kirsten Morton for acting as Interim CEO through the leadership transition period. Kirsten has displayed tremendous leadership and determination and will continue to be a key part of the success of Magellan going forward in her dual roles as Chief Financial Officer and Chief Operating Officer. Magellan Financial Group Limited | Annual Report 2022 Page 4 Chairman's Letter For the year ended 30 June 2022 Lastly, as you are aware, Hamish Douglass stepped down from the Board in March 2022. I thank Hamish for his contribution to the Board over many years and for founding and building a great business. Later this year, I look forward to welcoming Hamish to a new consultancy role which will enable him to deliver his macroeconomic and geopolitical investment expertise to Magellan commencing from October 2022. As we flagged earlier in the year, the Board continues its search for an additional non-executive director, and we are hoping to have news on an appointment in the coming months. Concluding Remarks Looking forward, I am excited for the next chapter of Magellan's growth. Despite recent challenges, it is important to remember that Magellan remains a globally significant asset manager with over A$60 billion of FUM as at 29 July 2022, a team of talented and dedicated employees, and thousands of clients who have placed their trust in us. I would like to thank my fellow Directors on the Board and Magellan employees for their dedication and hard work this year. Thank you for your ongoing support of Magellan. Yours sincerely, Hamish McLennan Chairman Magellan Financial Group Limited | Annual Report 2022 Page 5 Chief Executive Officer's Letter For the year ended 30 June 2022 Dear Shareholder, Magellan was founded in 2006 with a simple goal of protecting and growing the wealth of its clients through investments in high-quality global companies. By focusing on its clients and delivering on its investment objectives over many years, Magellan became an asset manager of meaningful scale, with deep and long-standing relationships in the investment community. This growth led to the creation of significant shareholder value. However, the past year has seen the company undergo a period of significant change and transformation. Changes to Magellan’s leadership team and personnel, as well as relative underperformance in the Global Equities strategy, have impacted client confidence and contributed to a period of declining funds under management and profitability. I acknowledge that this year’s events are not what you would have expected. It has only been a few short weeks since I joined the company, but I want to convey to you that I am acutely aware of the challenges, as is the Magellan Board and indeed the entire Magellan team. We are committed to improving investment returns and, in doing so, restoring stability, confidence and shareholder value. Despite recent changes, Magellan’s goal of protecting and growing its clients’ wealth remains undiminished. My initial impressions are of a professional, energetic and committed team with a tremendous pride to deliver for our clients. I am looking forward to working with the team in service of this goal. Strong Platform for Growth Notwithstanding the challenges of the past year, Magellan remains an asset manager of significant scale with considerable underlying financial strength and great potential. Our three core investment capabilities – Global Equities, Infrastructure Equities and Australian Equities – are supported by deeply experienced investment teams and disciplined investment processes, that provide the foundation for future growth. These capabilities also give Magellan the capacity to tailor and deliver new products to investors that leverage our existing investment expertise, such as the MFG Core Series and the Sustainable strategy. Importantly, our strong balance sheet and current level of profitability give us the flexibility to continue to invest in our core funds management business and take advantage of opportunities as they arise. I am excited by the opportunities in the market and how they present for Magellan. The current investment landscape is a volatile and challenging one. The end of monetary expansion marks a change from the time when money flows pushed all asset values upward. Such a volatile and difficult environment should reward outstanding fundamental company research and active management of portfolios, qualities that are trademarks of Magellan products. I look forward to contributing my own long-term investment perspectives and experience, developed during my 14 years at the Future Fund, to the considerable depth of knowledge and experience of our investment team as we navigate this evolving environment. Closing Remarks In my first weeks as CEO, I have had two priorities. The first has been to work with the investment team, supporting a relentless focus on efficiency, effectiveness, and excellence throughout our investment activity. The second has been to take time to listen to shareholders, clients and our team at Magellan, which I plan to continue to do in the coming months. This is part of a detailed review of the business to identify areas of improvement in our core funds management business and to formulate a strategy that restores performance, enhances shareholder returns and positions the business for future growth. I look forward to sharing my thoughts with shareholders in October. I would like to thank all shareholders for your ongoing support of Magellan. It is a great privilege to lead Magellan through the next chapter of its growth. There is much to do, and I look forward to updating you on our progress. David George Chief Executive Officer & Managing Director Magellan Financial Group Limited | Annual Report 2022 Page 6 Performance Overview For the year ended 30 June 2022 Overview of Results The 2022 financial year has been a challenging period for Magellan Financial Group Limited (“Magellan” or the “Group”). Funds under management (“FUM”) at 30 June 2022 was $61.3 billion, representing a decrease of 46% from the 30 June 2021 closing FUM of $113.9 billion. The timing of client outflows, which primarily occurred during (or shortly prior to) the second half, resulted in a more modest decrease to average FUM for the year of 9% to $94.3 billion (average FUM of $103.7 billion for the year ended 30 June 2021). The Group’s statutory net profit after tax for the 2022 financial year was $383.0 million, representing an increase of 44% over the previous corresponding period ($265.2 million for the year ended 30 June 2021). The significant increase in statutory net profit can be largely attributed to the material one-off after tax expense (of approximately $148 million) recognised by the Group in the 2021 financial year in respect of strategic initiatives for that period, associated with the issue of additional Magellan Global Fund (“MGF”) Closed Class Units and MGF Options under the MGF Partnership Offer and Bonus MGF Option Issue. The Group’s adjusted net profit after tax decreased by 3% to $399.7 million ($412.4 million for the year ended 30 June 2021). Adjusted earnings per share decreased by 4% to 215.9 cents per share (224.9 cents per share for the year ended 30 June 2021). The Group believes adjusted net profit after tax provides meaningful information about the performance of the business, particularly in comparative analysis. Adjusted financial measures for the period are adjusted for: • • • • • non-cash amortisation expense of $4.6 million; net unrealised capital losses from the Fund Investments segment of $92.9 million (net of tax: $65.1 million); net non-cash remeasurement of share purchase related loans of $3.3 million; net gain on dilutions and disposals of associates of $50.7 million (net of tax: $40.4 million), which primarily relates to the sale of the Group’s 11.6% shareholding in Guzman y Gomez (Holdings) Limited (“GYG”); and net non-cash benefits from strategic initiatives of $22.6 million (net of tax: $15.8 million), which primarily reflect changes in the fair value of Magellan’s liability to fund the 7.5% exercise discount in respect of the MGF Options. Profit before tax from the Funds Management business decreased by 13% to $482.0 million ($556.5 million for the year ended 30 June 2021). In the period, the Group earned crystallised performance fees before tax of $11.5 million ($30.1 million for the year ended 30 June 2021). These fees were previously disclosed in Magellan’s 1H22 Interim Results and were earned by the Group during the six-month period to 31 December 2021. Performance fees can, and usually do, vary significantly from period to period. Profit before tax and performance fees of the Funds Management business decreased 11% to $470.6 million ($526.4 million for the year ended 30 June 2021) which was broadly in line with the decrease in average FUM. The Group’s share of the after-tax profits generated by the investments in Magellan Capital Partners was $8.4 million. In addition, Magellan made an after-tax gain on disposal of $23.4 million from the sale of its 11.6% shareholding in GYG, which completed on 24 June 2022 and a one-off gain on dilution of $17.6 million resulting from Barclays’ $75 million additional investment in Barrenjoey. Fund Investments made a loss of $56.1 million before tax. This primarily comprised net unrealised capital losses of $92.9 million which were partially offset by distribution income of $17.6 million and net realised capital gains of $19.4 million. Earnings from distributions and realised capital gains/losses are included in other revenue in the table on the next page. The Directors have declared total dividends of 179.0 cents per share in respect of the year ended 30 June 2022. This compares with 211.2 cents per share in the 2021 financial year. In respect of the six months to 30 June 2022, the Directors have declared a total dividend of 68.9 cents per share, franked at 80% (114.1 cents per share, 75% franked, in 2021) which will be paid on 6 September 2022. The dividend comprises: • • a Final Dividend of 65.0 cents per share (102.6 cents per share for the six months to 30 June 2021); and a Performance Fee Dividend of 3.9 cents per share (11.5 cents per share for the six months to 30 June 2021). The Group’s policy is to pay Interim and Final Dividends of 90% to 95% of the net profit after tax of the Group’s Funds Management business excluding performance fees. Net profit after tax of the Funds Management business excludes amortisation of intangibles, expenses/benefits related to strategic initiatives and gains/losses from non-cash remeasurements. In addition to the Interim and Final Dividends, the Group will pay an annual Performance Fee Dividend of 90% to 95% of the net crystallised performance fees after tax. Any Performance Fee Dividend will be paid annually alongside the Final Dividend. The payment of dividends by the Group will be subject to corporate, legal and regulatory considerations. Magellan Financial Group Limited | Annual Report 2022 Page 7 Performance Overview For the year ended 30 June 2022 As previously noted, dividends are likely to be less than 100% franked due to the combination of Magellan’s payout ratio and its below 30% tax rate. Magellan’s effective tax rate is below the company tax rate (currently 30%) because Magellan has the benefit of being declared an Offshore Banking Unit (“OBU”). The benefit of an OBU is that assessable offshore income, net of costs, is taxed at a concessional rate of 10%. Assessable domestic income is still taxed at the company tax rate and so the actual overall tax rate will depend on the mix of the Group’s offshore and onshore businesses. Currently Magellan’s effective tax rate is 22.8%. As previously announced to shareholders, the OBU regime will be abolished from 1 July 2023. Once abolished, the concessional 10% rate will no longer be available and all of the Group’s assessable earnings will be taxed at the company tax rate. The Board has a policy of paying out franking credits to the maximum extent possible over time, however, the level of franking attached to dividends may vary from period to period. The proposed changes to the OBU will likely lead to higher levels of franking paid to shareholders in the future. The following table summarises the Group’s profitability over the past two financial years1: Management and services fees Performance fees Other revenue and income Adjusted revenue and other income 30 June 2022 $'000 592,634 11,472 43,145 647,251 30 June 2021 $'000 635,407 30,074 32,463 697,944 Change $'000 (42,773) (18,602) 10,682 (50,693) Change % (7%) (62%) 33% (7%) Adjusted expenses (132,082) (110,451) (21,631) 20% Adjusted net profit before tax Adjusted tax expense Adjusted net profit after tax and before associates 515,169 (122,037) 393,132 587,493 (133,292) 454,201 (72,324) 11,255 (61,069) (12%) (8%) (13%) Share of after tax profit/(loss) of associates1 6,601 (41,782) 48,383 116% Adjusted net profit after tax 399,733 412,419 (12,686) (3%) Net (expenses)/benefits related to strategic initiatives (after tax)2 Net gain on dilutions and disposals of associates (after tax) Amortisation expense of intangible assets Net non-cash remeasurement of SPA loans Net unrealised change in fair value of financial assets and liabilities (after tax) Total non-IFRS adjustments 15,814 40,395 (4,585) (3,291) (154,113) - (4,548) 240 (65,055) (16,722) 11,158 (147,263) 169,927 40,395 (37) (3,531) (76,213) 130,541 nm nm nm nm nm Statutory net profit after tax 383,011 265,156 117,855 44% Key statistics Diluted earnings per share (cents per share) Adjusted diluted earnings per share (cents per share) Dividends Interim and final dividends (cents per share) Annual performance fee dividend (cents per share) Total dividends (cents per share) 206.9 215.9 175.1 3.9 179.0 144.6 224.9 199.7 11.5 211.2 62.3 -9.0 -24.6 -7.6 -32.2 43% (4%) (12%) (66%) (15%) 1 Share of after-tax profit/(loss) of associates of $8.38 million adjusted for tax on undistributed associate profit of $1.78 million. A reconciliation to the reported statutory net profit is outlined in section 1.4.1 of the Directors' Report. 2 Comprises the change in value of the obligation associated with Magellan Global Fund ("MGF") Options issued under the MGF Partnership Offer and Bonus MGF Option Issue and contributions to Magellan FuturePay under the commitment made by the Group. The prior period also included the restructure of MGF and the costs of funding discounts under the Magellan High Conviction Trust ("MHH") and Magellan Global Trust ("MGG") DRPs. 1 Adjusted financial measures are adjusted for strategic, non-recurring, non-cash or unrealised items to provide additional meaningful information (refer to section 1.4.1 of the Directors’ Report and note 2 in the financial statements for the breakdown of these items). Magellan Financial Group Limited | Annual Report 2022 Page 8 Performance Overview For the year ended 30 June 2022 Funds Management Segment The Group’s Funds Management segment is Magellan’s core business and the driver of the Group’s revenues, profitability, and therefore, dividends paid to shareholders. As at 30 June 2022, the Funds Management business had FUM of $61.3 billion that is managed on behalf of Australian and New Zealand retail investors and institutional investors around the world. This section discusses the financial performance of the Funds Management segment for the period. For the year ended 30 June 2022, the Funds Management segment profit before tax was $482.0 million ($556.5 million for the year ended 30 June 2021). Excluding performance fees, profit before tax decreased by 11% to $470.6 million ($526.4 million for the year ended 30 June 2021). Funds Management segment profit excludes amortisation of intangibles, expenses/benefits related to strategic initiatives and gains/losses from non-cash remeasurements. The following table summarises the profitability of the Funds Management segment over the past two financial years: Revenue Management fees Performance fees Services fees Other revenue and income Expenses Employee expenses Fund administration and operational costs Information, technology and data Marketing Other expenses Net profit before tax 30 June 2022 $'000 30 June 2021 $'000 Change % 588,594 11,472 4,040 5,031 609,137 86,716 20,441 8,183 2,349 9,401 127,090 482,047 631,367 30,074 4,040 (2,887) 662,594 69,602 19,589 7,147 1,620 8,157 106,115 556,479 (7%) (62%) 0% 274% (8%) 25% 4% 14% 45% 15% 20% (13%) Net profit before tax and performance fees1 470,575 526,405 (11%) Key statistics Average funds under management ($ million) Average AUD/USD exchange rate Average number of employees Employee expenses / total expenses Cost / income Cost / income, excl. performance fees1 94,251 0.7257 137 68.2% 20.9% 21.3% 103,680 0.7469 135 65.6% 16.0% 16.8% (9%) (3%) 1% 1 Adjusts for the current period performance fee impact on revenue and expenses for the 12-month period. Revenues The primary component of the Group’s revenues are management fees, which are based on FUM. Changes in FUM are discussed further on page 11. Revenues for the year decreased by 8% to $609.1 million. This was driven by a 7% decrease in total management fee revenue, as a result of a 9% decrease in average FUM over the period, and a decline in performance fees. Performance fees before tax for the year totalled $11.5 million compared with $30.1 million in the prior corresponding period. Performance fees can, and very often do, vary significantly from period to period. Given a large portion of Magellan’s overall FUM is invested in offshore markets and is typically unhedged for currency movements, Magellan’s FUM, and therefore revenue, is inversely affected by movements in the Australian dollar. The depreciation of the Australian dollar during the year has had a positive impact on FUM and revenue, with the average AUD/USD exchange rate across the period depreciating 3% compared with the 2021 financial year. Magellan Financial Group Limited | Annual Report 2022 Page 9 Performance Overview For the year ended 30 June 2022 As a result of the acquisition of Frontier in 2018, the Group also receives revenues relating to Frontier’s third-party fund manager distribution business (excluding Magellan) which has been included in other revenue. Other revenue during the period was also impacted by a $3.4 million net foreign exchange gain. Expenses Expenses increased by 20% to $127.1 million over the previous corresponding period, within previously provided guidance that Funds Management segment expenses would be in the range of $125-$130 million. As noted above, the operating expenses of the Funds Management segment exclude items relating to strategic initiatives. For the year ended 30 June 2022 these initiatives included benefits arising from the change in value of the obligation to fund the discounts associated with MGF Options and costs incurred from contributions to Magellan FuturePay under the commitment made by Magellan. In the past, these items have included the costs associated with the restructure of Magellan’s global equities retail funds in December 2020, and funding of the discounts offered under any capital raisings (for example UPPs, DRPs and the MGF Partnership Offer) in Magellan’s closed-ended funds. These costs are regarded as investments in the business rather than contributing to day-to-day operating expenses. Overall, the Funds Management business operated efficiently with a cost to income ratio (excluding performance fees) of 21.3% compared with 16.8% for the year ended 30 June 2021. The increase to Magellan’s cost to income ratio primarily reflects the decrease in revenue resulting from a material reduction in FUM during the period. As a fund manager, Magellan’s business is heavy on human capital and its people are fundamental to delivering value for clients. Payments to employees increased by 25% to $86.7 million and made up 68.2% of the operating expenses of the Funds Management segment in the 2022 financial year. The increase in employee expenses during the period is primarily attributable to the payment of deferred cash bonuses in respect of the 2021 financial year (as foreshadowed in the 2021 Annual Report), Mr Douglass’ resignation payment and a pro-rated expense for the staff retention bonus plan announced in March 2022 (discussed further below). The following table sets out total employee numbers: Investment Portfolio Managers/Analysts Dealers Distribution & Marketing Other (including Finance, Risk & Compliance, Admin) Frontier Airlie Total Average number of employees 30 June 2022 30 June 2021 32 3 35 36 46 9 9 135 137 34 3 37 34 48 11 9 139 135 As at 30 June 2022, the Group had 135 employees. During the period, Magellan continued to invest in and support its people. In March 2022, a staff engagement and retention program was announced. This included a retention bonus plan and the issue of up to 10 million share options to employees, subject to standard conditions around vesting and continued employment. These initiatives have allowed employees to remain focused on clients and the business during a period of change and uncertainty, while also aligning with shareholder outcomes. The expenses associated with the employee options and retention bonus plan will be recognised over the course of their respective vesting periods. The Funds Management segment expenses for the period include the amounts recognisable in relation to these initiatives for the 2022 financial year. The level of expenses each year also depends on a number of market related variables such as foreign exchange rates, FUM levels and unitholder activity. The Group continues to pay close attention to costs and has a cost-conscious culture. Magellan Financial Group Limited | Annual Report 2022 Page 10 Performance Overview For the year ended 30 June 2022 Funds Under Management As at 30 June 2022, the Group had FUM of $61.3 billion, split between global equities (54%), infrastructure equities (33%) and Australian equities (13%). This compares with FUM of $113.9 billion at 30 June 2021. The decrease in FUM was driven by investment losses of approximately $2.3 billion, net outflows of $49.5 billion and cash distributions (net of reinvestment) of approximately $0.8 billion. The following table sets out the composition of FUM over the past two financial years: Retail Institutional Total FUM ($billion) Retail (%) Institutional (%) FUM subject to performance fees (%) Breakdown of FUM ($billion) Global equities Global listed infrastructure Australian equities Average base management fee (bps) per annum excluding performance fees1 30 June 2022 30 June 2021 22.2 39.1 61.3 36% 64% 40% 33.3 20.1 7.9 62 30.9 83.0 113.9 27% 73% 34% 85.4 19.0 9.5 61 1 Calculated as management fees (excluding performance and services fees) for the relevant period divided by the average of month end FUM over the same period. Retail FUM The Group’s retail business is focused on retail investors in Australia and New Zealand whom the Group targets through two key channels: broker advised and financial advisers, and self-directed retail investors. At 30 June 2022, the Group had total retail FUM of $22.2 billion. The Group experienced total net retail outflows of $5.2 billion for the 12 months to 30 June 2022, compared with total net inflows of $1.9 billion for the previous financial year. Retail net outflows increased during the second half of the financial year, with retail net outflows of $3.5 billion, compared with retail net outflows of $1.7 billion during the first half. The following table sets out the investment performance of the Magellan Global Fund, the Magellan Infrastructure Fund and the Airlie Australian Share Fund since their inceptions: Investment Performance for the Period to 30 June 20221 1 Year 3 Years 5 Years Magellan Global Fund3 MSCI World NTR Index ($A) Magellan Infrastructure Fund Global Listed Infrastructure Benchmark ($A)4 Airlie Australian Share Fund S&P/ASX 200 Accum. Index % % p.a. % p.a. (11.8) (6.5) 6.6 9.4 (7.4) (6.5) 2.1 7.7 1.5 2.4 8.0 3.3 8.4 10.1 5.5 4.2 - - Since Inception % p.a.2 10.2 6.7 7.5 5.4 7.8 6.1 1 Calculations are based on exit price with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and 2 entry fees (if applicable). Annualised performance is denoted with “p.a.” for the relevant period. Inception date for the Magellan Global Fund and Magellan Infrastructure Fund is 1 July 2007 and the inception date for the Airlie Australian Share Fund is 1 June 2018. 3 Performance for the Magellan Global Fund Open Class 4 The Global Listed Infrastructure benchmark is comprised of the following: from inception to 31 December 2014 the benchmark is UBS Developed Infrastructure and Utilities NTR Index (AUD Hedged) and from 1 January 2015 onwards, the benchmark is the S&P Global Infrastructure NTR Index (AUD Hedged). Magellan Financial Group Limited | Annual Report 2022 Page 11 Performance Overview For the year ended 30 June 2022 It has been a difficult 18 months for the Global Equities strategy, and Magellan recognises that it must do better. Magellan continues to believe investing in the world’s best companies is the path to growing wealth in the long-term, and it is extremely focused on sharpening investment processes to deliver the investment performance for which the Group is known. Magellan’s Infrastructure Equities strategy continues to deliver solid long-term performance underscored by the team’s strict approach to defining investment grade infrastructure, which excludes companies where Magellan has assessed their earnings to have material direct exposure to commodity prices, competitive pressure or sovereign risk. The long-term performance of the strategy speaks volumes to this disciplined approach, which has developed a strong following amongst investors and advisers. The Airlie Australian Share Fund (ASX: AASF / APIR: MGE9705AU), managed by Matt Williams and Emma Fisher, has established an exceptional three-year track record and continues to deliver strong investment performance. As at 30 June 2022, FUM in the Airlie Australian Share Fund stood at $308 million, significantly higher than the $103 million 12 months ago. While it is still early days, Magellan sees significant growth opportunities for the newer products launched in recent years as follows: • MFG Core Series: The three funds in the MFG Core Series (MFG Core International Fund, MFG Core ESG Fund and MFG Core Infrastructure Fund) were launched to retail investors in December 2020. There is growing demand for low cost products and Magellan is excited for the opportunities that the MFG Core Series presents. • Magellan Sustainable Fund: Magellan is pleased to continue to offer retail investors a thoughtful and differentiated approach to climate change and ESG risks through the Magellan Sustainable Fund, managed by Dom Giuliano. Subsequent to the end of the financial year, in July 2022, Magellan made the decision to close Magellan FuturePay. Magellan FuturePay was developed to meet the needs of many investors for retirement income and its unique structure achieved this objective. However, given the size and modest anticipated demand for FuturePay, Magellan determined that it was in the best interests of investors to return their capital and close the fund. The closure is also consistent with the Group’s strategy to simplify its business and concentrate on its core investment capabilities. Institutional FUM At 30 June 2022, the Group had total institutional FUM of $39.1 billion. During the 12 months to 30 June 2022, institutional net outflows were $44.2 billion, which compares with net inflows of $2.6 billion for the previous financial year. The loss of the St James’s Place mandate in December 2021 of $23 billion was the largest contributor to the institutional net outflows for the period. During the financial year, Magellan undertook a significant engagement program across its global institutional client base and continues to work closely with clients to provide transparency and insight on the performance and positioning of the Global Equities strategy. While Magellan’s institutional clients are diversified and located around the world, the Group seeks to implement a targeted approach to institutional distribution and therefore most of its institutional clients are based in North America, the UK and Australia/NZ. In February 2018, the Group acquired its North American distribution partner, Frontier. North America is regarded as a key market for the Group’s institutional distribution activities and Magellan is delighted to have Bill Forsyth, Frontier’s founder and Chairman, leading this activity. The Group’s global listed infrastructure strategies continue to see interest from institutional investors, and Magellan believes it is well positioned to grow in this space given its unique approach to defining infrastructure and the solid long-term investment performance the team has achieved. At 30 June 2022, the Group’s infrastructure FUM was US$13.8 billion. Magellan is also pleased with the continued development of its next generation of global equities strategies, the Sustainable strategies. Head of ESG and Portfolio Manager, Dom Giuliano, manages the Global Sustainable strategy, and the US Sustainable strategy is managed by Head of Financials and Portfolio Manager, Alan Pullen. Both strategies have passed their five year anniversaries and continue to gather investor interest. Magellan was pleased to welcome new institutional mandates into the Global Sustainable strategy during the period and total institutional FUM of these strategies is now $417 million. The Group believes both these strategies are well positioned on the back of solid track records and a thoughtful, differentiated sustainable investment approach. Magellan Financial Group Limited | Annual Report 2022 Page 12 Performance Overview For the year ended 30 June 2022 Fund Investments Fund Investments is a sub-set of the Group’s balance sheet and largely comprises investments in Magellan’s funds and seed portfolios for new strategies and initiatives. The Group believes that maintaining a strong balance sheet which can withstand almost any market condition is important for Magellan’s clients and shareholders. The Group’s Fund Investments are important for multiple reasons, including: • • • Alignment with clients through co-investment in Magellan’s investment strategies; Seeding new investment strategies; and Providing a meaningful level of liquid assets for operational risk purposes. As at 30 June 2022, the Group had net Fund Investments of $358.4 million, compared with $407.5 million at 30 June 2021. The following table sets out a summary of the Group’s Fund Investments as at 30 June 2022 and 30 June 2021: Cash Investments in: Magellan funds1 Net seed portfolios Other2 Total Net deferred tax liability3 Net Fund Investments Net Fund Investments per share (cents)4 1 Investments are set out in note 7 of the financial statements. 30 June 2022 $'m 30 June 2021 $'m 0.3 0.5 374.0 4.7 0.3 379.3 (20.9) 358.4 441.5 10.6 0.3 452.9 (45.4) 407.5 193.6 221.7 2 Comprises receivables and payables. 3 Arises from changes in the fair value of financial assets offset by the deferred tax asset relating to unused tax losses. 4 Based on 185,088,872 shares on issue at 30 June 2022 (June 2021: 183,793,753 ordinary shares). The Group aims to earn satisfactory returns on its Fund Investments portfolio over time while maintaining capital strength to underpin the Group’s business. The Board has established a pre-tax return hurdle of 10% per annum over the business cycle for the Fund Investments portfolio. The Group’s Fund Investments portfolio has returned pre-tax (11.9%), 2.0% and 7.8% per annum over the last 1, 3 and 5 years to 30 June 2022 respectively. Excluding the effect of the Group’s previous investment in MFF Capital Investments Limited, disposed of by way of an in-specie distribution to shareholders in February 2013, the portfolio returned pre-tax 9.8% per annum since inception from 1 July 2007. 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 underperformance of Magellan’s Global Equities strategy in the last 18 months has meaningfully impacted the returns of the Fund Investments portfolio. Magellan is highly focused on improving investment performance in its funds which, in turn, should improve the Group’s Fund Investments portfolio returns. Magellan Capital Partners As at 30 June 2022, Magellan Capital Partners comprised two financial investments: • • 36% economic interest (5% voting interest) in Barrenjoey Capital Partners Group Holdings Pty Limited (“Barrenjoey”), a recently established full-service financial services firm; and 16% interest in FinClear Holdings Limited (“FinClear”), a provider of technology, infrastructure and ASX market-access services (excluding the impact of any potential dilution arising from unexercised issued options). These investments are held on Magellan’s balance sheet and are managed separately from and independently of Magellan’s core Funds Management business. Magellan Capital Partners is overseen by Craig Wright, Head of Magellan Capital & Advisory. Magellan Financial Group Limited | Annual Report 2022 Page 13 Performance Overview For the year ended 30 June 2022 During the period, Magellan Capital Partners sold its 11.6% shareholding in GYG for cash consideration of $140 million, representing a 36.3% premium to Magellan’s entry price in January 2021. The sale completed on 24 June 2022. Magellan may also be entitled to a further payment of up to $6 million subject to the performance of GYG and the realisation of the investment by the acquiring entity. The Magellan Capital Partners segment delivered a pre-tax profit of $9.1 million during the year ended 30 June 2022, with Barrenjoey delivering a modest profit for the year and FinClear recognising a material one-off profit on the gain on acquisition of Pershing Australia. This profit excludes the sale of Magellan’s shareholding in GYG for a net pre-tax profit of $33.7 million and also excludes a one-off net pre-tax gain of $17.6 million on the dilution of Magellan’s shareholding in Barrenjoey from 40% to 36% following Barclays’ $75 million additional investment in Barrenjoey. As announced in conjunction with Magellan’s Interim Results in February 2022, Magellan does not plan to make further investments via Magellan Capital Partners. The Board is pleased with the performance of Magellan Capital Partners over the period and continues to manage these holdings in a prudent and patient way. Capital Management As at 30 June 2022, the Group’s financial position included: • • • • investment assets (cash and cash equivalents, financial assets and investments in associates) of $963.3 million (June 2021: $902.9 million). The Group’s cash position at 30 June 2022 was $419.9 million and current loans and receivables were $66.3 million. Dividends of $127.5 million are due to be paid to shareholders on 6 September 2022; net assets of $1,026.8 million (June 2021: $989.4 million) which includes $111.3 million of intangible assets in relation to the acquisitions of Airlie and Frontier; net tangible assets per share of $4.95 (June 2021: $4.77); and total liabilities of $214.6 million (June 2021: $226.7 million) which relate predominantly to the Group's financial commitments in regard to the MGF Options but which also include payables, employee benefits, income tax payable and lease liabilities. The Group has no debt and has access to an undrawn debt facility. During the period, Magellan delivered on a number of capital management initiatives which were announced at the Interim Results Briefing in February 2022. These included: • • • an on-market share buy-back of up to 10 million ordinary fully paid shares (representing up to 5.4% of shares on issue as at announcement). As at 30 June 2022, Magellan has bought back 626,960 shares pursuant to the programme; a 1-for-8 pro rata non-renounceable bonus issue of options to eligible shareholders for nil consideration. The options were issued with an exercise price of $35.00 per option and an expiry date of 16 April 2027 and commenced trading on the ASX in April 2022 under the ticker “MFGO”; the sale of Magellan Capital Partners’ shareholding in GYG for cash consideration of $140 million. The above initiatives are consistent with Magellan’s focus on its core Funds Management business and Magellan’s aim to deliver capital efficiency and attractive returns for shareholders. Magellan Financial Group Limited | Annual Report 2022 Page 14 Directors’ Report For the year ended 30 June 2022 The Directors present their report together with the financial statements of Magellan Financial Group Limited (the “Company” or “MFG”) and its controlled entities, which together form the Group, for the year ended 30 June 2022. 1. Operations and Activities 1.1. Company Overview The Company is a listed public company incorporated in Australia. The Group’s main operating company is Magellan Asset Management Limited (“MAM”). The shares of the Company are publicly traded on the Australian Securities Exchange ("ASX") under ASX Code: MFG. The Company’s principal place of business is Level 36, 25 Martin Place, Sydney, New South Wales, 2000. 1.2. Principal Activity The principal activity of the Group is funds management with the objective of offering investment opportunities to high net worth and retail investors in Australia and New Zealand, and institutional investors globally. 1.3. Dividends During the year ended 30 June 2022, dividends amounting to $414,179,000 were paid representing 224.2 cents per ordinary share (June 2021: $400,743,000 representing 219.1 cents per ordinary share). On 17 August 2022, the Directors declared a total dividend of 68.9 cents per ordinary share (80% franked) in respect of the six months to 30 June 2022 (June 2021: 114.1 cents per ordinary share 75% franked). The dividend payments comprise a Final Dividend of 65.0 cents per ordinary share and a Performance Fee Dividend of 3.9 cents per share (June 2021: Final Dividend of 102.6 cents per ordinary share and a Performance Fee Dividend of 11.5 cents per ordinary share). The amount of the Final and Performance Fee Dividend expected to be paid on 6 September 2022, but not recognised as a liability as at 30 June 2022, is approximately $127,526,000 (June 2021: $209,709,000). The Company’s policy is to pay Interim and Final Dividends of 90% to 95% of the net profit after tax of the Group’s funds management business excluding performance fees. Net profit after tax of the funds management business excludes amortisation of intangibles, expenses/benefits related to strategic initiatives and gains/losses from non-cash remeasurements. In addition to the Interim and Final Dividends, the Directors will pay an annual Performance Fee Dividend of 90% to 95% of net crystallised performance fees after tax. Any Performance Fee Dividend will be paid annually alongside the Final Dividend. The payment of dividends by the Group will be subject to corporate, legal and regulatory considerations. 1.4. Review of Financial Results and Operations 1.4.1. Reconciliation of Net Profit After Tax to Adjusted Net Profit After Tax The Group’s net profit after tax (“Statutory net profit”) and earnings per share are prepared in accordance with Australian Accounting Standards. The Group also reports a number of non-International Financial Reporting Standards ("non-IFRS") financial measures including "adjusted revenue and other income", "adjusted net profit before associates", "adjusted net profit after tax" and "adjusted basic and diluted EPS" which are shown on the next page. Refer to section 1.4.2 for further details on non-IFRS financial measures. The Group’s statutory net profit after tax for the year ended 30 June 2022 was $383,011,000, up $117,855,000 on the prior year. The Group’s adjusted net profit after tax was $399,733,000 (June 2021: $412,419,000) which takes into account various non-IFRS adjustments as shown on the following page. Magellan Financial Group Limited | Annual Report 2022 Page 15 Directors’ Report For the year ended 30 June 2022 30 June 2022 30 June 2021 Statutory $'000 Non-IFRS $'000 Statutory $'000 Non-IFRS $'000 Management and services fees Performance fees Other revenue and income Total revenue and other income Adjust for: net unrealised change in fair value of financial assets and liabilities Adjust for: non-cash interest recognised in respect of SPA loans Adjusted revenue and other income Total expenses Adjust for: net expenses/(benefits) related to strategic initiatives1 Adjust for: amortisation of intangible assets Adjust for: non-cash expenses recognised in respect of SPA loans Adjusted expenses Income tax Adjust for: tax on above adjustments Adjust for: tax on undistributed associate profit Adjust for: tax on gain from associate dilutions and disposals Adjusted income tax Adjusted net profit before associates 592,634 11,472 (50,576) 553,530 (116,582) (112,975) Share of after-tax profit/(loss) of associates Adjust for: tax on undistributed associate profit Net gain on dilutions and disposals of associates Adjust for: net gain on dilutions and disposals of associates 8,381 50,657 592,634 11,472 (50,576) 553,530 92,937 784 647,251 (116,582) (22,592) 4,585 2,507 (132,082) (112,975) (21,104) 1,780 10,262 (122,037) 393,132 8,381 (1,780) 50,657 (50,657) 635,407 30,074 49,531 715,012 (336,048) (72,087) (41,721) - 635,407 30,074 49,531 715,012 (15,940) (1,128) 697,944 (336,048) 220,161 4,548 888 (110,451) (72,087) (61,266) 61 - (133,292) 454,201 (41,721) (61) - - Net profit after tax Adjusted net profit after tax 383,011 265,156 399,733 412,419 Basic and diluted earnings per share Adjusted basic and diluted earnings per share 206.9 144.6 215.9 224.9 1 Comprises the change in value of the obligation associated with Magellan Global Fund ("MGF") Options issued under the MGF Partnership Offer and Bonus MGF Option Issue and contributions to Magellan FuturePay under the commitment made by the Group. In the prior period, costs also included the restructure of MGF and the costs of funding discounts under the Magellan High Conviction Trust ("MHH") and Magellan Global Trust ("MGG") DRPs. 1.4.2. Non-IFRS Financial Measures Non-IFRS financial measures are measures that are not defined or specified under IFRS. The Directors believe non-IFRS financial measures assist in providing additional meaningful information about the performance of the business and period-to- period comparability by adjusting for strategic, non-recurring, non-cash or unrealised items which affect the Group’s statutory financial results. Non-IFRS financial measures should be viewed in addition to, and not as a substitute for, the Group’s statutory results. These measures may also differ from non-IFRS measures used by other companies. The Group’s non-IFRS financial measures are presented with reference to the Australian Securities & Investments Commission ("ASIC") Regulatory Guide 230 Disclosing non-IFRS financial information, issued in December 2011. Non-IFRS financial measures are not subject to audit or review. Magellan Financial Group Limited | Annual Report 2022 Page 16 Directors’ Report For the year ended 30 June 2022 1.4.3. Statement of Financial Position The Group is in a strong financial position and at 30 June 2022 reported: • • • investment assets (cash and cash equivalents, financial assets and investments in associates) of $963,305,000 (June 2021: $902,878,000); shareholders’ funds of $1,026,760,000 (June 2021: $989,434,000); and NTA per share of $4.95 (June 2021: $4.77). The Group has access to $150,000,000 through a revolving debt facility. The Group may use the facility to finance the partnership benefits it has undertaken to fund as part of the MGF Partnership Offer. Refer to the Performance Overview on page 7 for further information on the Group’s operations and results. Further details regarding the future outlook of the Group are included in the Chief Executive Officer's Letter on page 6. 1.5. Likely Developments and Expected Results of Operations 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 in the Performance Overview section. 1.6. Significant Changes in the State of Affairs There were no significant changes in the state of affairs of the Group during the year ended 30 June 2022 other than as disclosed in this report or the financial statements. 1.7. Events Subsequent to the End of the Financial Year Other than the items noted below, 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 results of those operations or the state of affairs of the Group in subsequent financial periods. Final Dividend and Performance Fee Dividend Refer to section 1.3 for details of the dividend declared in respect of the six months ended 30 June 2022. Magellan FuturePay Closure On 12 July 2022 the Group announced the termination of Magellan FuturePay which took effect on 20 July 2022 (“Closure Date”). Investors in Magellan FuturePay on the Closure Date received a final payment comprising their pro-rata share of the net proceeds on wind-up. Investors who would otherwise have received less than their original investment, after taking into account distributions received, also received an ex gratia payment from the Group. The total ex gratia payment funded by the Group was $88,000. The final distribution was paid to investors on 27 July 2022. Due to the closure of the fund, the Group has been released from the following financial obligations: • • The commitment to provide up to $50,000,000 to assist Magellan FuturePay capitalise the FuturePay Support Trust was terminated with effect from the Closure Date. At the date of termination, the unutilised portion of the commitment was $48,567,000. The funding facility extended to Magellan FuturePay by the Group was terminated with effect from 12 July 2022. At no time during the financial period was the funding facility utilised. Funds Under Management On 4 August 2022, the Group reported to the ASX that its funds under management was $60.2 billion as at 29 July 2022. 1.8 Auditor Ernst & Young continues in office in accordance with section 327 of the Corporation Act 2001 and a copy of the Auditor’s Independence Declaration as required under section 307C of the Corporations Act 2001 is set out on page 44. Non-Audit Services The Audit & Risk Committee has reviewed details of the amounts paid and payable for non-audit services provided by the Group's auditors, Ernst & Young and Plante Moran, to the Group during the year ended 30 June 2022. Magellan Financial Group Limited | Annual Report 2022 Page 17 Directors’ Report For the year ended 30 June 2022 The Directors, in accordance with advice received from the Audit & Risk Committee, are satisfied that the provision of non-audit services by the auditors 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 did not impact the impartiality and objectivity of the auditors; the Board's own review conducted in conjunction with the Audit & Risk Committee concluded that the auditor independence was not compromised, having regard to the Board's policy with respect to the engagement of auditors; and none of the non-audit services provided by Ernst & Young or Plante Moran during the year had the characteristics of management, decision making, self review, advocacy or joint sharing of risks. For details regarding non-audit services provided by the auditors, fees paid to the auditors along with auditor tenure, refer to note 25 to the financial statements. 1.9 Rounding of Amounts The Company is of a kind referred to in the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and amounts in the Directors’ Report have been rounded to the nearest thousand dollars in accordance with that Legislative Instrument, or in certain cases, the nearest dollar. 2. Directors and Officers The Directors of the Company during the year and up to the date of this report were: Hamish McLennan1 Robert Fraser2 David George John Eales Colette Garnsey Karen Phin Paul Lewis Hamish Douglass3 Brett Cairns Non-Executive Chair Non-Executive Deputy Chair and Chair of MAM Chief Executive Officer and Managing Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Chair and Chief Investment Officer Chief Executive Officer Appointed Resigned 1 March 2016 23 April 2014 19 July 2022 1 July 2017 30 November 2020 23 April 2014 20 December 2006 21 November 2006 22 January 2007 - - - - - - 30 September 2021 19 March 2022 6 December 2021 1 During the year ended 30 June 2022, Mr McLennan served as Deputy Chair from 1 July 2021 until he was appointed Chair on 7 February 2022. 2 Mr Fraser was a Non-Executive Director of MFG and the Chair of Magellan Asset Management Limited ("MAM") during the year ended 30 June 2022. On 7 February 2022, Mr Fraser was appointed Deputy Chair of MFG. 3 During the year ended 30 June 2022, Mr Douglass was the Chair from 1 July 2022 until 7 February 2022 when he commenced a medical leave of absence. Secretaries Marcia Venegas has been Company Secretary since 2019. During the year Mariana Kolaroski was a joint Secretary of the Company until she resigned from the role on 3 June 2022. Information on Directors and Officers Hamish McLennan Chairman, Non-Executive Director and member of the Audit & Risk Committee and the Remuneration & Nominations Committee Hamish has over 30 years of experience in the media industry. He is currently Chairman of REA Group Limited (appointed February 2012 and Chairman since April 2012), a global online real estate advertising company, Chairman of HT&E Limited (appointed October 2018), an Australian media and entertainment company, and Chairman of Rugby Australia (appointed June 2020). Hamish is also a Non-Executive Director of the tech firm Claim Central Consolidated (since January 2020) and an independent director of Light & Wonder, a US gaming and lottery company (since November 2020). He was previously Executive Vice President, Office of the Chairman, News Corporation, and Global Chairman & CEO of Young & Rubicam (Y&R) in New York, part of WPP, the world’s largest communications services group. Hamish joined Young & Rubicam in 2002 as Chairman and CEO of Y&R Brands Australia/New Zealand, one of the largest marketing services groups in Australasia, and led the firm’s global business operations from 2006 to 2011. He was also previously Executive Chairman and Chief Executive Officer (March 2014 to July 2015) and Chief Executive Officer and Managing Director (February 2013 to March 2014) of Australian media company Ten Network Holdings Limited. He has previously served on the Boards of Directors for the United Negro College Fund (UNCF) and the US Ad Council. Magellan Financial Group Limited | Annual Report 2022 Page 18 Directors’ Report For the year ended 30 June 2022 Robert Fraser Non-Executive Director – Deputy Chairman of Magellan Financial Group Limited, Chairman of the Audit & Risk Committee and member of the Remuneration & Nominations Committee, Chairman of Magellan Asset Management Limited (Responsible Entity and main operating subsidiary of MFG) Robert is a company director and corporate adviser with over 30 years of investment banking experience, specialising in mergers and takeovers, corporate and financial analysis, capital management, equity capital markets and corporate governance. Robert is currently 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 Bachelor of Economics and Bachelor of Laws (Hons) degrees from the University of Sydney and is also qualified as a licensed business broker, licensed real estate agent and a registered tax (financial) adviser. Robert currently serves as a Non-Executive Director on the Boards of ARB Corporation Limited (since February 2004) where he is Chairman of the Audit Committee and the Remuneration and Nomination Committee, F.F.I. Holdings Limited (since October 2011) and MFF Capital Investments Limited (since May 2019) where he is Chairman of the Audit and Risk Commitee. David George Chief Executive Officer and Managing Director David’s career spans over 20 years in institutional investment management across analytical roles, investment management and organisational leadership in Australia and Canada. Most recently, David spent 14 years at the Future Fund (Australia’s Sovereign Wealth Fund). This included roles evaluating and investing alongside external investment managers, leadership of a sector team, and finally as Deputy Chief Investment Officer, Public Markets with responsibility for equities, credit, derivative overlays, public market alternatives, cash and treasury. David also served as a member of the firm-wide Senior Management Team and on all relevant internal investment portfolio management and risk committees. Prior to the Future Fund, David held senior roles at Mercer Investment Consulting, the Royal Bank of Canada and Integra Capital Management. David is a CFA and CAIA Charterholder and holds a Bachelor of Arts (Economics) degree from Western University in Canada. David also sits on the Board of the CAIA Association and is a trustee of the Standards Board of Alternative Investments. John Eales AM Non-Executive Director – Chairman of the Remuneration & Nominations Committee and member of the Audit & Risk Committee John graduated from the University of Queensland in 1991 and enjoyed a 10 year international sporting career with the Australian rugby team from 1991, captaining the Wallabies from 1996 until 2001. John has served as an executive, adviser, director and investor in a number of listed and unlisted private organisations. John co-founded the Mettle Group in 2003 – a corporate consultancy which was acquired by Chandler Macleod in 2007. John is currently Chairman of Trajan Group (since March 2021) and also serves on the Boards of Flight Centre Travel Group (since September 2012), FUJIFILM Data Management Solutions Pty Ltd and Executive Health Solutions. He continues to serve as a consultant to major Australian companies, including Westpac. John has been a regular columnist in both the Australian Financial Review and The Australian over the last 20 years and is the author of two books, Learning from Legends Sport and Learning from Legends Business. He is the Chair of the World Rugby Hall of Fame Selection Panel and on the Rugby Australia Bid Advisory Committee for the Rugby World Cup 2027. He was made a Member of the Order of Australia in 1999 for services to the community and rugby and is a Patron of the Melanoma Foundation, Hearts in Union and the Champagnat Trust. John holds a Bachelor of Arts from the University of Queensland and is a graduate of the Australian Institute of Company Directors. Colette Garnsey OAM Non-Executive Director and member of the Audit & Risk Committee and the Remuneration & Nominations Committee Colette has over 40 years of experience in retail, marketing and distribution and played a key role in the development and growth of the Australian retail industry using her established experience in branding, consumer insights, digital and marketing. Colette is currently Chair of Laser Clinics Australia (appointed to the Board in November 2020 and Chairman since October 2021). She also serves as a Director of Flight Centre Travel Group (since February 2018), Seven West Media Limited (since December 2018) and Loreto Normanhurst (since January 2021). Magellan Financial Group Limited | Annual Report 2022 Page 19 Directors’ Report For the year ended 30 June 2022 Colette has previously held senior roles with David Jones, Pacific Brands and Premier Investments. She has also held directorial and advisory positions for government boards and not-for-profit enterprises, including the CSIRO (1997 to 2001), Australian Government Innovation Council (2010 to 2012), Federal Trade and Investment Ministers (2014 to 2018), Australian Fashion Week (1998 to 2009) and the Melbourne Fashion Festival (2006 to 2013). Colette was awarded the Medal of the Order of Australia in 2012 for services to business and professional organisations. She holds an Executive MBA from the Graduate School of Business at Stanford University. Karen Phin Non-Executive Director and member of the Audit & Risk Committee and the Remuneration & Nominations Committee Karen has over 20 years of capital markets experience advising a range of top Australian companies on their capital management and funding strategies. Until 2014, Karen was Managing Director and Head of Capital Management Advisory at Citigroup in Australia and New Zealand. From 1996 to 2009, she worked at UBS where she was also a Managing Director and established and led the Capital Management Group. Prior to joining Citigroup, Karen spent 12 months at ASIC as a Senior Specialist in the Corporations group. Karen is currently a Non-Executive Director of Omni Bridgeway Ltd (since August 2017), Non-Executive Director of ARB Corporation Limited (since June 2019) and is a member of the Takeovers Panel and the Ascham School Council of Governors. Karen has a Bachelor of Arts/Law (Honours) from the University of Sydney and is a graduate of the AICD. Marcia Venegas Company Secretary Marcia was appointed Company Secretary of the Company on 20 March 2019. Marcia also holds the role of Chief Risk Officer and Head of Risk, Compliance and Legal. Prior to joining MFG in November 2015, Marcia was Chief Compliance Officer at Platinum Asset Management in Sydney and held senior roles including Chief Compliance Officer at Dodge & Cox in the US. Marcia brings more than 20 years of experience in the financial services industry in Australia and the US, during which time she has been responsible for national and international regulatory requirements, the development and maintenance of governance, risk and compliance frameworks, licensing, proxy voting, training and liaising with regulators, auditors and clients. Marcia holds a Bachelor of Arts from the University of Wollongong. Former Directors Hamish Douglass Chairman and Chief Investment Officer Hamish is the co-founder of the Company. He is a former member of the Australian Government’s Foreign Investment Review Board (FIRB), 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. Hamish is a Director of the Victor Chang Cardiac Research Institute. He holds a BCom from the University of NSW. Brett Cairns Chief Executive Officer 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 three years with Credit Suisse Financial Products, the then derivatives bank of the Credit Suisse group. Brett has a BE (Hons), Master of Business Administration and a Doctorate of Philosophy from the University of Sydney. Paul Lewis MBE Non-Executive Director, Chairman of the Remuneration & Nominations Committee and member of the Audit & Risk Committee Paul was Managing Partner and Chief Executive – Asia for PA Consulting Group, based in Hong Kong from 1992 to 2004, 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 2009 was a member of British Telecom’s Global Advisory Board. Paul is currently Deputy National Chairman of the Australian British Chamber of Commerce, Chair of IPScape Limited, Chair of GWS Giants Foundation, and a board member of Volt Bank. He was previously Chair of the NAB Private Advisory Board, NAB Business Advisory Board, Optal Limited and British Telecom Global Advisory Board. Paul is a Fellow of the Australian Institute of Company Directors, and was awarded an MBE in June 2018 for services to bilateral trade. Magellan Financial Group Limited | Annual Report 2022 Page 20 Directors’ Report For the year ended 30 June 2022 Directors' Meetings The number of meetings of the Board and Board Committees held during the year ended 30 June 2022 and the number of those meetings attended by each Director are set out below: Board Audit & Risk Committee Remuneration & Nominations Committee Held Attended Held Attended Held Attended 3 18 25 25 25 1 25 25 2 8 25 25 25 1 24 25 - - 10 10 10 4 10 10 - - 10 10 10 4 10 10 - - 6 6 6 1 6 6 - - 6 6 6 1 6 6 Brett Cairns Hamish Douglass John Eales Robert Fraser Colette Garnsey Paul Lewis Hamish McLennan Karen Phin Directors' Interests No 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. Indemnification and Insurance of Directors and Officers The Group 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 and its subsidiaries as permitted by the Corporations Act 2001. The terms of the contract prohibit the disclosure of the premiums paid. Magellan Financial Group Limited | Annual Report 2022 Page 21 Directors’ Report For the year ended 30 June 2022 3. 2022 Remuneration Report (Audited) Message from the Chair of the Remuneration & Nomination Committee Dear Shareholder, On behalf of the Board of Directors, I present the Group's Remuneration Report for the financial year ended 30 June 2022. As well as an explanation of Magellan Financial Group’s remuneration framework, performance and outcomes for Group Executives and Non-Executive Directors, the Remuneration Report includes context on our culture and current people initiatives. Our year, Remuneration at a Glance This was a challenging year for the business as we navigated significant internal change, volatile markets and other difficult external factors. During the year, the Remuneration & Nomination Committee ("the Committee") dealt with the following significant items relating to people and remuneration: • Senior leadership and Board renewal. Mr Hamish McLennan was appointed Non-Executive Chairman following Mr Hamish Douglass unexpectedly stepping down as Chairman for a medical leave of absence on 7 February 2022. The Board was able to respond quickly to this challenge by implementing its risk management and succession plans. During the year, Ms Kirsten Morton assumed the role of Interim CEO while we undertook a search for a new CEO following the resignation of Dr Cairns in December 2021. In May 2022, we were pleased to announce the appointment of Mr David George, an experienced investment management executive, as CEO and Managing Director. Mr George commenced with the Group on 19 July 2022 and we have been very pleased with his contribution to date. We have also commenced a process around further Board renewal involving a search for an additional Non-Executive Director. We look forward to providing details of our progress in the coming months. • Employee staff engagement and retention program successfully implemented. At its core we are a client-led people business built around people talent and skills. Over some months we designed and refined a program to retain key talent and skills and ensure business and leadership continuity for both the renewal and future growth of our business. After extensive involvement and consideration by the Committee, the Board and the CEO, the Board approved an engagement and retention program which was implemented in early April 2022. This program targeted all levels of employees across the business and was an important element in the Board's goal to return stability and simplicity to the business as quickly as possible. Details of the program were announced on 31 March 2022 and are discussed in more detail at section 3.2. The program included a one-off incentive that consisted of the following components: 1. cash retention incentive – The cash incentive comprises two components and is payable provided the employee remains continuously employed at September 2024 and September 2025 and performs to the Group's satisfaction, in which case the full component values of the retention cash incentive will be awarded. 2. employee share options ("options") – The options were issued under the Employee Share Option Plan for nil consideration and have an exercise price of $35.00. The options vest on 1 September 2024 provided that the employee remains continuously employed until that date, after which they may be exercised up until 16 April 2027. 3. share purchase plan ("SPP") loans – The Board varied the repayment terms for employees with SPP loans by extending the repayment dates for the interest free loans from 10 to 15 years. The variations provide additional time for employees to repay their loans. In addition, for employees who receive a cash retention incentive and have an outstanding SPP loan at the relevant date, the after-tax cash retention incentive paid will automatically be applied to reduce their outstanding loan balance. Magellan Financial Group Limited | Annual Report 2022 Page 22 Directors’ Report For the year ended 30 June 2022 • Review of SPP. Whilst participation in the SPP is voluntary, over 85% of employees are Magellan shareholders and are aligned to think and act like owners of the business, and the original intent was to promote alignment between employees and shareholders. However, particularly in light of the share price decline, the Board suspended the SPP indefinitely from February 2022 as we considered the future SPP issuance and related loans would be unlikely to meet its intended purposes. As mentioned above, the Board also varied the terms of the SPP Rules. The variations included extending the maximum loan term from 10 to 15 years, removing the requirement for loan repayments from an employee's annual cash bonus and permitting voluntary loan repayments. As part of approving the above variation, the Board put in place a process to ensure that the security over shares held by employees is protected. The variations did not alter the full recourse nature of the loans. That is, all SPP loans remain on foot and are required to be repaid. Further details on the SPP and variations are included in section 3.2 and note 10 of the financial statements. The variations only applied to SPP loans provided to employees and not SPP loans provided to Non-Executive Directors. 2022 Variable Remuneration Outcomes For the year ended 30 June 2022, the Group Executives (other than the Executive Directors) were awarded variable performance- based incentives of between 55% - 76% of their fixed remuneration. This reflects strong commitment and performance of management over the financial year, whilst managing many external factors outside of their control. Mr Douglass and Dr Cairns, former Executive Directors, received no variable remuneration outcomes in the 2022 financial year. More details can be found in section 3.4. Supporting the Group's Strategy The Board is committed to ensuring the remuneration strategy reflects good governance, includes consultation with key stakeholders, is transparent in its design to support the Group's strategy, and drives sustainable shareholder value creation over the short, medium and long-term. On behalf of the Board, we invite you to read the Remuneration Report and welcome your feedback. Yours faithfully, John Eales, Chairman Remuneration & Nominations Committee Magellan Financial Group Limited | Annual Report 2022 Page 23 Directors’ Report For the year ended 30 June 2022 3.1. Key Management Personnel This Remuneration Report outlines the remuneration arrangements for the Key Management Personnel (“KMP”) of the Group for the year ended 30 June 2022. KMP 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 2022 financial year, the KMP for the Group included the Non-Executive Directors and the Group’s Executives as set out below. Chairman Hamish McLennan1 (from 7 February 2022) Non-Executive Directors Robert Fraser John Eales Colette Garnsey Karen Phin Paul Lewis2 Term as KMP Full Year Full Year Full Year Full Year Full Year Until 30 September 2021 Executive Directors Hamish Douglass3 Brett Cairns Chairman (until 7 February 2022) and Chief Investment Officer Chief Executive Officer Until 19 March 2022 Until 6 December 2021 Group Executives (Other KMP) Kirsten Morton4 Marcia Venegas Craig Wright Interim CEO (from 6 December 2021) and Chief Financial Officer Company Secretary and Head of Risk, Compliance and Legal Head of Magellan Capital & Advisory Full Year Full Year Full Year 1 Mr McLennan was appointed Chairman on 7 February 2022 following the Board's review of structure and governance arrangements and the commencement of Mr Douglass' medical leave of absence. 2 Mr Lewis retired as a Director on 30 September 2021. 3 Mr Douglass served as Chairman up until 7 February 2022 at which point he commenced a medical leave of absence and resigned from the role. He subsequently resigned as a Director on 19 March 2022. He resigned as an employee of MAM on 15 June 2022. Although Mr Douglass ceased to be a KMP on 19 March 2022, his remuneration for the entire period of employment up until his resignation on 15 June 2022 is included in this Remuneration Report for purposes of transparency. 4 Ms Morton was Chief Financial Officer for the year ended 30 June 2022. Following Dr Cairns' resignation on 6 December 2021, Ms Morton was appointed Interim CEO and held dual roles for the remainder of the year. Following Dr Cairns stepping down as CEO on 6 December 2021, the Board conducted an executive search for a new CEO. On 11 May 2022, the Board announced the appointment of Mr David George as Managing Director and CEO, with Mr George commencing in the role on 19 July 2022. Consequently, Mr George is not a KMP in the 2022 financial year. In February 2022, at the request of the Board, Mr Christopher Mackay stepped into an oversight role in relation to portfolio management of the Group's Global Equity strategies upon Mr Douglass commencing his medical leave of absence. Mr Mackay is not a Director of any Group entity and has no other role with the Group. In addition, Mr Mackay did not receive any remuneration from the Group for this role or otherwise. The Remuneration Report has been prepared and audited against the disclosure requirements of the Corporations Act 2001. Magellan Financial Group Limited | Annual Report 2022 Page 24 Directors’ Report For the year ended 30 June 2022 3.2. Oversight and Governance Magellan Financial Group Board • • • Overall responsibility for the remuneration strategy and outcomes for Executives and Non-Executive Directors Reviews an approves recommendations from the Remuneration & Nominations Committee Approves the appointment of Non-Executive Directors and CEO Information and exchange with other Board committees Notably the Audit & Risk Committee, to ensure that all relevant matters are considered before the Remuneration and Nominations Committee makes remuneration recommendation and decisions. Independent remuneration advisors The Committee appoints an external independent advisor to assist it with market and governance issues, benchmarking, best practice observations and general advice. Remuneration & Nominations Committee The Remuneration & Nominations Committee ("the Committee") supports the Board by overseeing the Group's remuneration policies and practices. Including its Chairman, the Committee has five members, all of whom are independent Non-Executive Directors. The key responsibilities of the Committee are as follows: • • • • • • • Review the composition, functions, responsibilities and size of the Board and Directors tenure; Lead the process to appointment of Directors and CEO Develop and implement a process for the evaluation of the performance of Non-Executive Directors Provide oversight over the Company's strategic human resources initiatives including diversity, culture and leadership; and Review and recommend significant changes in remuneration policy and structure including employee equity plans and awards Equitably, consistently and responsibly reward executives – including variable performance-based remuneration targets and achievement of remuneration outcomes; and Take appropriate action to ensure the Committee, Board and senior management have available to them sufficient information and external advice to ensure informed decision-making regarding remuneration. CEO & Senior Management Provides relevant data and information for the Committee to recommend: 1. 2. 3. 4. Variable remuneration targets and outcomes Remuneration policy Individual remuneration and contractual arrangements Culture and people matters Magellan Financial Group Limited | Annual Report 2022 Page 25 Directors’ Report For the year ended 30 June 2022 Remuneration Philosophy and Principles The Group’s remuneration philosophy is centred on fair compensation for performance and contribution that achieves business outcomes. It aims to balance short-term and long-term incentives appropriately, including encouraging broad based employee ownership in the Group. Importantly, incentives motivate each employee to achieve agreed business objectives which align to long-term business outcomes. The key drivers of the Group’s remuneration philosophy and principles are: • • • • Promoting staff behaviour that is in the best interest of clients; Attracting and retaining outstanding staff; Building a culture that rewards performance while maintaining the Group’s reputation and mitigating risk; and Encouraging staff to think and act like long-term owners of the Group. Broadly the Group’s remuneration arrangements for employees comprise the following components: • • • A fixed remuneration amount (inclusive of superannuation); A variable incentive which is determined annually and is usually subject to some level of deferred payment; and An offer of voluntary participation in the Group’s SPP, to encourage long-term ownership in the Group. In February 2022, the Board suspended the SPP indefinitely as it considered it no longer met its intended purposes. The Committee engages external remuneration advisors from time to time to conduct benchmarking and advice on regulatory and market developments. To ensure independence and avoid conflicts of interest, a remuneration advisor is directly engaged by the Committee's Chairman or upon his/her instruction and reports must be delivered directly to the Chairman. The Committee generally seeks information rather than specific remuneration recommendations within the definition of the Corporations Act 2001 ("the Act"). The recommendations that the Committee makes to the Board are based on its own independent assessment of the advice and information received from various sources, using its experience and having careful regard to the principles and objectives of the remuneration framework, Group performance, shareholder and community expectation and good governance. During the year, no external advisor provided any remuneration recommendations as defined by the Act. Performance-Based Variable Remuneration The Board believes variable incentives should be aimed at areas where employees have a direct influence over the business and the outcomes that are aligned to the best interests of the Group’s clients and shareholders. The Board does not believe it is appropriate to use measures such as earnings per share or the share price performance of the Group in determining annual variable remuneration. Such arrangements could misalign the interests of the employee with those of the Group’s clients and ultimately be detrimental to the long-term interests of shareholders. With the exception of Mr Douglass and certain portfolio managers, the variable incentive amount is discretionary and is determined by reference to an employee’s individual performance and contribution, and the overall performance of the Group. Other than for Mr Douglass, variable remuneration is not determined on a formulaic basis but is an outcome of an overall performance appraisal process. Variable performance-based remuneration may be in the range of 0-100% of the fixed remuneration amount and can be higher in exceptional circumstances. The Lead Portfolio Manager for the Group’s Global Listed Infrastructure strategy has a variable remuneration arrangement that is directly tied to the net revenues, less certain allocated costs, of the Group’s Global Listed Infrastructure business and the performance of the investment strategies for which he has primary responsibility. The Board considers that this arrangement appropriately rewards and aligns his interests with those of the Group’s clients and shareholders. Certain portfolio managers have variable remuneration arrangements that incorporate two components: • • A discretionary component in the range of 0-100% of fixed remuneration or higher in certain circumstances; and A performance component in the range of 0-200% of fixed remuneration dependent upon the performance of the investment strategies for which they are responsible, which is generally calculated over a three year period, or a lesser term where a three year period is not available or appropriate. Variable incentives are paid partly as a current year cash bonus and partly as a conditional deferred cash bonus amount over periods up to three years, dependent upon ongoing employment. Magellan Financial Group Limited | Annual Report 2022 Page 26 Directors’ Report For the year ended 30 June 2022 2022 Retention Program As a funds manager, people are fundamental to delivering value for our clients, which in turn delivers shareholder returns. Our view is that retaining our talented people is an investment for our long-term success. In April 2022, a retention program was introduced as a one-off incentive and is in addition to annual remuneration. The program was designed to retain key talent and skills and ensure leadership continuity for both the renewal and future growth of our business. The program extended to all levels across the business and was an important element in returning stability and simplicity to the business as quickly as possible. As the Group is a very manageable size at approximately 135 employees, each retention offer was able to be thoughtfully considered and tailored to maximise its impact and therefore alignment to all stakeholders. Notwithstanding the highly competitive labour market at present, we are pleased to report that we have continued to experience low turnover up to the date of this report and morale across the business remains good. Under the retention program, certain staff were offered either a cash retention incentive, employee share options under the Employee Share Option Plan ("options") or both. Providing the employee remains continuously employed at September 2024 and September 2025 and performs to the Group's satisfaction, the full value of the cash incentive will be awarded. For employees who receive a cash retention incentive and have an outstanding loan balance under the SPP, the after-tax cash retention incentive will be automatically applied to reduce the employee's outstanding loan balance. The options were issued for nil consideration and have an exercise price of $35.00. The options vest on 1 September 2024 providing the employee remains continuously employed at that date. Once vested, the options may be exercised until 16 April 2027 provided the employee remains employed. The options lapse if the employee leaves the Group. The Group issued 8,202,500 employee options to employees under the Employee Share Option Plan ("ESOP") during the year ended 30 June 2022. Further details on the options are included in note 18 of the financial statements. Other Equity/Share Plans Share Purchase Plan The Group does not operate a specific long-term incentive plan. Until February this year, the Group offered voluntary participation in the SPP as a means to align employees with shareholders, encourage employees to think and act like business owners and to create value over the longer term. Whilst the SPP provided both employees and Non-Executive Directors ("participants") with the opportunity to acquire a meaningful ownership interest in the Group, the Board suspended the SPP indefinitely from February 2022 as it considered it no longer met its intended purpose of employee retention in the current environment. Notwithstanding this, the Board encourages equity ownership in line with an individual's personal circumstances, to promote alignment with shareholders. The Board does not require any minimum share ownership thresholds. The Group’s SPP involved a subscription for shares by SPP participants at the prevailing market price. The Group provided financial assistance to the SPP participants for up to either 75% or 100% of the subscription value, via a full recourse, interest-free loan, and thus the SPP participant bears the full risks and benefits of being a shareholder. The Board believed the Group was best placed to offer stable financing arrangements to establish and support meaningful ownership as it would be counterproductive to a true long-term ownership position if short-term share price movements were to impact upon an employee’s own financing of this loan. In the year ended 30 June 2022, repayments against the full recourse loan comprised dividends paid on associated shares plus 25% (or other amount as permitted by the SPP rules) of the relevant employee’s after tax variable performance-based incentive. From April 2022, the Board varied the terms to no longer require a payment to be made from the employee's variable performance-based incentive. As the loan is full recourse, participants are liable to repay the loan irrespective of the performance of the Group’s shares. The interest-free component of the full recourse loan provides real value to SPP participants and is expensed by the Group through the Consolidated Statement of Profit or Loss and Comprehensive Income. Up until the suspension, the Group's SPP was also extended to Non-Executive Directors which allowed Non-Executive Directors to be appropriately invested in the Group at the beginning of their tenure rather than waiting many years to accumulate a meaningful ownership position. The Board held the view that providing full recourse financial assistance to Non-Executive Directors under the SPP did not hinder their independence from management and that an ownership stake that is meaningful but in line with their personal circumstances, promotes independent thought and engagement that will be in the long-term interests of the Group’s shareholders. Further details of the SPP are set out in note 10 to the financial statements. Magellan Financial Group Limited | Annual Report 2022 Page 27 Directors’ Report For the year ended 30 June 2022 Employee Share Options Plan (ESOP) Whilst the Group has not granted share options to Directors or employees in the past, the options issued under the ESOP have an exercise price of $35.00 and a five year term. Consequently, the Board believes this creates alignment between employees and shareholders as employees are incentivised to, and rewarded for, delivering a share price within a reasonable period of time that is at a meaningful premium to the share price at the time of the issue of the options. The Group issued 8,202,500 employee options to employees under the Employee Share Option Plan during the year ended 30 June 2022. Further details on the options are included in note 18 of the financial statements. 3.3. Remuneration of Non-Executive Directors Non-Executive Director remuneration comprises Directors’ fees (inclusive of superannuation). Non-Executive Directors do not receive retirement benefits (other than superannuation) or remuneration linked to the performance or earnings of the Group, which ensures the Non-Executive Directors are able to independently and objectively assess both executive and Group performance. The Board periodically reviews, and determines, the remuneration of Non-Executive Directors. The Board believes Non-Executive Director fees should fairly recognise the Directors' contribution to the work of the Board and the associated Committees on which Directors serve. This is central to ensuring the Board's remuneration policy attracts and retains experienced, high-calibre independent Directors with a broad range of skills and experience particularly during this period of change. In addition, the Board encourages equity ownership by Non-Executive Directors in line with their personal circumstances, to ensure alignment with shareholders. The non-cash expense to the Group of providing the full recourse, interest-free loans under the SPP is described in section 3.2. The total amount of Non-Executive Director fees is capped at a maximum aggregate fee limit that is approved by shareholders. The current fee limit of MFG is $750,000, which was approved by shareholders at the AGM on 12 October 2017 and the current fee limit of MAM is $500,000. In 2022, total Board and Committee fees paid for both MFG and MAM were $503,000. Annual Board and Committee fees of both the Group and MAM for the years ended 30 June 2022 and 30 June 2021 is below. These did not change in the year ended 30 June 2022 other than a modest inflationary adjustment. Actual fees paid to the Chairman and Board members in 2022 are provided in section 3.5. MFG Board (Group) MFG Audit & Risk Committee MFG Remunerations & Nominations Committee MAM Board Position Chair Member Chair Member Chair Member Chair Member 30 June 2022 $'000 30 June 2021 $'000 77 77 27 11 - - 27 - 72 72 26 10 - - 26 - The Group has reimbursed or borne expenses incurred by the Non-Executive Directors in the discharge of their duties of $17,000 (June 2021: $nil). Magellan Financial Group Limited | Annual Report 2022 Page 28 Directors’ Report For the year ended 30 June 2022 3.4. Remuneration of Executive KMP Remuneration of current and former Executive KMP comprised fixed remuneration and performance-based remuneration. The summary below provides further details of the different elements of the CEO and Other KMP remuneration structures applicable during the year ended 30 June 2022 along with a summary of exit arrangements. CEO Remuneration Structure Following the resignation of Dr Cairns as CEO on 6 December 2021, Ms Morton was appointed Interim CEO on 6 December 2021 and performed CEO duties while a search for a new CEO was underway. For the year ended 30 June 2022, the remuneration arrangement of the Interim CEO mirrored that of the former CEO, pro-rated for the period of service. As in prior years, the variable performance-based remuneration of the CEO is based on the performance metrics set by the Board at the outset of each financial year. The performance metrics for the current year are discussed below. Ms Morton adopted the same metrics upon her appointment as Interim CEO as the Board assessed the performance metrics remained appropriate. The Remuneration and Nominations Committee determines, and the Board approves, the variable performance-based incentive to be awarded on an annual basis with regards to the determined performance metrics. Dr Cairns' Remuneration Component Detail Fixed remuneration (including superannuation) Variable remuneration structure Variable remuneration outcome Exit arrangement For the year ended 30 June 2022, Dr Cairns' fixed remuneration (inclusive of superannuation) was $1,639,091. Dr Cairns was eligible to receive a variable performance-based incentive of up 50% of fixed remuneration based on the performance metrics the Board believe are important to the long-term success of the business and over which Dr Cairns has direct influence over the outcome. Dr Cairns' remuneration as CEO was appropriately aligned to the Group's strategy. As previously outlined to shareholders, the key driver of creating shareholder value is servicing and retaining the Group's existing clients and funds the Group manages on behalf of clients by achieving our stated investment objectives. As CEO, Dr Cairns was not responsible for managing client money and, therefore, the Board believe it inappropriate for his incentive to be based on investment performance. Dr Cairns was responsible for ensuring the Group operates to the highest standards and to ensure operational areas that underpin the Group’s reputation and confidence of clients in the Group such as compliance, cybersecurity and fund operations are managed appropriately. Further, employees are key to the success of the Group and achievement of the Group’s strategy and the ability to foster and retain key talent and protect the Group’s cultural values is a priority for the business. For the year ended 30 June 2022, the Board determined the performance metrics and weightings were: Leadership, People & Culture (25%); 1. Design & Delivery of Strategic Initiatives (25%); 2. 3. Compliance, Governance & Cybersecurity (25%); and 4. Operational Effectiveness (25%). Dr Cairns did not receive a bonus for the 2022 financial year. After stepping down from the CEO position effective 6 December 2021, Dr Cairns received a payment in lieu of notice and for his statutory entitlements of accrued annual and long service leave. He was not awarded a performance-based incentive in respect of the period 1 July 2021 to 6 December 2021 as per the Board's discretion. Details of the overall remuneration paid to Dr Cairns is provided in section 3.5. Dr Cairns' existing SPP loan remains on-foot after cessation of his employment and there have been no changes to the terms and conditions of the full recourse loan. Magellan Financial Group Limited | Annual Report 2022 Page 29 Directors’ Report For the year ended 30 June 2022 Ms Morton's Remuneration Component Detail Fixed remuneration (including superannuation) Ms Morton received a pro-rated salary adjustment for the increase in her role and accountabilities following her appointment as Interim CEO. For the year ended 30 June 2022, Ms Morton's fixed remuneration (inclusive of superannuation) for her dual roles was $1,157,000 (2021: $496,000). Effective from 19 July 2022, Ms Morton stepped down as Interim CEO and into the role of Chief Financial Officer & Chief Operating Officer. At that date, Ms Morton's fixed remuneration is $527,000 per annum. Variable remuneration structure As CFO and Interim CEO, Ms Morton is eligible to receive a variable performance-based incentive: • • Interim CEO role: up to 50% of the 2022 CEO's annual fixed remuneration of $1,639,091, pro-rated for the period 6 December 2021 to 30 June 2022 and subject to the achievement of the performance metrics set by the Board. This equates to a maximum award of $469,160 for performance that exceeds aggregate performance metrics; and CFO role: up to 100% of the CFO's annual fixed remuneration. For the year ended 30 June 2022 and notwithstanding Ms Morton held dual roles during the year, the maximum variable performance-based incentive as CFO was based on the 2022 CFO's annual fixed remuneration of $511,400, pro-rated for the period 1 July 2021 to 6 December 2021. This equates to a maximum award of $218,642. As was the case for Dr Cairns, Ms Morton as Interim CEO, was not responsible for managing client money and therefore the Board believed it was inappropriate for her incentive to be based on investment performance. Having regard to the changing priorities and extraordinarily challenging and dynamic environment during her appointment, it was determined Ms Morton was responsible for ensuring the Group operates to the highest standards. This included servicing clients and ensuring operational areas that underpin the Group’s reputation and confidence of clients such as compliance, cybersecurity and fund operations were strongly managed. As the Group is a people business, Ms Morton was also responsible to foster and retain key talent and protect the Group’s cultural values to assist with the long-term success of the Group and its achievement of the Group's strategy in the near-term. Variable remuneration outcome The below table provides an overview of key achievements and business outcomes delivered by Ms Morton that were considered when determining her variable remuneration as Interim CEO for the period 6 December 2021 to 30 June 2022. Ms Morton's achievements as CFO are summarised separately on the next page. Performance Metric and Weighting Leadership, People & Culture (25%) FY22 Performance Outcome Against Metric • • • • • • • • Piloted new culture survey and responsively actioned throughout 2022 Lifted employee engagement, internal communication and connection with the Group's values, in a challenging environment Developed, managed and delivered employee retention program in response to Group's needs, together with ongoing retention strategy and additional engagement initiatives Successfully managed the organisational process and related changes around the 2022 announcements of Mr Douglass and Mr George Reviewed and progressed succession planning across the Group Ongoing retention strategy reviewed and additional retention and employee engagement initiatives implemented Implemented effective hybrid working arrangements No regretted departures across Group in 2022 Magellan Financial Group Limited | Annual Report 2022 Page 30 Directors’ Report For the year ended 30 June 2022 Component Detail Performance Metric and Weighting Compliance, Governance & Cybersecurity (25%) FY22 Performance Outcome Against Metric • • Managed risk and operational considerations pertaining to external announcements and internal business changes from December 2021 onwards, with no material issues Actively involved in managing response to client servicing during internal business changes, including establishing and maintaining client relationships No significant regulatory issues identified or unresolved in the Group during the period, nor breaches or near-misses • Design & Delivery of Strategic Initiatives (25%) Operational Effectiveness (25%) • • • • • • Reviewed and implemented simplification initiatives to create capacity to invest in our core business Successful divestment of Guzman & Gomez at 36% premium to entry price Efficient closure of FuturePay with minimal disruption Progressed ESG integration within Group Strong management and handling of the Group's operations during a challenging period, and adjusting processes and reporting to respond to various internal stakeholders and external requirements, without taking undue risks Delivered uninterrupted service to clients with no significant issues. For the year ended 30 June 2022, Ms Morton received a total variable incentive of $676,870 (2021: $471,671), representing 59% of Ms Morton's 2022 total fixed remuneration. The amount awarded comprised the maximum 50% for the Interim CEO role and 95% of the maximum 100% for the CFO role, pro-rated for the relevant period as discussed above. Mr George's Remuneration Mr George joined the Group as CEO on 19 July 2022 and consequently is not included within the 2022 Remuneration Report. A summary of the material terms of Mr George's remuneration arrangement was announced to the Australian Securities Exchange on 11 May 2022. The Board will disclose the FY23 performance metrics, along with the respective weightings, for Mr George's performance-based incentive in the FY23 annual report. Mr George’s remuneration will align with the the Group strategy, whilst also being designed in a manner that drives both Company and shareholder value creation. Magellan Financial Group Limited | Annual Report 2022 Page 31 Directors’ Report For the year ended 30 June 2022 Mr Douglass’ Remuneration Structure Mr Douglass is Magellan’s co-founder. He served as Chairman of the Board up until 7 February 2022 at which he commenced a medical leave of absence and resigned from the role. He subsequently resigned as a Director of the Board on 19 March 2022. He held the role of Chief Investment Officer and Lead Portfolio Manager of Magellan’s Global Equities strategies until his resignation from the Company on 15 June 2022. Component Detail Fixed remuneration (including superannuation) Variable remuneration structure For the year ended 30 June 2022, Mr Douglass' fixed remuneration (inclusive of superannuation) was $2,731,000. Mr Douglass was eligible to receive a variable performance-based incentive of up to 200% of fixed remuneration. The Board believed it was important for Mr Douglass’ remuneration to be tied to the performance of the investment strategies under his control and focusing on client outcomes and achieving superior investment returns for clients over the medium to long-term will ultimately be in shareholders’ interests. Consequently, Mr Douglass’ annual variable incentive was determined in relation to the performance of the Global Equity Strategy over a three-year period, that being the current year and the two preceding years. The three-year performance period emphasised the Group’s medium to long-term focus for its investment strategies and the needs of clients. Mr Douglass does not receive any of his variable incentive upfront. Instead, payment is deferred over the subsequent three financial years which is consistent with the medium term focus of Mr Douglass’ variable remuneration arrangements. In addition, the Board viewed Mr Douglass’ substantial shareholding in the Group, along with his investments in the Group’s investment strategies, as creating strong alignment with clients and shareholders. Variable remuneration outcome The Board determined the performance metrics and underlying quantitative measures that applied for Mr Douglass’ variable remuneration for the year ended 30 June 2022. These metrics were unchanged from the prior year. In respect of the year ended 30 June 2022, Mr Douglass was entitled to a variable performance-based incentive, however upon mutual agreement between the Board and Mr Douglass, no variable performance-based remuneration was awarded (June 2021: $4,007,000). Exit arrangement Mr Douglass' entitlement to variable incentive amounts is dependent on him being employed by the Group at the time of payment and, where relevant, is also subject to the termination arrangements described in Section 3.6. Notwithstanding Mr Douglass resigned on 15 June 2022 and had a 12 month written notice period, the Board and Mr Douglass agreed this notice would be served over the period of 7 February 2022 to 6 February 2023 ("agreed notice period"). The total amount paid and payable to Mr Douglass upon his resignation was $2,499,000 which comprised a payment in lieu of notice to 6 February 2023 and unpaid deferred cash bonuses earned in prior periods (to which he was entitled over the period to 6 February 2023). Mr Douglass also received his statutory entitlements of accrued annual and long service leave. Details of the overall remuneration paid to Mr Douglass are provided in section 3.5. No performance-based incentive was paid or payable to him in respect of the 2022 financial year. Mr Douglass forfeited $1,868,361 of unpaid deferred cash bonuses arising in respect of prior periods, but only payable to him at dates beyond the end of the agreed notice period on 6 February 2023. Following Mr Douglass' resignation from the Group on 15 June 2022, Mr Douglass entered into a consultancy agreement with MAM effective from 1 October 2022 to provide geopolitical and macroeconomic investment insights to the Group. Magellan Financial Group Limited | Annual Report 2022 Page 32 Directors’ Report For the year ended 30 June 2022 Remuneration Structure for Other KMP Fixed remuneration is structured as a total employment cost package, which may be received as a combination of cash, non-cash benefits and superannuation contributions. Fixed remuneration for Other KMP is reviewed annually to ensure that it is competitive and reasonable. However, there are no guaranteed increases to the fixed remuneration amount. When considering variable remuneration, the Board’s primary objective is that KMP are motivated to achieve high performance over areas where they have direct influence, while maintaining the Group's reputation and mitigating risk. The core of the Group's culture is to put our clients first. If these objectives are met, the interests of shareholders will also be satisfied. The CEO and Chairman determine the amount of variable incentive to be paid to Other KMP, subject to review and approval of overall amounts by the Remuneration and Nominations Committee, taking into consideration each individual’s performance and contribution during the year. The variable performance-based incentive of Other KMP is discretionary and may be in the range of 0 to 100% of fixed remuneration (higher in exceptional circumstances) and comprises a cash bonus amount and a conditional deferred cash bonus payable over periods up to three years. Entitlement to the deferred cash bonus is dependent on Other KMP being employed by the Group at the time of payment. Additionally, the Group may require KMP to act as a Director of a subsidiary of the Group or associate of the Group for no additional remuneration. Magellan Financial Group Limited | Annual Report 2022 Page 33 Directors’ Report For the year ended 30 June 2022 Summary of 2022 Variable Remuneration Outcomes Variable Performance-Based Remuneration Outcomes for 2022 The table below outlines the variable remuneration outcomes (as a % of fixed remuneration) for current and former Executive KMP who were employed during the 2022 financial year, along with an overview of key achievements delivered that were considered when determining their variable remuneration for the year. KMP Variable remuneration outcome Comments Hamish Douglass 0% • Mr Douglass and the Board mutually agreed to award no performance-based incentive in 2022. Brett Cairns 0% Kirsten Morton 59% Marcia Venegas 76% • • • • • • • • • No performance-based incentive awarded as per the Board's discretion. In relation to the Interim CEO role - refer to achievements of the performance metrics relating to the long term success of the business and the Group's operations over which Ms Morton has direct influence as outlined in section 3.4. In relation to the CFO role - • Efficiently adapted processes, controls and reporting across finance and investment operations to respond to business needs following internal changes, with no increase in risk and no near misses Implemented further expense discipline and optimal allocation of resources to the Group's highest priorities, notably in second half of 2022 Further progressed succession and key person risk management across operations team. The effectiveness of role readiness planning and testing was shown through the seamless step change in role by the Deputy CFO following Ms Morton's appointment to Interim CEO • • • Maintained sound relationships with tax regulators throughout assurance tax reviews in 2022 and outcomes were within risk tolerance. Delivered strong company secretarial support and senior leadership throughout challenging period Successfully implemented technology solutions streamlining management of regulatory changes and client information requests Strong management of elevated level of investor inquiries following internal changes in 2022 financial year Strong oversight in identification, management and governance of non-financial risk against backdrop of internal changes, with no material issues Implemented enhanced framework for assessing and addressing modern slavery risks in the Group's operations, with no material issues identified Regular and constructive engagement with regulators and industry bodies. Craig Wright 55% • Managed the sale of Magellan’s investment in Guzman y Gomez (Holdings) Limited for • • • • • • a 36% premium to its initial investment Crisis management planning and response implementation Strongly led stakeholder outreach program in a year of change Strong management of elevated level of shareholder inquiries following internal changes in 2022 financial year Delivered the successful migration of the Group's corporate IT network and infrastructure to a new cloud hosting environment, with no business disruption Project managed management initiatives Oversees Magellan’s involvement in the Group’s UCITS investment company based in Ireland and co-mingled private fund in respect of the High Conviction investment strategy during a period of change. implementation of various capital the development and Magellan Financial Group Limited | Annual Report 2022 Page 34 Directors’ Report For the year ended 30 June 2022 Components of 2022 Variable Performance-Based Remuneration The table below provides a summary of variable remuneration outcomes for current and former KMP for the years ended 30 June 2022 and 30 June 2021. The table outlines the portion of performance-based variable remuneration awarded for each financial year that is paid in cash and the portion that is deferred over subsequent financial years, along with the retention incentives offered under the 2022 retention program. Details of the remuneration paid to former Executive Directors and Other KMP is provided in section 3.5. Details of the employment agreements of Executive Directors and Other KMP are described in section 3.6. Performance-based Cash bonus Conditional deferred cash bonus $'0001 $'0002 Total performance- based remuneration awarded $'000 Group Executives (Other KMP) 2022 Kirsten Morton 2021 2022 Marcia Venegas 2021 2022 Craig Wright 2021 100 333 100 314 100 385 Former Executive Directors Brett Cairns5 Hamish Douglass6 2022 2021 2022 2021 - 773 - - Total KMP 2022 2021 300 1,804 577 139 245 128 150 167 - - - 4,007 972 4,441 677 472 345 442 250 553 - 773 - 4,007 1,272 6,246 Fixed remuneration (incl. super) $'000 1,157 496 455 442 455 442 709 1,545 2,618 2,500 5,395 5,425 Performance- based remuneration as % of fixed remuneration % Retention Cash incentive Options $'0003 $'0004 59% 95% 76% 100% 55% 125% 0% 50% 0% 160% 400 - 230 - 60 - - - - - 113 - 113 - 113 - - - - - 690 - 340 - 1 Cash bonus represents the portion of Other KMP's awarded variable remuneration that is payable in September post the release of the Group's Annual Report. 2 Conditional deferred cash bonus represents the portion of Other KMP’s awarded variable remuneration for the financial year that is deferred and is paid in cash in future financial years, subject to continued employment with the Group. 3 Retention incentives awarded to Other KMP in the 2022 financial year as part of a broader employee retention program will be payable in cash in September 2024 and September 2025, subject to performance and continued employment with the Group. Where Other KMP have an outstanding SPP loan, the cash retention incentive will firstly be directed to repayment of the loan balance. 4 Share options awarded to Other KMP in the 2022 financial year as part of a broader employee retention program are exercisable from 1 September 2024 at an exercise price of $35.00 per option, subject to continued employment with the Group. The value of the share options was independently determined at grant date. 5 Dr Cairns' remuneration for the year ended 30 June 2022 is shown for the period 1 July 2021 to 6 December 2021. 6 Mr Douglass' remuneration for the year ended 30 June 2022 is shown for the period 1 July 2021 to 15 June 2022. Although Mr Douglass ceased to be a KMP on 19 March 2022, his remuneration for the entire period of employment is included for purposes of transparency. Magellan Financial Group Limited | Annual Report 2022 Page 35 Directors’ Report For the year ended 30 June 2022 3.5. Details of Remuneration The total amount paid or payable to KMP of the Group is detailed below: Short-term benefits Long-term benefits Salary Cash bonus Conditional deferred cash bonus paid Superan- nuation Total cash remuneration $'000 $'0001 $'0002 $'000 $'0003 Annual and long service leave $'0004 Retention incentives Termination benefits Other benefits Total statutory remuneration $'0005 $'0006 $'0007 $'0008 Non-Executive Directors Hamish McLennan 2022 2021 79 75 Robert Fraser John Eales Colette Garnsey Karen Phin Paul Lewis9 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 131 124 79 75 79 44 79 75 22 82 Group Executives (Other KMP) Kirsten 2022 Morton10 1,133 2021 465 Marcia Venegas Craig Wright 2022 2021 2022 2021 432 412 432 412 Former Executive Directors Brett Cairns11 2022 692 1,523 2021 Hamish Douglass12 2022 2021 2,595 2,478 - - - - - - - - - - - - 286 333 175 314 126 385 - 773 - - Total KMP 2022 2021 5,754 5,766 587 1,804 - - - - - - - - - - - - 46 - 43 - 56 - - - 2,844 2,721 2,989 2,721 8 7 - - 8 7 8 4 8 7 - - 24 22 24 22 24 22 18 22 24 22 87 82 131 124 87 82 87 48 87 82 22 82 1,489 820 673 747 637 819 709 2,318 5,463 5,221 144 134 9,474 10,426 - - - - - - - - - - - - 46 40 17 51 29 9 50 60 126 136 267 296 - - - - - - - - - - - - 46 - 31 - 18 - - - - - 94 - - - - - - - - - - - - - - - - - - - 404 - 2,499 - 2,903 - 22 27 11 16 26 29 9 - 9 13 - - 7 5 8 7 8 5 685 145 - - 785 247 110 109 142 140 113 112 96 48 96 96 22 82 1,588 864 730 805 691 833 1,848 2,523 8,087 5,357 13,523 10,969 1 The cash bonus amount reflects the portion of Other KMP's awarded variable remuneration that is paid in cash post the release of the Group's Annual Report. For the year ended 30 June 2022, the amount shown is the cash bonus payable in September along with the portion of the conditional deferred cash bonus that each Other KMP has become entitled to up to the date of this report. 2 The conditional deferred cash bonus paid reflects the deferred components of prior years’ bonuses which have been paid in cash during the current financial year. With the exception of Mr Douglass, deferred cash bonuses in respect of financial year 2020 were brought forward in response to Covid-related remuneration changes. As a result, there were no conditional deferred cash bonuses paid in 2021. 3 The total cash remuneration represents the cash amounts actually received by the Group KMP, as distinct from the accounting expense. As a result, it does not align to Australian Accounting Standards. 4 Comprises annual leave and long service leave entitlements accrued and not taken during the year. 5 Comprises the portion of the retention incentives accrued as an employee expense during the financial year. Included in the amount for each Other KMP is $12,000 of share-based payment expense recognised in respect of options granted in 2022. Refer to note 18 of the financial statements for further information. 6 Represents payments made to employees who have resigned in the period. 7 Other benefits represent the non-cash cost of providing interest-free loans to Participants in the SPP (refer to further details at section 3.2). At the time of Dr Cairns' resignation, the remaining balance of unrecognised interest on his SPP loan at 6 December 2022 totalling $685,000 has been reflected as non-cash remuneration. 8 No non-monetary benefits or other short-term benefits not otherwise disclosed above were paid during the years ended 30 June 2022 and 30 June 2021. 9 Mr Lewis' remuneration covers the period 1 July 2021 to 30 September 2021, being the date of his retirement from the Board. 10 Ms Morton's salary for the year ended 30 June 2022 reflects her dual role as Interim CEO and Chief Financial Officer from 6 December 2021. 11 Dr Cairns' remuneration covers the period 1 July 2021 to 6 December 2021, being the date of his resignation. 12 Mr Douglass' remuneration covers the period 1 July 2021 to 15 June 2022. Although Mr Douglass ceased to be a KMP on 19 March 2022, his remuneration for the entire period of employment up until his resignation on 15 June 2022 is included for purposes of transparency. Magellan Financial Group Limited | Annual Report 2022 Page 36 Directors’ Report For the year ended 30 June 2022 3.6. KMP Employment Agreements Remuneration and other terms of employment for the Executive Directors and Other KMP are formalised in employment agreements with MAM, a controlled entity of the Group. The key contractual details for current and former Executive KMP who are or were employed during the year ended 30 June 2022 are summarised below. Hamish Douglass, former Chairman and CIO Mr Douglass was employed from 1 March 2008 until his resignation on 15 June 2022. Fixed and variable remuneration Mr Douglass was entitled to fixed and variable remuneration as outlined in Section 3.4. Shareholding requirement Mr Douglass’ contract does not specify a shareholding ownership requirement. However as one of the founders of the business Mr Douglass and his associates held 22,212,727 ordinary shares (2021: 22,212,727 ordinary shares) up until 15 June 2022. Termination arrangements Termination with cause: The contract provided the Board with the ability to immediately terminate Mr Douglass’ employment agreement with cause. Under those circumstances, Mr Douglass would be entitled to be paid the statutory requirements of any accrued fixed remuneration (e.g. accrued base salary and superannuation) and accrued leave entitlements (e.g. annual and long service leave) at the termination date, after set-off of any loss suffered by the Group from the acts of Mr Douglass which led to his termination. Termination without cause: Either the Board or Mr Douglass had the ability to terminate Mr Douglass’ employment contract at any time by providing not less than 12 months' written notice. Under those circumstances, Mr Douglass would be entitled to be paid the statutory requirements of any accrued fixed remuneration (e.g. accrued base salary and superannuation), accrued leave entitlements (e.g. annual and long service leave) at the termination date, unpaid deferred bonuses earned in prior years and payable during the written notice and any other amounts approved by the Board in its absolute discretion subject to all applicable laws and regulations. termination due to death or incapacity: In addition to the statutory requirements of any accrued fixed remuneration (e.g. accrued • base salary and superannuation) and accrued leave entitlements (e.g. annual and long service leave) at the termination date, Mr Douglass would be paid any outstanding variable remuneration attributable to any previous financial year; and a pro-rata variable remuneration component for the period from 1 July of that year to the termination date. • CEO Length of employment agreement Notice period provided by executive Notice period provided by Company Kirsten Morton1 Brett Cairns Ongoing Ceased employment on 6 December 2021 3 months 3 months 3 months 3 months 1 Following the commencement of Mr David George on 19 July 2022, Ms Morton stepped down as Interim CEO. In the event of termination, the termination payment comprises any accrued fixed compensation, including superannuation, after set-off of any loss suffered by the Group from the acts of the CEO which led to his termination; and any amounts of accrued annual and long service leave. Under their respective employment agreements, both Dr Cairns and Ms Morton are restrained from soliciting employees and clients of MAM or any related company of MAM for a period of six months after termination of employment. Group Executives (Other KMP) Other KMP have rolling employment contracts with MAM. MAM may terminate the contracts at any time by giving up to three months written notice or providing payment in lieu of that notice, or at any time without notice if serious misconduct has occurred. Other KMP may terminate the contract at any time by giving up to three months' written notice. In the event of the termination, their termination payment comprises any accrued fixed compensation, including superannuation, after set-off of any loss suffered by MAM from the acts of that the KMP which led to their termination; and any amounts of accrued annual and long service leave. On termination, any KMP with an outstanding SPP loan balance is required to repay the amount in respect of shares acquired under the Group’s SPP in accordance with the SPP terms and conditions. Magellan Financial Group Limited | Annual Report 2022 Page 37 Directors’ Report For the year ended 30 June 2022 3.7. Shareholdings The number of ordinary shares and options over ordinary shares held during the year by each KMP is set out below: Closing balance 30 June 2020 Net additions/ (disposals) Closing balance 30 June 2021 Net additions/ (disposals) Closing balance 30 June 2022 Non-Executive Directors John Eales Ordinary shares MFG 2027 Options1 Robert Fraser Ordinary shares MFG 2027 Options1 Colette Garnsey2 Ordinary shares MFG 2027 Options1 Paul Lewis3 Ordinary shares Hamish McLennan Ordinary shares MFG 2027 Options1 Karen Phin Ordinary shares MFG 2027 Options1 Group Executives (Other KMP) Kirsten Morton Ordinary shares MFG 2027 Options1 ESOP issued options4 Marcia Venegas Ordinary shares MFG 2027 Options1 ESOP issued options4 Craig Wright Ordinary shares MFG 2027 Options1 ESOP issued options4 Former Executive Directors Brett Cairns5 Ordinary shares Hamish Douglass6 Ordinary shares 77,616 - 599,109 - - - - - (99,109) - 2,030 - 77,616 - 500,000 - 2,030 - 3,238 10,112 - 62,502 28,710 3,843 80,854 10,112 500,000 62,502 30,740 3,843 1,500,000 (150,000) 1,350,000 - 1,350,000 105,248 - 89,312 - 18,896 - - 4,694 - - 18,896 - - - - - - 6,748 - - 8,308 - - 5,836 - - 105,248 - 89,312 - 25,644 - - 13,002 - - 24,732 - - - 13,157 257 11,197 - 3,206 75,000 1,735 1,843 75,000 (17,896) 855 75,000 105,248 13,157 89,569 11,197 25,644 3,206 75,000 14,737 1,843 75,000 6,836 855 75,000 1,137,615 13,000 1,150,615 27,709 1,178,324 22,212,727 - 22,212,727 - 22,212,727 1 MFG 2027 Options issued 14 April 2022. 2 Ms Garnsey was appointed as a Director on 30 November 2020 and the balance as at 30 June 2020 represents the number of ordinary shares held by her and her associates as at the date of her appointment. 3 The balance as at 30 June 2022 represents the number of ordinary shares and options held by Mr Lewis and his associates at 30 September 2021, being the date of his retirement from the Board. 4 Share options awarded to Group Executives in the 2022 financial year are exercisable from 1 September 2024 at an exercise price of $35.00 per option, subject to continued employment with the Group. The share options expire on 16 April 2027. The fair value per option was $1.512 at grant date. Refer to note 18 of the financial statements for further information. 5 The balance as at 30 June 2022 represents the number of ordinary shares and options held by Dr Cairns and his associates at 6 December 2021, being his resignation date. 6 The balance as at 30 June 2022 represents the number of ordinary shares and options held by Mr Douglass and his associates at 19 March 2022, being the date he ceased to be a KMP. Magellan Financial Group Limited | Annual Report 2022 Page 38 Directors’ Report For the year ended 30 June 2022 3.8. Unitholdings in Magellan Funds The number of units held during the year by each KMP in funds managed by the Group, is set out below: Closing balance 30 June 2020 Net additions/ (disposals)1 Closing balance 30 June 2021 Net additions/ (disposals)1 Closing balance 30 June 20222 Magellan Global Fund - Open Class Units3 Hamish Douglass4 Brett Cairns5 Paul Lewis6 Marcia Venegas Magellan Global Fund - Closed Class Units7 Hamish Douglass4 Brett Cairns5 John Eales Robert Fraser Paul Lewis6 Hamish McLennan Karen Phin Kirsten Morton Marcia Venegas Craig Wright MGF Options expiring 1 March 20248 Hamish Douglass4 Brett Cairns5 John Eales Robert Fraser Paul Lewis6 Hamish McLennan Karen Phin Kirsten Morton Marcia Venegas Craig Wright Magellan High Conviction Trust Hamish Douglass4 Brett Cairns5 John Eales Robert Fraser Paul Lewis6 Hamish McLennan Karen Phin Kirsten Morton Marcia Venegas Craig Wright Magellan Global Equities Fund (Currency Hedged) Hamish Douglass4 Brett Cairns5 Magellan Infrastructure Fund (Currency Hedged) Marcia Venegas 2,257,577 - 581,324 - - - - - - - - - - - - - - - - - - - - - 1,163,549 3,421,126 70,416 31,696 5,545 70,416 613,020 5,545 70,592 1,335 10,436 207 3,491,718 71,751 623,456 5,752 21,869,659 21,869,659 414,898 22,284,557 142,270 388,435 260,893 142,270 388,435 260,893 1,048,196 1,048,196 115,655 115,909 45,674 93,390 69,791 115,655 115,909 45,674 93,390 69,791 12,829,522 12,829,522 96,598 235,377 158,092 696,197 70,083 70,237 26,702 11,394 42,291 96,598 235,377 158,092 696,197 70,083 70,237 26,702 11,394 42,291 274 7,961 5,348 - 2,371 2,376 936 315 1,431 - - - - - - - - - - 142,544 396,396 266,241 1,048,196 118,026 118,285 46,610 93,705 71,222 12,829,522 96,598 235,377 158,092 696,197 70,083 70,237 26,702 11,394 42,291 14,294,964 1,438,079 15,733,043 422,247 16,155,290 181,594 218,196 252,566 1,485,530 36,319 120,471 21,791 3,632 72,638 520,118 10,881 3,661 5,607 6,738 7,797 10,523 1,121 2,243 673 88,431 2,243 366 615 174 187,201 224,934 260,363 1,496,053 37,440 122,714 22,464 92,063 74,881 520,484 11,496 3,835 2,558 6,078 7,035 35,000 1,012 2,023 607 101 (74,881) - 203 155 189,759 231,012 267,398 1,531,053 38,452 124,737 23,071 92,164 - 520,484 11,699 3,990 Magellan Financial Group Limited | Annual Report 2022 Page 39 Directors’ Report For the year ended 30 June 2022 Magellan Infrastructure Fund Hamish Douglass4 Paul Lewis6 Magellan High Conviction Fund9 Hamish Douglass4 Paul Lewis6 Craig Wright Airlie Australian Share Fund Brett Cairns5 John Eales Paul Lewis6 Karen Phin Craig Wright Magellan FuturePay Brett Cairns5 Karen Phin Closing balance 30 June 2020 Net additions/ (disposals)1 Closing balance 30 June 2021 Net additions/ (disposals)1 Closing balance 30 June 20222 101,174 441,835 - 918,376 101,174 1,360,211 3,382,101 - 39,542 89,853 889,714 (39,542) 3,471,954 889,714 - 20,000 - - 19,049 - - - 989 16,685 415,755 - - 20,000 - 20,989 16,685 415,755 19,049 - 20,000 - - 76,185 54,324 11,754 - 335 - 6,629 - 30,050 140 33,653 101,174 1,436,396 3,526,278 901,468 - 21,324 16,685 422,384 19,049 30,050 20,140 33,653 2 1 Includes the reinvestment of June and December distributions in the years ended 30 June 2020 and 30 June 2021 respectively. In addition to the above holdings, Mr Douglass selected the Magellan Global Fund product via his employer superannuation account and had holdings of 480,824 units at a value of $1,154,217 as at 19 March 2022 when he ceased to be a KMP (June 2021: 474,987 units at a value of $1,197,014). 3 As a result of the restructure of the retail global equity funds completed in December 2020, KMP's interests in Magellan Global Equities Fund and Magellan Global Trust were acquired by the Magellan Global Fund by way of two trust schemes. KMP were issued Open Class Units and Closed Class Units in the Magellan Global Fund respectively on the same terms as the other members of the funds. 4 Mr Douglass ceased to be a KMP on 19 March 2022 and the balance as at 30 June 2022 represents the number of units held by Mr Douglass and his associates as at 19 March 2022. 5 Dr Cairns resigned on 6 December 2021 and the balance as at 30 June 2022 represents the number of units held by Dr Cairns and his associates as at 6 December 2021. 6 Mr Lewis resigned as a Director on 30 September 2021 and the balance as at 30 June 2022 represents the number of units held by Mr Lewis and his associates as at 30 September 2021. 7 As a result of the restructure of the retail global equity funds completed in December 2020, KMP's interests in Magellan Global Equities Fund and Magellan Global Trust were acquired by the Magellan Global Fund by way of two trust schemes. KMP were issued Open Class Units and Closed Class Units in the Magellan Global Fund respectively on the same terms as the other members of the funds. If KMP were eligible and participated in the Magellan Global Fund Partnership Offer in the year ended 30 June 2021, additions include units issued under that offer on 1 March 2021 at $1.7383 per new unit. These units were issued on the same terms as other investors in the Partnership Offer. If KMP were eligible and participated in the Magellan Global Fund Partnership Offer and Bonus MGF Option Issue, in the year ended 30 June 2021 additions include MGF Options issued under these offers. These MGF Options were issued on the same terms as other investors in the Partnership Offer and Bonus MGF Option Issue. Includes Class A and Class B units of the Magellan High Conviction Fund. 9 8 Unless specified above, no other KMP held units in Magellan Funds. Magellan Financial Group Limited | Annual Report 2022 Page 40 Directors’ Report For the year ended 30 June 2022 3.9. Loans to KMP The Group has made full recourse interest-free loans to Non-Executive Directors and Other KMP in connection with shares acquired under the Group’s SPP. As at 30 June 2022, six KMP held a loan (June 2021: eight). The terms and conditions of the loans, including repayment terms, are disclosed in note 10 of the financial statements. There are no other related party transactions with KMP other than those disclosed. SPP shares acquired during year Opening loan balance Loans made Loans (repaid) Closing loan balance number $'000 $'000 $'000 $'000 Face value1 Carrying value2 Directors Hamish McLennan Robert Fraser John Eales Colette Garnsey Karen Phin 2022 2021 2022 2021 2022 2021 2022 2022 2021 Group Executives (Other KMP) Kirsten Morton Marcia Venegas Craig Wright 2022 2021 2022 2021 2022 2021 - - - - - - 28,710 - - - 6,748 - 5,367 - 5,836 541 681 138 352 663 780 - 114 291 327 - 341 49 297 - Former Executive Director 2022 Brett Cairns 2021 - - 4,678 4,904 - - - - - - 750 - - - 330 - 300 - 300 - - (143) (140) (138) (214) (120) (117) (32) (114) (177) (15) (3) (57) (8) (13) (3) (641) (226) 398 541 - 138 543 663 718 - 114 312 327 284 341 283 297 323 483 - 136 401 563 538 - 112 247 246 215 264 186 222 4,038 4,678 3,676 3,816 1 The face value represents the loan balance due to be repaid to the Company. 2 The carrying value represents the loan balance as required by the accounting standards (for further detail, refer to note 10 of the financial statements). Magellan Financial Group Limited | Annual Report 2022 Page 41 Directors’ Report For the year ended 30 June 2022 3.10. Link Between Performance and Remuneration Paid by the Group Group Results Total revenue Total expenses Net profit after tax Adjusted revenue1 Adjusted expenses1 Adjusted net profit before associates1 Adjusted net profit after tax1 Funds Management Business Net profit before tax Net profit before tax and performance fees Shareholder Value Diluted EPS Adjusted diluted EPS1 Total dividends paid Closing share price (ASX code: MFG)2 KMP Remuneration Total KMP remuneration:3 Fixed compensation4 Variable compensation5 2022 2021 2020 2019 2018 $'000 $'000 $'000 $'000 $'000 $'000 $'000 553,530 116,582 383,011 647,251 132,082 393,132 399,733 715,012 336,048 265,156 699,072 111,339 454,441 412,659 693,952 178,874 396,214 692,941 119,751 438,299 438,299 617,387 124,050 376,947 577,251 104,024 364,225 364,225 452,598 181,988 211,791 452,598 101,010 268,897 268,897 $'000 $'000 482,047 470,575 556,690 526,616 558,012 477,048 459,789 376,182 331,430 291,841 cps cps cps $ 206.9 215.9 179.0 12.92 144.6 225.0 211.2 53.86 218.3 241.5 214.9 58.01 $'000 $'000 6,165 7,358 13,523 6,197 4,772 10,969 6,052 5,164 11,217 213.1 205.9 185.2 51.00 5,568 3,153 8,721 122.0 154.9 134.5 23.30 8,782 4,448 13,231 Number of KMP for the year 11 11 10 10 12 Growth rates % Net profit after tax % Adjusted net profit after tax % FM net profit before tax % FM net profit before tax and performance fees % Diluted EPS % Adjusted diluted EPS % Total KMP remuneration6 % Dividends paid Total KMP remuneration as % of net profit after tax % 44% -3% -13% -11% 43% -4% 23% -15% 4% -33% -6% 0% 10% -34% -7% -2% -2% 4% 5% 20% 21% 27% 2% 17% 29% 16% 3% 78% 35% 39% 29% 75% 33% -34% 38% 2% 8% 37% 33% 29% 7% 36% 30% 57% 6% 1 Adjustments are made for strategic, non-recurring, non-cash or unrealised items to provide additional meaningful information (refer to section 1.4.1 of the Directors’ Report and note 2 in the financial statements for the breakdown of these items). 2 As at 30 June. 3 As reported in historical Annual Reports and has not been adjusted for changes to KMP. For the year ended 30 June 2022, total remuneration includes termination benefits of $2.9 million whch were paid to Mr Douglass. 4 Fixed compensation comprises salary, superannuation and leave benefits outlined in section 3.5. 5 Variable compensation comprises cash bonuses, retention incentives, termination benefits and other benefits outlined in section 3.5. 6 Excluding termination benefits paid to Mr Douglass of $2.9 million during the year ended 30 June 2022, Total KMP remuneration increased 0.5% for the year ended 30 June 2022. Magellan Financial Group Limited | Annual Report 2022 Page 42 Directors’ Report For the year ended 30 June 2022 This report is made in accordance with a resolution of the Directors. Hamish McLennan Chairman Sydney 17 August 2022 Magellan Financial Group Limited | Annual Report 2022 Page 43 Magellan Financial Group Limited | Annual Report 2022 Page 44 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor’s independence declaration to the Directors of Magellan Financial Group Limited As lead auditor for the audit of the financial report of Magellan Financial Group Limited for the financial year ended 30 June 2022, I declare to the best of my knowledge and belief, there have been: a) No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; b) No contraventions of any applicable code of professional conduct in relation to the audit; and c) No non-audit services provided that contravene any applicable code of professional conduct in relation to the audit. This declaration is in respect of Magellan Financial Group Limited and the entities it controlled during the financial year. Ernst & Young Clare Sporle Partner 17 August 2022 Consolidated Statement of Profit or Loss and Comprehensive Income For the year ended 30 June Revenue Management fees Performance fees Services fees Advisory fees Dividend and distribution income Interest income Net change in the fair value of financial assets and liabilities: Realised Unrealised Net foreign exchange gain/(loss) Total revenue and other income Expenses Employee expenses Non-Executive Director fees Fund administration and operational costs Information, technology and data Marketing Professional services fees Travel and entertainment Depreciation and amortisation Foreign and withholding taxes Expenses/(benefits) related to strategic initiatives Finance costs Other expenses Total expenses Share of after tax profit/(loss) of associates Net gain on dilution of interests in associates Net gain on disposal of interests in associates Net profit before tax Income tax expense Net profit after tax Other comprehensive income for the year Exchange differences on translation of foreign operations Other comprehensive income for the year, net of tax Total comprehensive income for the year Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Note 4 4 4 2 8 8 8 5 3 3 2022 $'000 588,594 11,472 4,040 1,536 17,600 422 19,353 (92,937) 3,450 553,530 88,654 503 20,642 8,183 2,349 4,366 924 7,142 351 (22,592) 2,227 3,833 116,582 8,381 17,002 33,655 2021 $'000 631,367 30,074 4,040 1,632 15,122 1,766 19,917 15,940 (4,846) 715,012 70,513 505 19,810 7,147 1,620 3,068 347 7,071 416 220,161 2,768 2,622 336,048 (41,721) - - 495,986 337,243 (112,975) (72,087) 383,011 265,156 3,344 3,344 (3,484) (3,484) 386,355 261,672 206.9 206.9 144.6 144.6 The Consolidated Statement of Profit or Loss and Comprehensive Income should be read in conjunction with the Notes to the Financial Statements. Magellan Financial Group Limited | Annual Report 2022 Page 45 Consolidated Statement of Financial Position As at 30 June Current assets Cash and cash equivalents Loans and receivables Financial assets Prepayments Other assets Total current assets Non-current assets Loans and receivables Financial assets Associates Property, plant and equipment Right-of-use assets Intangible assets Net deferred tax asset Other assets Total non-current assets Total assets Current liabilities Payables Employee benefits Financial liabilities Income tax payable Lease liabilities Total current liabilities Non-current liabilities Employee benefits Provisions Lease liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity Note 10 7 10 7 8 11 9 5 12 13 14 11 13 11 16 17 2022 $'000 419,922 66,270 1,650 994 724 489,560 31,901 379,438 162,295 592 9,560 111,287 49,849 6,919 751,841 1,241,401 15,478 31,401 133,349 18,483 2,585 201,296 3,316 62 9,967 13,345 214,641 1,026,760 671,716 317,758 37,286 1,026,760 2021 $'000 211,577 118,389 1,650 1,342 817 333,775 21,191 452,523 237,128 619 11,497 113,062 41,110 5,261 882,391 1,216,166 13,043 25,493 157,547 11,576 2,275 209,934 4,422 51 12,325 16,798 226,732 989,434 607,849 344,987 36,598 989,434 The Consolidated Statement of Financial Position should be read in conjunction with the Notes to the Financial Statements. Magellan Financial Group Limited | Annual Report 2022 Page 46 Consolidated Statement of Changes in Equity For the year ended 30 June Contributed equity Profits reserve Note $’000 $'000 Share- based payments reserve $'000 Foreign currency translation reserve $’000 Retained earnings Total equity $'000 $’000 Opening balance at 1 July 2021 607,849 345,089 Net profit after tax for the year Other comprehensive income for the year Total comprehensive income for the year - - - - - - - - - - (102) 36,598 989,434 - 383,011 3,344 - 3,344 383,011 383,011 3,344 386,355 Issue of shares: Under Dividend Reinvestment Plan ("DRP") Under share purchase agreements ("SPA") On exercise of MFG 2027 Options Shares bought back on-market and cancelled Transaction costs, net of tax Dividends paid SPA expense Share-based payment expense Transfer (from retained earnings)/to profits reserve 16 16 16 16 16 19 16 24 52,335 19,731 99 (7,796) (709) - 207 - - - - - - (414,179) - - - - - - - - - 1,283 - - - - - - - - - - - - - - - - 52,335 19,731 99 (7,796) (709) (414,179) 207 1,283 - 382,323 - - (382,323) - Closing balance at 30 June 2022 671,716 313,233 1,283 3,242 37,286 1,026,760 Opening balance at 1 July 2020 525,271 356,925 Net profit after tax for the year Other comprehensive income for the year Total comprehensive income for the year - - - - - - Issue of shares: To acquire shares in Barrenjoey Capital Partners Under SPA Transaction costs, net of tax Dividends paid SPA expense Transfer (from retained earnings)/to profits reserve 16 16 16 19 16 24 66,033 16,411 (81) - 215 - - - (400,743) - - 388,907 Closing balance at 30 June 2021 607,849 345,089 - - - - - - - - - - - 3,382 160,349 1,045,927 - (3,484) (3,484) 265,156 - 265,156 265,156 (3,484) 261,672 - - - - - - - - - - 66,033 16,411 (81) (400,743) 215 (388,907) - (102) 36,598 989,434 The Consolidated Statement of Changes in Equity should be read in conjunction with the Notes to the Financial Statements. Magellan Financial Group Limited | Annual Report 2022 Page 47 Consolidated Statement of Cash Flows For the year ended 30 June Cash flows from operating activities Management and services fees received Performance fees received Advisory fees received Dividends and distributions received Interest received Finance cost payments Tax payments Payments to suppliers and employees Payments of transaction costs related to strategic initiatives Net cash from operating activities Cash flows from investing activities Proceeds from the sale of financial assets and liabilities Purchases of financial assets and liabilities Proceeds from the sale of associates Purchases of associates Purchases of property, plant and equipment Net returns/(placements) of cash on term deposits Net repayments from/(loans to) associates Net cash from/(used in) investing activities Cash flows from financing activities Proceeds from share issuances, net of transaction costs Proceeds from repayment of share purchase plan loans Dividend payments Lease payments Shares bought back on-market Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Note 2022 $'000 2021 $'000 661,808 31,991 1,384 14,987 1,053 (2,227) (113,917) (158,314) (2,139) 434,626 43,832 (42,694) 136,858 (2,985) (261) - - 134,750 23,035 3,120 (381,819) (2,390) (6,890) (364,944) 204,432 3,913 211,577 419,922 659,980 48,639 1,835 18,046 882 (2,685) (122,849) (139,922) (62,595) 401,331 81,744 (98,104) - (212,816) (272) 367 7,500 (221,581) (115) 749 (398,523) (2,632) - (400,521) (220,771) (5,165) 437,513 211,577 6 8 19 16 The Consolidated Statement of Cash Flows should be read in conjunction with the Notes to the Financial Statements. Magellan Financial Group Limited | Annual Report 2022 Page 48 Notes to the Financial Statements For the year ended 30 June 2022 Overview Magellan Financial Group Limited (the “Company” or “MFG”) is a for-profit entity that is incorporated and domiciled in Australia. The Company is listed on the Australian Securities Exchange (ticker code: MFG). The principal activities of the Company and its subsidiaries (the “Group”) are described in the segment information in note 2. This financial report was authorised for issue in accordance with a resolution of the Directors on 17 August 2022 and the Directors have the power to amend and reissue this financial report. 1. Basis of Preparation This general purpose financial report is presented in Australian dollars and has been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards (“AASB”) and Interpretations issued by the Australian Accounting Standards Board and other mandatory professional reporting requirements. It also complies with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. This financial report has been prepared on a going concern basis and under the historical cost convention except for the measurement of financial assets and liabilities at fair value through profit or loss. All amounts in this financial report are rounded to the nearest thousand dollars ($’000) in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, unless stated otherwise. 1.1. Accounting Policies The accounting policies adopted in the preparation of this financial report are contained within the notes to which they relate. The policies adopted in the preparation of this financial report are consistent with those of the previous financial year except for the accounting policy set out in note 18 regarding the employee share option plan. The Group has not early adopted any accounting standard, interpretation or amendment that has been issued but is not yet effective at reporting date. No accounting standards, interpretations or amendments that have been issued are expected to have a material impact on the Group's financial statements. Reclassification of employee benefits The Group's liabilities for employee benefits including salaries, wages, leave obligations and bonuses, were previously presented as either payables or provisions in the Statement of Financial Position. However, management considers it to be more relevant if all employee benefits are presented in one separate line item in the Statement of Financial Position. Prior year comparatives as at 30 June 2021 have been restated by reclassifying current payables of $23,510,000 and current provisions of $1,983,000 to current employee benefits and by reclassifying non-current provisions of $4,422,000 to non-current employee benefits. 1.2. Critical Accounting Estimates and Judgements In applying the Group’s accounting policies, a number of estimates and assumptions have been made concerning the future. 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. As a result, actual results could differ from those estimates. The main areas where a higher degree of judgement or complexity arises, or where assumptions and estimates are significant to the financial statements are: • • • Determination of significant influence over associates for which the Group holds less than a 20 percent voting interest (refer to note 8); Estimation of useful lives and impairment of intangible assets including goodwill (refer to note 9); and Classification of interests held in funds for which the Group provides management services (refer to note 20). 1.3. Foreign Currency Translation Both the functional and presentation currency of MFG is Australian dollars. Transactions in foreign currencies are initially recorded in the functional currency by applying the 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 reporting date. The fair values of financial assets where denominated in a foreign currency are translated to Australian dollars using the Reuters London 4pm exchange rates at reporting date. Foreign currency exchange differences relating to financial assets are included in net changes in fair value in the profit or loss. All other foreign currency exchange differences are presented separately in the profit or loss as net foreign exchange gains/(losses). Magellan Financial Group Limited | Annual Report 2022 Page 49 Notes to the Financial Statements For the year ended 30 June 2022 1.4. Goods and Services Tax (“GST”) 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. 1.5. Expenses Expenses are recognised in the Consolidated Statement of Profit or Loss and Comprehensive Income on an accruals basis at the fair value of the consideration paid or payable for services rendered. Certain costs, such as depreciation of property, plant and equipment and amortisation of intangible assets, are charged evenly over the useful life of the asset. Employee expenses include salaries, wages, allowances and annual and long service leave, together with the cost of other benefits provided to employees such as bonuses, share purchase loans and options. The Group makes some performance awards to employees that are deferred over a specified vesting period. The cost of such awards are charged to the Consolidated Statement of Profit or Loss and Comprehensive Income over the vesting period. Information regarding the Directors’ remuneration is included in the Remuneration Report commencing on page 22. 1.6. Impairment of Non-Financial Assets 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 and Comprehensive Income 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. 1.7. Structured Entities Structured entities are those entities that have been designed so that voting or similar rights are not the dominant factor in deciding who has control, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by means of contractual arrangements. The Group has determined that the funds for which it acts as Responsible Entity or Investment Manager (as set out in note 2) and the funds in which it invests (as set out in note 7) are not structured entities. In making this assessment the decision-making rights of the Group, as Responsible Entity or Investment Manager, as well as the various rights afforded to investors in the funds, including the right to remove the Investment Manager and redeem holdings, have been taken into consideration. Magellan Financial Group Limited | Annual Report 2022 Page 50 Notes to the Financial Statements For the year ended 30 June 2022 2. Segment Information The Group’s business activities are organised into the reportable operating segments listed below for internal management purposes. Funds Management The Funds Management segment provides investment funds management to high net worth and retail investors in Australia and New Zealand, and institutional investors globally. Funds Management activities include: • • • Providing investment research and administrative services to certain clients; Providing investment management and sub-advisory services under client mandates; and Acting as Responsible Entity/Trustee ("RE") and/or Investment Manager ("IM") for the following funds (collectively the "Magellan Funds"): International funds MFG Global Fund1 MFG Select Infrastructure Fund1 MFG Global Sustainable Fund1 Frontier MFG Global Equity Fund2 Frontier MFG Global Plus Fund2 Frontier MFG Core Infrastructure Fund2 Frontier MFG Select Infrastructure Fund2 Frontier MFG Global Sustainable Fund2 MFG High Conviction Master Fund LP IM ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Australian funds Magellan Global Fund Magellan Global Fund (Hedged) Magellan Global Equities Fund (Currency Hedged) Magellan Infrastructure Fund Magellan Infrastructure Fund (Unhedged) Magellan Infrastructure Fund (Currency Hedged) Magellan High Conviction Fund Magellan High Conviction Trust MFG Core Infrastructure Fund3 MFG Core International Fund3 MFG Core ESG Fund3 Magellan Sustainable Fund Magellan FuturePay FuturePay Support Trust Magellan Global Wholesale Fund MC Fund Airlie Australian Share Fund4 Airlie Concentrated Share Fund4 RE ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ IM ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 1 Funds authorised under the European Commission (Undertakings for Collective Investment in Transferable Securities (“UCITS”)). 2 Collectively, the Frontier MFG Funds. 3 Collectively, the Core Series Funds. 4 Collectively, the Airlie Funds. Fund Investments The Fund Investments segment comprises the Group's direct investment in certain Magellan Funds and a select portfolio of listed Australian and international equities. Magellan Capital Partners The Magellan Capital Partners segment comprises a portfolio of selective investments in businesses in which the Group has a strategic interest. Corporate The Corporate segment principally comprises the Group's treasury management activities, corporate development and strategy activities and the costs associated with governance and corporate management. The combined income tax consequences of the Group are reported in the Corporate segment, with the exception of deferred income tax arising from changes in the value of financial assets and associates, which are reported in the relevant segment. No operating segments have been aggregated to form the above reportable operating segments and inter-segment revenues and expenses (where applicable) have been eliminated on consolidation. Magellan Financial Group Limited | Annual Report 2022 Page 51 Notes to the Financial Statements For the year ended 30 June 2022 Segment Financial Results 30 June 2022 $’0001 $’000 Funds Management Fund Investments Segment revenue Management fees Performance fees Services and advisory fees Dividend and distribution income Interest income Net change in the fair value of financial assets and liabilities: Realised Unrealised Net foreign exchange gain/(loss) Total segment revenue and other income Segment expenses Employee expenses Non-Executive Director fees Other expenses Total segment expenses 588,594 11,472 5,576 - 99 - - 3,396 609,137 86,716 314 40,060 127,090 - - - 17,600 1 19,353 (92,937) 54 (55,929) - - 205 205 Magellan Capital Partners $’000 - - - - 739 - - - 739 - - - - Corporate Total $’000 $’000 - - - - 367 - - - 367 588,594 11,472 5,576 17,600 1,206 19,353 (92,937) 3,450 554,314 26 189 4,572 4,787 86,742 503 44,837 132,082 Share of after tax profit/(loss) of associates - - 8,381 - 8,381 Total segment operating profit before tax 482,047 (56,134) 9,120 (4,420) 430,613 Other comprehensive income Exchange differences on translation of foreign operations Other comprehensive income for the year, before tax Total comprehensive income for the year, before tax 3,344 3,344 485,391 - - (56,134) - - 9,120 - - 3,344 3,344 (4,420) 433,957 1 Includes elimination of income and expense under the transfer pricing agreements between MFG's wholly-owned subsidiary, Magellan Asset Management Limited ("MAM"), and US controlled entities, within the Funds Management segment. Reconciliation of Segment Operating Profit Before Tax to Statutory Net Profit After Tax Total segment operating profit before tax Add back: Amortisation of intangible assets2 Net non-cash remeasurement of SPA loans Net gain on dilutions and disposals of interests in associates Net (expenses)/benefits related to strategic initiatives: MGF Partnership Offer and Bonus MGF Option Issue Commitment to Magellan FuturePay Restructure of Magellan Global Fund Dividend Reinvestment Plan discounts relating to Magellan Funds Total benefits/(expenses) related to strategic initiatives Statutory net profit before tax for the year Income tax expense Statutory net profit after tax for the year Note 30 June 2022 $'000 30 June 2021 $'0001 430,613 561,712 8 14 (4,585) (3,291) 50,657 22,961 (369) - - 22,592 495,986 (112,975) 383,011 (4,548) 240 - (211,718) (1,062) (5,981) (1,400) (220,161) 337,243 (72,087) 265,156 1 Prior period segment operating profit before tax has been restated to exclude the net non-cash remeasurement of SPA loans of $240,000 on a basis consistent with the current reporting period. 2 Amortisation expense relates to intangible assets recorded on acquisition of Airlie Funds Management ("Airlie") and Frontier Partners Inc, Frontegra Strategies LLC and Frontegra Asset Management Inc (collectively, the “Frontier Group”). Magellan Financial Group Limited | Annual Report 2022 Page 52 Notes to the Financial Statements For the year ended 30 June 2022 Segment Financial Results (continued) 30 June 20211 $’0002 $’000 Funds Management Fund Investments Magellan Capital Partners $’000 Corporate Total $’000 $’000 Segment revenue Management fees Performance fees Services and advisory fees Dividend and distribution income Interest income Net change in the fair value of financial assets and liabilities: Realised Unrealised Net foreign exchange (loss)/gain Total segment revenue and other income Segment expenses Employee expenses Non-Executive Director fees Other expenses Total segment expenses 631,367 30,074 5,672 - 45 - - (4,564) 662,594 69,602 313 36,200 106,115 - - - 15,122 1 19,917 15,940 (282) 50,698 - - 228 228 - - - - 227 - - - 227 - - - - - - - - 365 - - - 365 631,367 30,074 5,672 15,122 638 19,917 15,940 (4,846) 713,884 23 192 3,893 4,108 69,625 505 40,321 110,451 Share of after tax profit/(loss) of associates - - (41,721) - (41,721) Total segment operating profit before tax 556,479 50,470 (41,494) (3,743) 561,712 Other comprehensive income Exchange differences on translation of foreign operations Other comprehensive income for the year, before tax Total comprehensive income for the year, before tax (3,484) (3,484) 552,995 - - 50,470 - - (41,494) - - (3,743) (3,484) (3,484) 558,228 1 Prior period segment operating profit before tax has been restated to exclude the net non-cash remeasurement of SPA loans of $240,000 on a basis 2 consistent with the current reporting period. Includes elimination of income and expense under the transfer pricing agreements between MAM and US controlled entities, within the Funds Management segment. Segment Assets and Liabilities 30 June 2022 Financial assets Associates Other assets Total liabilities Net assets 30 June 2021 Financial assets Associates Other assets Total liabilities Net assets Funds Management Fund Investments $’000 $’000 1,650 - 249,813 (60,947) 190,516 1,650 - 296,645 (55,740) 242,555 378,743 - (20,351)1 - 358,392 452,523 - (46,439)1 (462) 405,622 Magellan Capital Partners $’000 695 162,295 (1,821)1 - 161,169 - 237,128 (76)1 - 237,052 Corporate Total $’000 $’000 - - 470,377 (153,694) 316,683 381,088 162,295 698,018 (214,641) 1,026,760 - - 274,735 (170,530) 104,205 454,173 237,128 524,865 (226,732) 989,434 1 Reflects tax liabilities within the Group's net deferred tax asset. Magellan Financial Group Limited | Annual Report 2022 Page 53 Notes to the Financial Statements For the year ended 30 June 2022 3. Earnings Per Share Basic earnings per share ("EPS") is calculated as net profit/(loss) after income tax expense for the year divided by the weighted average number of ordinary shares on issue. Diluted EPS is calculated by adjusting the basic EPS to take into account the effect of any costs associated with dilutive potential ordinary shares and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. Basic and diluted EPS Net profit attributable to shareholders ($'000) Weighted average number of shares for basic and diluted EPS ('000) Basic and diluted EPS (cents) 30 June 2022 30 June 2021 383,011 185,125 206.9 265,156 183,379 144.6 The outstanding MFG 2027 Options and the outstanding options issued to certain employees under the MFG Employee Share Option Plan (refer to notes 16 and 18) are not included in the calculation of diluted earnings per share because they are antidilutive for the year ended 30 June 2022. However, these options could potentially dilute basic earnings per share in the future. 4. Revenue The Group's primary source of revenue is fee income from investment management activities. Fee income includes management, services and performance fees. Management Fees Management fees are based on an agreed percentage of the value of funds under management. Management fee revenue, determined in accordance with Investment Management Agreements for mandates and Constitutions for managed funds, is recognised as the service is provided and at the amount the Group is entitled to receive. Magellan Global Fund1 Magellan Global Fund (Hedged) Magellan Global Equities Fund (Currency Hedged) Magellan Infrastructure Fund Magellan Infrastructure Fund (Unhedged) Magellan Infrastructure Fund (Currency Hedged) Magellan High Conviction Fund Magellan High Conviction Trust MFG Core Infrastructure Fund MFG Global Fund MFG Select Infrastructure Fund MFG Global Sustainable Fund MFG High Conviction Master Fund Frontier MFG Funds Airlie Funds Other funds and mandates Total management fees 30 June 2022 $'000 30 June 2021 $'000 212,610 17,618 3,749 29,333 11,515 9,174 7,243 12,067 1,464 15,501 2,733 856 849 25,089 2,468 236,325 588,594 215,893 20,349 4,063 25,178 9,877 7,509 8,966 14,450 1,538 18,957 2,285 237 808 26,277 1,116 273,864 631,367 1 On 27 November 2020, Magellan Global Equities Fund and Magellan Global Trust were acquired by Magellan Global Fund as part of a global equities restructure. Services Fees Services fees arise from providing investment research and administrative services to MFF Capital Investments Limited as well as research and advisory services under other mandates. Services fees are recognised as the relevant service is provided and it is probable that the fee will be collected. Performance Fees Performance fees may be earned from certain funds and mandates. The Group's entitlement to a performance fee is dependent on outperformance of certain hurdles over an agreed performance measurement period. These hurdles may be index relative (including Magellan Financial Group Limited | Annual Report 2022 Page 54 Notes to the Financial Statements For the year ended 30 June 2022 in some cases a fixed percentage above an index), absolute return or both absolute return and index relative. In addition, 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 high-water mark is the NAV per unit at the end of the most recent measurement period for which the Group was entitled to a performance fee, less any intervening income (including capital distributions). Performance measurement periods vary across funds and mandates and are typically one, three, six or 12 month periods. The measurement period for all Magellan funds is six months ending 30 June and 31 December each year. Performance fee arrangements give rise to variable consideration and fees are only recognised where it is highly probable that a significant reversal of such revenue will not occur in future periods, being when any uncertainty related to outperformance is resolved. Performance fees are therefore typically recognised at the end of the performance period. Based on performance relative to both market index and absolute return hurdle Magellan Global Fund (Open/Closed Class) Magellan Global Fund (Hedged) Magellan Global Equities Fund (Currency Hedged) Magellan Infrastructure Fund Magellan Infrastructure Fund (Unhedged) Magellan Infrastructure Fund (Currency Hedged) Based on performance relative to absolute return hurdle Magellan High Conviction Fund (Class A/B) Magellan High Conviction Trust MFG High Conviction Master Fund Based on performance relative to a market index Other funds and mandates Total performance fees High watermark unit price ($)1 30 June 2022 $'000 30 June 2021 $'000 2.3186/1.6653 1.4711 2.9029 1.3605 1.8552 2.9951 2.2580(A)/1.3869(B) 1.7813 - various 104 13 2 5,336 1,838 1,648 791 1,052 680 8 11,472 103 48 - - - - 7,945 9,968 225 11,785 30,074 1 The high watermark as at 30 June 2022 and adjusted for distributions. The high watermark is the Net Asset Value ("NAV") per unit at the end of the most recent calculation period for which the Group was entitled to a performance fee, less any intervening income (including capital distributions). Management, Services and Performance Fees by Investor Type Management and services fees Retail Institutional Performance fees Retail Institutional Total management, services and performance fees Total Retail Total Institutional Total management, services and performance fees 30 June 2022 $'000 30 June 2021 $'000 345,324 247,311 10,590 881 604,106 355,914 248,192 604,106 347,168 288,239 18,063 12,011 665,481 365,231 300,250 665,481 Magellan Financial Group Limited | Annual Report 2022 Page 55 Notes to the Financial Statements For the year ended 30 June 2022 Management, Services and Performance Fees by Geographic Location Australia & New Zealand United Kingdom & Europe North America Asia Total management, services and performance fees Dividend and Distribution Income 30 June 2022 $'000 30 June 2021 $'000 404,976 97,925 80,232 20,973 604,106 416,174 142,372 87,715 19,220 665,481 Dividend and distribution income is recognised when it is declared and the Group's right to receive payment is established. Interest Income Interest income is calculated using the effective interest rate method and recognised on an accrual basis. 5. Taxation Reconciliation of Income Tax Expense Net profit before tax Prima facie income tax expense at 30% (2021: 30%) Effect of amounts which are non-deductible/(assessable) in calculating taxable income: Concessional tax rate on offshore banking unit ("OBU") Share of profit/(losses) of associates Non-assessable income and non-deductible expenses US state and local taxes (net of tax credits) Differences in overseas tax rates Imputed interest, expense and allowances relating to SPA loans Franked dividends and distributions received (Under)/over provision of prior year income tax Income tax expense Components of Income Tax Expense Current income tax (expense)/benefit Deferred income tax expense/(benefit) Differences in overseas tax rates US state and local taxes (net of tax credits) (Under)/over provision of prior year income tax Income tax expense Offshore Banking Unit 30 June 2022 $'000 30 June 2021 $'000 495,986 (148,796) 337,243 (101,173) 32,358 5,870 (1,274) (310) (35) (988) - 200 (112,975) 42,444 (12,593) (1,996) (423) (120) 72 2 1,700 (72,087) 30 June 2022 $'000 30 June 2021 $'000 (121,263) 8,433 (35) (310) 200 (112,975) (115,569) 42,325 (120) (423) 1,700 (72,087) MAM, a controlled entity of MFG and a member of the Australian tax consolidated group, was declared an OBU on 31 July 2013. 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% and is determined with reference to current Australian tax legislation definitions of assessable OB income, exclusive OB deductions and general OB deductions. Magellan Financial Group Limited | Annual Report 2022 Page 56 Notes to the Financial Statements For the year ended 30 June 2022 In September 2021, the Treasury Laws Amendment (2021 Measures No. 2) Bill 2021 received Royal Assent. This legislation abolishes the OBU regime and removes the concessional tax rate of 10% applying to certain Group income and expenses from 1 July 2023. This change does not result in any financial impact on the Group for the 2022 financial year, but will result in the Group paying higher income tax in Australia from 1 July 2023, which in turn will generate additional franking credits available to frank the Group's dividends to shareholders (all other variables being equal). For the year ended 30 June 2022, the Company’s effective tax rate was 22.8% (June 2021: 21.4%), which includes tax paid (net of tax credits in foreign jurisdictions). This rate is below the Australian company tax rate of 30% primarily as a result of MAM’s qualifying OB income, net of costs. The impact of the OBU concessional tax rate during the year ended 30 June 2022 is a benefit of $32,358,000 in the income tax expense recognised in the Consolidated Statement of Profit or Loss and Comprehensive Income (June 2021: $42,444,000). Reconciliation of Net Deferred Tax Asset/(Liability) Financial assets held at fair value Accruals and provisions Investment in associates Business-related costs deductible over 5 years Unused tax losses from issuance of loyalty units under MGG priority offer Net deferred tax asset/(liability) 30 June 2022 $'000 (20,906) 51,777 (1,822) 20,800 - 49,849 Charged to Equity Profit $'000 $'000 - - - 306 - 306 26,336 (5,181) (1,745) (9,086) (1,891) 8,433 30 June 2021 $'000 (47,242) 56,958 (77) 29,580 1,891 41,110 At 30 June 2022, deferred tax assets of $6,887,000 (June 2021: $12,593,000) relating to the Group's share of post-tax losses from associates have not been recognised in the Consolidated Statement of Financial Position. Tax Consolidation MFG and its wholly owned Australian subsidiaries have formed a tax consolidated group for income tax purposes. The entities in the tax consolidated group are party to a tax sharing agreement, which limits the joint and several liability of the subsidiaries in the case of a default of MFG. These entities are also party to a tax funding agreement under which each subsidiary has agreed to compensate MFG for the amount of tax calculated as though the subsidiary were a tax paying entity. MFG, as head entity, and the subsidiaries in the tax consolidated group continue to account for their own current and deferred tax amounts. The amounts are measured as if each entity in the tax consolidated group were a standalone taxpayer in its own right. The subsidiary tax balances are transferred to MFG via inter-company transactions and recognised as related party tax payables or receivables. During the financial year, income tax liabilities of $122,746,000 (June 2021: $123,447,000) were assumed by MFG of which $5,687,000 remained receivable from other entities under the tax funding agreement as at reporting date (June 2021: $16,006,000). There is also a US tax consolidated group for income tax purposes which includes several US based entities. Income Tax Income tax expense/benefit is the tax payable/receivable on the current year’s taxable income adjusted by changes in deferred tax assets and liabilities. Taxable profit differs from net profit reported in the Consolidated Statement of Profit or Loss and Comprehensive Income as some items of income or expense are assessable or deductible in years other than the current year and some items are never assessable or deductible. Current and deferred tax is recognised in the profit or loss, except to the extent that it relates to items recognised in comprehensive income or directly in equity. In this case, the tax is recognised in comprehensive income or equity respectively. Magellan Financial Group Limited | Annual Report 2022 Page 57 Notes to the Financial Statements For the year ended 30 June 2022 Current Tax Current tax assets or liabilities are amounts receivable or payable in relation to income taxes attributable to taxable profits of the current or prior financial years, less income tax instalments paid. The tax rates and laws used to calculate current taxes are those that are enacted or substantively enacted as at the reporting date. Deferred Tax Deferred tax balances represent amounts that will become payable or recoverable in future accounting periods. They arise when there are temporary differences between the tax bases of the Group's assets and liabilities and the related accounting values. Deferred tax is not recognised if it arises from the initial recognition of goodwill, from an asset or liability in a transaction other than a business combination which affects neither taxable income nor accounting profit or from investments in subsidiaries, associates and foreign operations when the timing of reversal can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise the temporary differences and losses. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that the tax benefit will be realised. Deferred tax assets and liabilities are offset only when there is a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority and for which the tax consolidated group intends either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. Deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled based on tax legislation that has been enacted or substantively enacted at reporting date. Magellan Financial Group Limited | Annual Report 2022 Page 58 Notes to the Financial Statements For the year ended 30 June 2022 6. Reconciliation of Operating Cash Flows The below table provides a reconciliation of net profit after tax, which is based on accounting rules, to operating cash flows. Net profit after tax Adjustments for non-cash items of profit or loss: Net change in the fair value of financial assets and liabilities: Unrealised Recorded as dividend and distribution income Share of (profit)/loss of associates Net gain on dilution of interest in associates Net gain on disposal of interests in associates Depreciation and amortisation expense Net foreign exchange (gain)/loss Non-cash charges related to SPP loans Share-based payment expense Expected credit losses Adjustments for which cash effects are investing activities: Realised changes in the fair value of financial assets and liabilities Dividends and distributions reinvested Adjustments for operating asset and liability movements: (Increase)/decrease in receivables (Increase)/decrease in prepayments (Increase)/decrease in net deferred tax asset Increase/(decrease) in payables and provisions Increase/(decrease) in income tax payable Effects of exchange rates on cash and cash equivalents Net cash from operating activities 30 June 2022 $'000 30 June 2021 $'000 383,011 265,156 92,937 (745) (8,381) (17,002) (33,655) 7,142 (3,450) 2,916 1,283 375 (15,940) (1,356) 41,721 - 7,071 4,846 (240) - - (19,353) (1,342) (19,917) (2,605) 49,521 358 (8,433) (17,469) 6,907 6 434,626 13,137 (577) (42,325) 160,967 (8,603) (4) 401,331 Cash and cash equivalents comprise cash at bank and short term deposits with a maturity of 90 days or less that are readily convertible to known amounts of cash and subject to an insignificant risk of change in value. Term deposits with maturities greater than 90 days from inception date are classified as financial assets (refer to note 7). Magellan Financial Group Limited | Annual Report 2022 Page 59 Notes to the Financial Statements For the year ended 30 June 2022 7. Financial Assets Term deposits - at amortised cost1 Total current financial assets Investments - fair value through profit or loss Magellan Funds2 Magellan Global Fund - Open Class3 Magellan Global Fund - Closed Class4,5 Magellan Global Fund (Hedged) Magellan Global Equities Fund (Currency Hedged) Magellan Infrastructure Fund (Currency Hedged) Magellan High Conviction Fund6 Magellan High Conviction Trust7 MFG Core International Fund MFG Core ESG Fund Magellan Sustainable Fund Magellan FuturePay Magellan Wholesale Plus Global Fund Magellan Wholesale Plus Infrastructure Fund Frontier MFG Core Infrastructure Fund Frontier MFG Global Plus Fund Frontier MFG Global Sustainable Fund MFG Global Sustainable Fund MC Fund8 Magellan Global Wholesale Fund9 Total investments in Magellan Funds Seed portfolios - securities by domicile of primary stock exchange United States Europe and United Kingdom Asia Australia Total investments in seed portfolios Unlisted entities 30 June 2022 $'000 30 June 2021 $'000 1,650 1,650 1,650 1,650 153,875 55,518 839 19,850 12,660 8,654 34,212 10,175 9,857 4,760 9,454 9,079 6,334 8,526 11,594 15,290 1,655 795 908 374,035 4,184 524 - - 4,708 695 211,704 42,589 1,069 25,067 12,323 19,176 33,424 11,670 11,514 5,520 10,879 10,890 6,204 7,591 13,058 16,959 1,821 - - 441,458 9,595 908 451 111 11,065 - Total non-current financial assets 379,438 452,523 1 Held with a major Australian bank and pledged against bank guarantees in respect of the Group's lease obligations. Should the Group fail to make its lease payments, the bank can apply the deposits in settlement of the amount paid to the lessor under the guarantees. 2 At 30 June 2022, MFG held the following investments: Magellan Global Fund Open Class 1.6% and Closed Class 2.8% (June 2021: 1.4% and 1.4%), Magellan Global Fund (Hedged) 0.1% (June 2021: 0.1%), Magellan Global Equities Fund (Currency Hedged) 12.3% (June 2021: 7.2%), Magellan Infrastructure Fund (Currency Hedged) 1.4% (June 2021: 1.5%), Magellan High Conviction Fund 3.8% (June 2021: 4.0%), Magellan High Conviction Trust 6.4% (June 2021: 3.7%), MFG Core International Fund 66.0% (June 2021: 84.5%), MFG Core ESG Fund 79.7% (June 2021: 84.6%), Magellan Sustainable Fund 64.3% (June 2021: 70.9%), Magellan FuturePay 53.4% (June 2021: 63.6%), MC Fund 90.9% (June 2021: nil), Magellan Global Wholesale Fund 99.9% (June 2021: nil), Magellan Wholesale Plus Global Fund 1.3% (June 2021: 1.1%), Magellan Wholesale Plus Infrastructure Fund 4.0% (June 2021: 4.2%), Frontier MFG Core Infrastructure Fund 1.5% (June 2021: 1.1%), Frontier MFG Global Plus Fund 18.4% (June 2021: 2.9%), Frontier MFG Global Sustainable Fund 90.2% (June 2021: 99.1%) and MFG Global Sustainable Fund 9.8% (June 2021: 3.9%). 3 MFG sold 10,658,054 units for $27,430,000 during the year. 4 MFG purchased 17,999,911 units for $28,238,000 during the year. 5 At 30 June 2022, MFG held 8,379,927 MGF Options (June 2021: 8,379,927 MGF Options). 6 MFG sold 3,422,597 units for $7,674,000 during the year. 7 MFG purchased 4,561,060 units for $7,672,000 during the year. 8 MFG seeded the fund with $1,000,000 on 30 December 2021. 9 MFG seeded the fund with $1,000,000 on 28 March 2022. Magellan Financial Group Limited | Annual Report 2022 Page 60 Notes to the Financial Statements For the year ended 30 June 2022 Reconciliation of Financial Assets Carrying Value Current Opening balance at 1 July Cash placed on term deposit Matured term deposits Closing balance Non-current Opening balance at 1 July Acquisitions Disposals Net change in fair value Realised Unrealised Recorded as dividend and distribution income Closing balance Classification and Measurement 30 June 2022 $'000 30 June 2021 $'000 1,650 1,650 (1,650) 1,650 452,523 43,474 (43,603) 19,308 (93,009) 745 379,438 2,017 2,384 (2,751) 1,650 396,420 100,612 (81,822) 19,916 16,041 1,356 452,523 Financial assets are recognised initially at fair value on the date at which the Group becomes a party to the contractual provisions of the instrument. Financial assets are measured at amortised cost when their contractual cash flows represent solely payments of principal and interest and they are held within a business model designed to collect cash flows. This classification typically applies to the Group's receivables, loans and term deposits. The carrying value of financial assets at amortised cost is adjusted for impairment under an expected credit loss model (refer to note 22). All other financial assets are measured at fair value through profit or loss with future changes in the value of such assets recognised in the Consolidated Statement of Profit or Loss and Comprehensive Income. The change in fair value of financial assets does not include dividend and distribution income. Financial assets are classified as non-current assets unless management intends to dispose of the assets within 12 months of reporting date. Derecognition Financial assets are derecognised when the rights to receive cash flows from the assets have expired or have been transferred and the Group no longer holds substantially all the risks and rewards of ownership. Magellan Financial Group Limited | Annual Report 2022 Page 61 Notes to the Financial Statements For the year ended 30 June 2022 8. Associates Associates are entities in which the Group has an investment and over which it has significant influence, but not control, through participation in financial and operating policy decisions. The Group accounts for associates using the equity method. Under the equity method, investments are initially recognised in the Consolidated Statement of Financial Position at cost and adjusted thereafter to recognise the Group's share of the associate's profit or loss and other comprehensive income. The Group's share of the associate's profit or loss and other comprehensive income is included in the Consolidated Statement of Profit or Loss and Comprehensive Income. Dividends received from an associate are accounted for as a reduction to the carrying value of the investment. At each reporting date, the Group applies judgement to determine whether there is any indication that the carrying value of associates may be impaired. If an associate is deemed to be impaired, the carrying value is reduced to the investment's recoverable amount. This reduction is recognised as an impairment charge in the Consolidated Statement of Profit or Loss and Comprehensive Income. Associate Industry Ownership interest Investment carrying value 2022 % 2021 % 30 June 2022 $'000 30 June 2021 $'000 Barrenjoey Capital Partners Group Holdings Pty Ltd ("Barrenjoey")1 FinClear Holdings Ltd ("FinClear")2,3 Guzman y Gomez (Holdings) Ltd ("GYG")4 Financial services Financial services Consumer services 36 16 - 40 17 13 133,240 29,055 - 162,295 114,480 19,744 102,904 237,128 1 Barrenjoey is an Australian-based financial services firm providing corporate and strategic advisory, capital market underwriting, research, prime brokerage and fixed income services. The Group's voting interest in Barrenjoey is 4.99%. During the year ended 30 June 2022, Barclays Unquoted Investments Limited ("Barclays") increased its shareholding in Barrenjoey via a $75 million subscription for new capital. As a result of the Barclays capital injection, the Group's economic interest in Barrenjoey was diluted from 40% to 36.4% and a $17,594,000 gain on dilution was recognised in the Consolidated Statement of Profit or Loss and Comprehensive Income. 2 FinClear is an Australian-based provider of technology, trading infrastructure and exchange market-access services to wealth, stockbroking, platform and fintech customers. The Group's voting interest in FinClear is equal to its ownership interest. 3 Ownership interest reflects the Group's current entitlement and excludes the impact of any potential dilution arising from unexercised options issued by FinClear. 4 On 9 May 2022, the Group sold its shares in GYG to an investment trust managed by Barrenjoey. The Group received cash consideration of $136,858,000, net of arranging fees, and recorded a gain on sale of $33,655,000 (before tax) in the Consolidated Statement of Profit or Loss and Comprehensive Income. Key Judgement Through representation on the board of directors of each associate, the Group participates in financial and operating policy decisions. As a result, the Group is deemed to have significant influence despite holding less than 20% of the voting rights of the entities. Transactions with Associates The Group provides Barrenjoey with up to $50,000,000 of unsecured working capital finance. During the year ended 30 June 2022 an aggregate of $45,000,000 was drawn in varying amounts (June 2021: $15,000,000) and all borrowings were subsequently repaid in full. The maximum loan balance during the year was $25,000,000. Interest received in respect of these borrowings amounted to $739,000 (June 2021: $86,000). The facility was undrawn at 30 June 2022 and has not been drawn since that date. During the period, the Group received the following services from Barrenjoey: • • • DRP underwriting services in respect of the dividend declared for the six month period ended 30 June 2021. As part of the DRP underwrite, Barrenjoey was issued 586,056 ordinary MFG shares, all of which were subsequently transferred to relevant MFG shareholders. No MFG shares were held by Barrenjoey as at 30 June 2022. The Group paid Barrenjoey fees of $46,000 (June 2021: nil) in connection with the underwriting service. Brokering services in respect of the MFG on-market share buy-back of up to 10 million ordinary shares announced on 16 March 2022. The Group paid Barrenjoey $9,000 in brokerage fees during the year ended 30 June 2022 (June 2021: nil). Arranging services in respect of the Group's disposal of its interest in GYG to a trust managed by Barrenjoey on behalf of investors. The Group paid Barrenjoey $3,079,000 in arranging fees during the year ended 30 June 2022 (June 2021: nil). As part of the transaction, the Group has executed an agreement with Barrenjoey which would see the Group receive further consideration of up to $6,128,000, net of $138,000 in related arranging fees, subject to the performance of GYG and the realisation of the investment by the managed trust. Magellan Financial Group Limited | Annual Report 2022 Page 62 Notes to the Financial Statements For the year ended 30 June 2022 Associates' Financial Information The tables below provide summarised financial information of the Group's associates aggregated on an industry classification basis. The information reflects the amounts presented in the financial statements of the associates and not the Group's share of those amounts (except where indicated). As required by the equity method of accounting, amounts have been amended to reflect adjustments made by the Group, including fair value adjustments and modifications for differences in accounting policies. Summarised Statement of Financial Position Current assets Non-current assets Current liabilities Non-current liabilities Net assets Group's interest in net assets Goodwill and transaction costs Investment carrying amount Financial services Consumer services Total 30 June 2022 $'000 5,296,420 93,404 (4,520,696) (622,817) 246,311 71,675 90,620 162,295 30 June 2021 $'000 196,521 24,500 (108,164) (10,646) 102,211 35,340 98,884 134,224 30 June 2022 $'000 30 June 2021 $'000 30 June 2022 $'000 - - - - - - - - 5,296,420 80,922 125,502 93,404 (38,506) (4,520,696) (622,817) 246,311 (100,454) 67,464 8,611 94,293 102,904 71,675 90,620 162,295 30 June 2021 $'000 277,443 150,002 (146,670) (111,100) 169,675 43,951 193,177 237,128 Summarised Statement of Profit or Loss and Comprehensive Income Financial services Consumer services Total 30 June 2022 $'000 30 June 2021 $'000 30 June 2022 $'0001 30 June 2021 $'000 30 June 2022 $'000 30 June 2021 $'000 Revenue 273,536 18,516 139,536 59,504 413,072 78,020 Profit or loss from continuing operations Other comprehensive income Total comprehensive income 45,580 - 45,580 (105,823) - (105,823) 3,267 - 3,267 2,009 - 2,009 48,847 - 48,847 (103,814) - (103,814) Group's share of associates' profit/(loss) Dividends received from associates 7,965 - (41,973) - 416 - 252 - 8,381 - (41,721) - 1 Amounts presented in consumer services for the year ended 30 June 2022 reflect the period from 1 July 2022 to 30 April 2022 as the Group's interest in GYG was divested in May 2022. Magellan Financial Group Limited | Annual Report 2022 Page 63 Notes to the Financial Statements For the year ended 30 June 2022 9. Intangibles Intangible assets comprise goodwill and customer relationships resulting from the acquisition of Airlie and the Frontier Group. 30 June 2022 30 June 2021 Customer relationships $'000 Goodwill Total $'000 $'000 Customer relationships $'000 25,743 105,288 131,031 25,381 102,840 Goodwill Total $'000 $'000 128,221 (19,744) 5,999 - 105,288 (19,744) 111,287 (15,159) 10,222 - 102,840 (15,159) 113,062 10,222 (4,585) 362 5,999 102,840 - 2,448 105,288 113,062 (4,585) 2,810 111,287 15,300 (4,548) (530) 10,222 105,252 - (2,412) 102,840 120,552 (4,548) (2,942) 113,062 At cost less: accumulated amortisation and impairment Total intangible assets Movements: Opening balance at 1 July Amortisation expense Net foreign exchange differences Closing balance Customer Relationships Customer relationships reflect existing agreements with clients and relationships with unitholders in the case of the Magellan Funds. They are definite life assets with useful lives based on the following expected client attrition profile: • • Airlie - 5 years Frontier Group - 7 years. Customer relationship assets are recognised at fair value at the date of acquisition and amortised to profit or loss on a straight-line basis over the useful lives stated above. Goodwill Goodwill arises when consideration paid for a business exceeds the fair value of the identifiable net assets acquired or liabilities assumed at the date of acquisition. The Group's goodwill represents the value of expected synergies from the acquisitions of Airlie and the Frontier Group, as well as the value of their respective workforces. Goodwill has an indefinite life. It is initially recognised at cost at the date of a business acquisition and subsequently measured at cost less any accumulated impairment. Impairment Goodwill is tested for impairment annually or when circumstances indicate the carrying value may not be recoverable. In addition, impairment tests for all assets are performed when there is an indication of impairment. All of the Group's goodwill is allocated to one cash generating unit ("CGU"), being the Funds Management segment ("FM CGU"). The recoverable amount of the FM CGU has been determined by taking a value-in-use approach which calculates the net present value of the CGU’s estimated future pre-tax cash flows. Key Estimates and Judgements Judgement is applied to assess the estimated useful life of intangible assets, the presence of indicators of impairment and the recoverable amount of goodwill and customer relationship assets. Determination of the recoverable amount of goodwill requires the application of significant judgement when making assumptions about the future cash flows of the FM CGU, including the reasonableness of applied growth and discount rates. In the Group's goodwill impairment testing, estimated future cash flows are based on financial budgets approved by the Directors for a period of one year. Cash flows for the 4 years beyond the approved budget period are extrapolated using a growth rate of 5.0% (June 2021: 4.0%) based on external forecasts of long-term global equity market returns. A perpetuity growth rate of 3.0% (June 2021: 2.5%) is used to derive a terminal value and a pre-tax discount rate of 12.4% (June 2021: 11.6%) is applied to net cash flows. In forecasting cash flows over the assessment period, the current economic conditions, impacts arising from COVID-19 and the Funds Management segment performance were considered. Management is of the view that no reasonably possible change to a key assumption would cause the recoverable amount of goodwill to fall short of the carrying amount. As such there is no impairment of goodwill at 30 June 2022. Magellan Financial Group Limited | Annual Report 2022 Page 64 Notes to the Financial Statements For the year ended 30 June 2022 10. Loans and Receivables Current Fees receivable Distributions receivable from Magellan Funds Other receivables Loans issued under share purchase agreements Non-current Loans issued under share purchase agreements Total loans and receivables Fees Receivable 30 June 2022 $'000 30 June 2021 $'000 64,081 221 352 1,616 66,270 31,901 98,171 113,717 279 126 4,267 118,389 21,191 139,580 Fees receivable comprise uncollected management, performance and services fees. These amounts are initially recognised at the fair value of the amounts to be collected. An impairment analysis is performed at each balance date to determine whether a loss allowance should be recognised for expected credit losses. Expected credit losses are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The Group applies the simplified approach for trade receivables whereby the loss allowance is based on lifetime expected credit losses at each balance date. Receivables of $3,521,000 were past due at 30 June 2022 (June 2021: $2,550,000). Based on the credit quality of the Group's clients (including Magellan Funds) and no historical credit losses, there were no provisions for expected credit losses recognised during the year (June 2021: nil). Share Purchase Agreements The Group has arrangements in place through which its employees, Non-Executive Directors and employees of associates receive financial assistance to purchase MFG shares (referred to as "Share Purchase Agreements" or "SPA") to align more closely the interests of SPA particants to those of shareholders of the Group. The financial assistance provided to SPA participants is by way of a full recourse interest free loan (“SPA loan”). The SPA loan is generally secured by the MFG shares issued under the SPA to that participant. Any outstanding balance at the end of the SPA loan term must be repaid by the participant. A participant who ceases to be employed must repay the total amount owing under the SPA loan within three months of cessation, or such longer period as determined by the Board. Shares purchased under the SPA are issued at the volume weighted average price of traded shares on the five business days prior to the offer date. This issue price is deemed to be fair market value of the shares at the offer date. Shares purchased under the SPA have the same rights as all other MFG ordinary shares except they are placed in a trading lock. Following full repayment of the SPA loan, the holding lock and any security over the shares issued under the SPA is released and the participant has unrestricted access to their shares. SPA loans to employees and Non-Executive Directors are subject to the Group's Share Purchase Plan (“SPP”) Rules. During the year, terms relating to the repayment of loans were varied in accordance with the SPP Rules. The variations only applied to loans issued to employees of Magellan Asset Management Limited and were intended to provide greater flexibility to assist employees with the repayment of their loan(s). The variations did not amend the full recourse nature of the SPA loans. The variations included extending the maximum loan term from 10 to 15 years and removing the requirement for loan repayments from an employee’s annual cash bonus. In addition, voluntary loan repayments have been permitted, however MFG retains absolute discretion to determine the allocation of loan repayments where multiple loans are held. This ensures appropriate security over the outstanding loan is retained by the Group. For the same reason, where an employee has more than one SPA loan, dividends are not aggregated but rather repayment occurs by applying the dividends received from the shares issued under each SPA loan to that particular SPA loan. Where an employee is awarded a cash retention amount (refer to note 13) and has an outstanding SPA loan at the payment date of that award, the variation includes a requirement for the after-tax amount to be applied to reduce any outstanding SPA loan. Magellan Financial Group Limited | Annual Report 2022 Page 65 Notes to the Financial Statements For the year ended 30 June 2022 At 30 June 2022, the weighted average duration of the SPA loans was 6.9 years, with individual terms ranging from 1.5 years to 14.4 years (June 2021: weighted average duration of 5.0 years, with individual terms ranging from 1.2 years to 9.8 years). Reconciliation of SPA Loans Opening balance at 1 July Loan issuances Modification adjustment Imputed interest income/(expense) Repayments - cash Repayments - dividends (refer to note 19) Expected credit losses1 Shares released on loan termination Closing balance 30 June 2022 30 June 2021 Number of shares SPA loans $'000 Number of shares SPA loans $'000 1,196,445 566,503 - - - - - (384,594) 1,378,354 25,458 15,029 (350) (233) (3,120) (2,892) (375) - 33,517 950,469 312,720 - - - - - (66,744) 1,196,445 15,289 12,010 - 1,128 (749) (2,220) - - 25,458 1 Reflects an allowance for potential loan defaults recognised in accordance with the measurement requirements of AASB 9 Financial Instruments (refer to note 22 for further discussion). Classification and Measurement SPA loans are initially recognised at fair value, which is determined by discounting loans to their net present value using an interest rate reflective of the risk of the underlying asset at the time the loan is granted and an estimated repayment schedule. Subsequently, the loans are carried at amortised cost using the effective interest rate method and adjusted for changes in the projected repayment schedule. Changes in the carrying value of the SPA loans are recognised within interest income in the Consolidated Statement of Profit or Loss and Comprehensive Income. The cost of providing the interest free loans to SPA participants is capitalised at inception of the loan and subsequently expensed on a straight-line basis over the expected life of the SPA loan. This cost, which reflects the foregone interest income of the Group, is recorded within employee expenses in the Consolidated Statement of Profit or Loss and Comprehensive Income. During the year ended 30 June 2022, $2,132,000 was recognised within employee expenses (June 2021: $888,000). Both the change in the carrying value of the SPA loans recorded in interest income and the cost of providing the interest free loan to participants recorded as employee expenses are non-cash items and therefore not included in the Group’s Consolidated Statement of Cash Flows. Over the life of the SPA loans, the amounts credited to interest income and the amounts recognised within employee expenses will exactly offset each other. On variation of the SPA loan terms, the revised cash flows, reflecting the new loan maturities and repayment terms, were discounted using the effective interest rate determined at inception of the original loan. The carrying values of the SPA loan, and the related capitalised cost of providing those loans were adjusted and a net modification gain of $206,000 was recognised within interest income in the the Consolidated Statement of Profit or Loss and Comprehensive Income (June 2021: nil). The total value of MFG ordinary shares securing the SPA loans to SPA participants applying MFG’s closing share price at 30 June 2022 of $12.92 was $17,808,000 (June 2021: $64,441,000 at a share price of $53.86). An impairment analysis is performed at each reporting date to determine whether to recognise a loss allowance for potential loan defaults. At 30 June 2022, an expected credit loss allowance of $375,000 (June 2021: nil) has been recognised within other expenses in the Consolidated Statement of Profit or Loss and Comprehensive Income (refer to note 22 for further discussion). Magellan Financial Group Limited | Annual Report 2022 Page 66 Notes to the Financial Statements For the year ended 30 June 2022 11. Leases The Group's lease arrangements primarily comprise operating leases of office space typically for fixed periods of up to 10 years. At commencement of a lease, the Group records a lease liability in the Consolidated Statement of Financial Position reflecting the present value of future contractual payments to be made over the lease term, discounted at the Group's incremental borrowing rate, unless an interest rate is stated within the lease. A right-of-use ("ROU") asset is also recorded at the value of the lease liability plus any initial direct costs incurred to obtain the leased asset. Interest is accrued on the lease liability, and recognised within finance costs in the Consolidated Statement of Profit and Loss and Comprehensive Income, whilst the liability balance is reduced as lease payments are made. The ROU asset is depreciated on a straight-line basis over the shorter of the leased asset's useful life or the lease term. The liability is remeasured upon the occurrence of certain events, such as a change in the lease term or the lease payments. The amount of any liability remeasurement is adjusted against the value of the ROU asset. Payments associated with short term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short term leases have a term of 12 months or less and low-value assets comprise small items of technology and office equipment. 30 June 2022 30 June 2021 ROU assets $'000 Lease liabilities $'000 ROU assets $'000 Lease liabilities $'000 Opening balance at 1 July Additions and remeasurements Lease terminations Lease payments Depreciation expense Interest expense Net foreign exchange differences Closing balance 11,497 323 - - (2,270) - 10 9,560 14,600 313 - (2,918) - 547 10 12,552 13,666 138 - - (2,285) - (22) 11,497 The Group's undiscounted lease payments are contractually due in the following time periods: 30 June 2022 30 June 2021 Within 1 year $'000 Within 2 to 5 years $'000 Beyond 5 years $'000 Total $'000 Within 1 year $'000 Within 2 to 5 years $'000 Beyond 5 years $'000 Lease liabilities 3,036 10,721 - 13,757 2,817 11,716 1,809 12. Payables Payables represent liabilities for goods and services received prior to the end of the year which remain unpaid at 30 June. 17,288 135 (323) (3,107) - 634 (27) 14,600 Total $'000 16,342 Trade payables and accruals GST and Fringe Benefits Tax payable Unsettled trades Total payables 30 June 2022 $'000 30 June 2021 $'0001 13,456 2,022 - 15,478 10,321 2,716 6 13,043 1 Prior year comparatives as at 30 June 2021 have been restated by reclassifying current payables of $23,510,000 to current employee benefits. Trade payables are unsecured and are recognised at the amount due to suppliers. Accruals represent amounts due for supplies and services received but not invoiced at reporting date. Magellan Financial Group Limited | Annual Report 2022 Page 67 Notes to the Financial Statements For the year ended 30 June 2022 13. Employee Benefits Employee benefits comprise wages, salaries, annual and long service leave obligations, bonuses and cash retention incentives. Accrued employee entitlements Leave obligations Total current employee benefits Accrued employee entitlements Leave obligations Total non-current employee benefits 30 June 2022 $'000 30 June 2021 $'0001 27,377 4,024 31,401 1,636 1,680 3,316 21,584 3,909 25,493 2,947 1,475 4,422 1 Prior year comparatives as at 30 June 2021 have been restated by reclassifying current payables of $23,510,000 and current provisions of $1,983,000 to current employee benefits and by reclassifying non-current provisions of $4,422,000 to non-current employee benefits. Wages, Salaries and Annual Leave Liabilities for wages and salaries and annual leave are measured at the amounts expected to be paid when the liabilities are settled and include related on-costs, for example payroll tax. Long Service Leave Liabilities for long service leave are recognised when employees reach a qualifying period of continuous service. Current liabilities are measured at the amount expected to be settled within 12 months of the reporting date. Non-current liabilities are measured as the present value of expected future payments and are expected to be paid beyond 12 months of the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service and discounted using high quality corporate bond rates at reporting date, with terms to maturity that match, as closely as possible, the estimated future cash outflows. Bonuses Bonuses are recognised in respect of employee services received up to the end of the reporting period where the Group is contractually obliged or where there is past practice that has created a constructive obligation to pay the bonus under the employee bonus plan. A current liability is recorded for accrued bonuses to be paid within 12 months of reporting date. A non-current liability is recorded for accrued bonuses to be paid beyond 12 months of the reporting date. For certain employees, a portion of their annual bonus is deferred and paid in equal instalments for a period of up to 36 months conditional on the employee being employed at the time of payment. The conditional deferred bonus paid each month is expensed in the Consolidated Statement of Profit or Loss and Comprehensive Income as incurred. The unrecognised portion of annual bonuses payable to employees by the Group in the future is a contingent liability. At 30 June 2022, the contingent liability is $9,766,000 (June 2021: $16,596,000). Of this amount, $4,405,000 would be payable during the year ending 30 June 2023 and $5,361,000 would be payable during the years ending 30 June 2024 through 30 June 2025, subject to the vesting conditions being met. Employee Retention Program During the year ended 30 June 2022, the Group offered a retention package to employees as part of its broader employee retention program. The package included a cash incentive payable subject to satisfactory performance and continued employment up to September 2024 and September 2025. Where employees have a share purchase loan, cash incentive awarded at those dates will firstly be directed to repayment of the outstanding loan. For further details refer to section 3.2 in the Remuneration Report. Retention incentives payable in cash are recognised in respect of employee services received up to the end of the reporting period. A current liability is recorded for accrued incentives to be paid within 12 months of reporting date. A non-current liability is recorded for accrued incentives to be paid beyond 12 months of the reporting date. The retention incentives payable in cash for services provided by employees in future periods is a contingent liability. At 30 June 2022, the contingent liability is $16,433,000 (June 2021: $nil). Of this amount, $6,650,000 would be payable during the year ending 30 June 2025 and $9,783,000 would be payable during the year ending 30 June 2026, subject to the vesting conditions being met. Magellan Financial Group Limited | Annual Report 2022 Page 68 Notes to the Financial Statements For the year ended 30 June 2022 14. Financial Liabilities Financial liabilities - fair value through profit or loss Obligation to fund the discount offered on MGF Options1 Other financial liabilities Total financial liabilities 30 June 2022 $'000 30 June 2021 $'000 133,349 - 133,349 157,093 454 157,547 1 In January 2021, MFG committed to fund the 7.5% discount associated with options issued to MGF unitholders under the MGF Partnership Offer and the Bonus MGF Option Issue (referred to collectively as "MGF Options"). In accordance with accounting standards, the funding obligation has been recognised as a financial liability assuming all MGF Options are exercised over the three-year option term. As a result, the financial liability moves in line with changes to the NAV per MGF Closed Class Unit and reduces when MGF Options are exercised or ultimately forfeited. Any increase in the financial liability is recorded as an additional expense, and any decrease as a gain, in the Consolidated Statement of Profit or Loss and Comprehensive Income. Reconciliation The movement in the carrying value of the Group's obligation to fund the MGF Options discount is as follows: Opening balance at 1 July Initial recognition of liability to fund MGF Options discount Net increase/(decrease) in liability resulting from NAV changes Expense recognised in the Consolidated Statement of Profit or Loss and Comprehensive Income Exercise of MGF Options during the period Closing balance as at 30 June 30 June 2022 $'000 157,093 - (22,961) 134,132 (783) 133,349 30 June 2021 $'000 - 137,220 19,996 157,216 (123) 157,093 Classification and Measurement Financial liabilities are recognised initially at fair value on the date at which the Group becomes a party to the contractual provisions of the instrument. These liabilities are subsequently measured at fair value through profit or loss if they are held for trading purposes or designated as such upon initial recognition. Changes in the value of such liabilities are recognised in the Consolidated Statement of Profit or Loss and Comprehensive Income. All other financial liabilities are measured at amortised cost. Financial liabilities are classified as current unless the Group has the unconditional right to defer settlement beyond 12 months from the reporting date. Magellan Financial Group Limited | Annual Report 2022 Page 69 Notes to the Financial Statements For the year ended 30 June 2022 15. Capital Management The Board of Directors is committed to prudent capital management and a conservative approach to protect shareholder value. The Board's objectives when managing capital are to ensure the Group continues as a going concern, has sufficient liquidity to meet its operating requirements, is able to support the payment of dividends to shareholders in accordance with the Company's dividend policy, and maintains the flexibility to retain capital if required for future business expansion. The Directors recognise and believe that the Group’s core business, being funds management, is scalable over time without the need to make material additional capital investment into the business. The Group’s capital consists of contributed equity and a profits reserve which preserves the Company’s capacity to pay future dividends. The Board regularly reviews the Group's free cash flow generation, cash and cash equivalents, investments, tax and other financial factors. The Group also has access to a revolving credit facility which remains fully undrawn as at 30 June 2022 (refer to the Liquidity Risk discussion in note 22). In order to maintain an optimal capital structure, the Board may: • • • • • vary the amount of dividends paid to shareholders; issue new shares; utilise a dividend reinvestment plan; increase or decrease borrowings; or redeem and/or sell investments. The Group is also subject to regulatory capital requirements by virtue of an Australian Financial Services Licence (“AFSL”) held by MAM. Under the AFSL, MAM must hold a minimum level of net tangible assets and cash and cash equivalents. During the 2022 financial year MAM complied with its licensing requirements at all times. 16. Contributed Equity Ordinary shares Opening balance Shares issued: Under Dividend Reinvestment Plan1 Under SPA On exercise of MFG 2027 Options As purchase consideration for shares in Barrenjoey Shares bought back on-market and cancelled2 Transaction costs, net of tax SPA expense Total ordinary shares3,4 Options Opening balance MFG 2027 Options issued 14 April 2022 Shares issued from exercise of options during period Transaction costs of option issues, net of tax Total options 30 June 2022 30 June 2021 Number of securities '000 Contributed equity $'000 Number of securities '000 Contributed equity $'000 183,794 607,849 182,280 525,271 1,353 566 3 - (627) - - 185,089 - 23,219 (3) - 23,216 52,335 19,731 99 - (7,796) (164) 207 672,261 - - - (545) (545) - 313 - 1,201 - - - 183,794 - - - - - - 16,411 - 66,033 - (81) 215 607,849 - - - - - Total contributed equity 208,305 671,716 183,794 607,849 1 On 30 September 2021, 766,692 ordinary shares were issued to DRP participants at a price of $38.43 and 586,056 ordinary shares were issued to 2 3 4 the underwriter in accordance with the underwriting agreement at a price of $39.02. Includes $906,000 in respect of share purchases that had not settled as at 30 June 2022. Includes 1,378,354 ordinary shares held by SPA participants (June 2021: 1,196,445). Refer to note 10 for further details. Includes 1,480,060 ordinary shares subject to voluntary escrow which expires in respect of 655,646 shares on 1 March 2023, in respect of 98,438 shares on 2 October each year until 2025 and in respect of 430,662 shares on 23 November 2031 (or such other date determined under the terms governing the issuance of those shares). Magellan Financial Group Limited | Annual Report 2022 Page 70 Notes to the Financial Statements For the year ended 30 June 2022 Ordinary Shares Ordinary shares are fully paid and entitle the holder to receive declared dividends and proceeds on winding up of the Company in proportion to the number of and amounts paid up on shares held. An ordinary share also entitles the holder to one vote, either in person, or by proxy, at a meeting of the Company shareholders. Share Buy-back On 16 March 2022, the Company announced its intention to undertake an on-market share buy-back of up to 10 million ordinary shares, representing up to 5.4% of the shares on issue. During the year ended 30 June 2022, the Group bought back and cancelled 626,960 ordinary shares at a total cost of approximately $7,796,000. The shares were acquired at an average price of $12.43 per share, with prices ranging from $11.91 to $12.97. The total acquisition cost, inclusive of after-tax transaction costs, was deducted from contributed equity. The on-market buy-back program has a proposed end date of 3 April 2023. MFG 2027 Options On 14 April 2022, each eligible shareholder received one option for every eight ordinary shares held at 7 April 2022 for nil consideration. A total of 23,218,530 options were issued by the Company. The options are listed on the ASX (ASX code: MFGO) with an exercise price of $35.00. Each option entitles the holder to acquire one ordinary share in the company and is exercisable at any time prior to their expiry date at 5pm (Sydney time) on 16 April 2027. The options are not entitled to dividends, and ordinary shares issued on exercise of the options rank equally with all other ordinary shares from the date of issue. Ordinary shares issued on exercise of the options are only entitled to receive a dividend if such shares have been issued on or prior to the applicable record date for determining entitlements. Employee Options Information relating to the MFG Limited Employee Share Option Plan, including details of the options issued and lapsed during the financial year and options outstanding at the end of the reporting period, is set out in note 18. 17. Reserves Profits reserve Opening balance at 1 July Transfer from retained earnings Payment of dividends Closing balance at 30 June Share-based payments reserve Opening balance at 1 July Recognised in employee expenses Closing balance at 30 June Foreign currency translation reserve Opening balance at 1 July Recognised in other comprehensive income Closing balance at 30 June Total reserves Profits Reserve 30 June 2022 $'000 30 June 2021 $'000 345,089 382,323 (414,179) 313,233 356,925 388,907 (400,743) 345,089 - 1,283 1,283 (102) 3,344 3,242 - - - 3,382 (3,484) (102) 317,758 344,987 The profits reserve consists of profits transferred from MFG's accumulated retained profits that are preserved for future dividend payments. The profits reserve will reduce when dividends are paid from this reserve. Share-based Payments Reserve The share-based payments reserve is used to recognise the fair value of options issued to employees under the MFG Limited Employee Share Option Plan over the vesting period (refer to note 18). Magellan Financial Group Limited | Annual Report 2022 Page 71 Notes to the Financial Statements For the year ended 30 June 2022 Foreign Currency Translation Reserve The foreign currency translation reserve comprises foreign exchange differences arising from translation of the financial statements of the Group's US-based operations to Australian dollars. 18. Employee Share Option Plan During the financial year, the Magellan Financial Group Limited Employee Share Option Plan ("ESOP") was established as part of broader employee engagement and retention program. Participation in the ESOP is at the Board's discretion and no individual has a contractual right to participate or to receive any guaranteed benefits. Under the ESOP, participants have been granted options which vest on 1 September 2024 provided the participant has not given or been given notice of termination of their employment. Once vested, the options may be exercised until 16 April 2027 provided the participant remains employed with satisfactory performance. Options are granted under the ESOP for no consideration and carry no dividend or voting rights. If exercised, each option is converted into one ordinary share at an exercise price of $35.00 per option. On exercise of their options, participants can pay the exercise price in cash and be issued an equivalent number of MFG shares or, alternatively, can elect to set off the total applicable exercise price against the market value of the equivalent number of shares which they are entitled to receive on exercise ("cashless exercise"). Under a cashless exercise, the market value of the shares is calculated as the volume weighted average MFG share price in respect of the 10 trading days ending on the day before the exercise date.The number of shares issued to a participant who elects the cashless exercise alternative will be equivalent in value to the number of options exercised, multiplied by the excess of the market value over the $35.00 option exercise price. Set out below is a summary of options granted under the ESOP: Outstanding at 1 July 2021 Granted Lapsed Outstanding at 30 June 20221 Exercisable at 30 June 2022 Number of options Weighted average exercise price - 8,327,500 (125,000) 8,202,500 - - $35.00 $35.00 $35.00 - 1 The options outstanding at 30 June 2022 have a contractual life of 4.8 years. Fair Value The assessed fair value at grant date of options granted during the year ended 30 June 2022 was $1.512 per option (June 2021: nil). The fair value at grant date was independently determined using a binomial tree model under the Black-Scholes-Merton framework that takes into account the exercise price, the term of the option, the share price at grant date, price volatility of the underlying share, dividend yield and the risk-free interest rate for the term of the option. The model inputs for options granted during the year ended 30 June 2022 include: Grant date Expiry date Share price at grant date Exercise price Expected share price volatility1 Expected dividend yield Risk-free interest rate Assumption 11 April 2022 16 April 2027 $16.62 $35.00 42.0% 7.6% 2.9% 1 Expected price volatility is based on historic volatility over a period commensurate with the remaining life of the options, adjusted for the impacts of extraordinary periods of volatility not expected by the Directors to occur in the future. Classification and Measurement Over the vesting period, the fair value of the options is recognised as an employee expense within the Consolidated Statement of Profit or Loss and Comprehensive Income, with a corresponding entry recognised in the share-based payments reserve within equity. Where an option holder ceases to be an employee before the option has vested, the cumulative employee expense recognised in previous periods is reversed. There is no reversal of employee expense for vested options that subsequently lapse or expire unexercised. Magellan Financial Group Limited | Annual Report 2022 Page 72 Notes to the Financial Statements For the year ended 30 June 2022 The total share-based payment expense recorded in respect of options issued under the ESOP for the year ended 30 June 2022 is $1,283,000 (June 2021: nil). 19. Dividends Cents per share Franking %1 Total $'000 Date Paid During the year ended 30 June 2022 Prior year final dividend paid Prior year performance fee dividend paid Total prior year final and performance fee dividend paid Interim dividend paid Total dividends declared and paid during the year2 During the year ended 30 June 2021 Prior year final dividend paid Prior year performance fee dividend paid Total prior year final and performance fee dividend paid Interim dividend paid Total dividends declared and paid during the year2 102.6 11.5 114.1 110.1 224.2 91.6 30.4 122.0 97.1 219.1 75% 75% 75% 75% 75% 75% 188,573 23 September 2021 21,136 23 September 2021 209,709 204,470 414,179 166,969 55,413 222,382 178,361 400,743 8 March 2022 26 August 2020 26 August 2020 25 February 2021 1 At the corporate tax rate of 30%. 2 Includes dividends of $2,892,000 which were not paid in cash but rather applied directly against the balances of SPA loans (June 2021: $2,220,000) (refer to note 10) and a further $29,468,000 which were not paid in cash as they were delivered in shares in relation to the DRP participation (June 2021: nil). Dividend Declared On 17 August 2022, the Directors declared a total dividend of 68.9 cents per ordinary share (80% franked at the corporate tax rate of 30%) in respect of the six months to 30 June 2022 (June 2021: 114.1 cents per ordinary share 75% franked). The dividend comprises a Final Dividend of 65.0 cents per ordinary share and a Performance Fee Dividend of 3.9 cents per share (June 2021: Final Dividend of 102.6 cents per ordinary share and a Performance Fee Dividend of 11.5 cents per ordinary share). A dividend payable to shareholders of the Company is only recognised for the amount of any dividend declared by the Directors on or before the end of the financial year, but not paid at reporting date. Accordingly, the Final Dividend and Performance Fee Dividend for the six months to 30 June 2022 totalling approximately $127,526,000 are not recognised as liabilities and will be paid on 6 September 2022. Imputation Credits The Group has a total of $39,363,000 imputation credits available for subsequent reporting periods based on a tax rate of 30% (June 2021: $46,375,000 at a 30% tax rate). The amount comprises the balance of the imputation account at the end of the reporting period, adjusted for franking credits that will arise from the payment of income tax liabilities after the end of the year. The dividend declared by the Directors on 17 August 2022 will be partially franked out of existing franking credits, or out of franking credits arising from the payment of income tax. Magellan Financial Group Limited | Annual Report 2022 Page 73 Notes to the Financial Statements For the year ended 30 June 2022 20. Subsidiaries Country of incorporation/ Principal place of business % equity interest1 30 June 2022 30 June 2021 Magellan Asset Management Limited Magellan FuturePay Pty Limited2 Magellan Capital Partners Pty Limited Magellan Capital Partners No. 2 Pty Limited3 Magellan Capital Partners No. 3 Pty Limited3 Magellan Capital Partners No. 4 Pty Limited3 MFG Services LLC4 Frontier North American Holdings Inc.5 Frontier Partners Inc. Frontegra Strategies LLC Frontegra Asset Management Inc. MFG High Conviction Master Fund GP LLC Australia Australia Australia Australia Australia Australia United States of America United States of America United States of America United States of America United States of America United States of America 100 100 100 100 100 100 100 80 100 100 100 100 100 100 100 100 100 - 100 80 100 100 100 100 1 The proportion of ownership interest is equal to the proportion of voting power held. 2 Magellan FuturePay Pty Limited (formerly MRTF Pty Limited) is the corporate trustee of FuturePay Support Trust. 3 Magellan Capital Partners No. 2 Pty Limited, Magellan Capital Partners No. 3 Pty Limited and Magellan Capital Partners No. 4 Pty Limited have share capital consisting solely of ordinary shares that are held wholly and directly by MFG, which also holds all the voting rights. 4 MFG Services LLC ("MFGS") is a service company and provides MAM with investment research and distribution services. 5 Frontier North American Holdings Inc. ("FNAH") is the US holding company of the Frontier Group. FNAH is 20% owned by a former shareholder of the Frontier Group. MFG has a call option over the remaining 20% of the issued share capital of FNAH, the acquirer of the Frontier Group and a controlled entity of MFG. The minority shareholder of FNAH, Mr Bill Forsyth, holds a put option over his interest in the issued share capital of FNAH. The options can be exercised by either party during the period 1 January 2026 to 31 March 2026, at an exercise price based on a multiple of annualised average earnings for a specified period. In addition to the above, MFG holds a further call option to purchase the remaining 20% of the issued share capital of FNAH for $1. This option can be triggered at any time prior to 31 December 2025 in certain circumstances. At the date of this report, the Group has no expectation that this call option would be triggered. The Group has determined that it has a present ownership interest in the non-controlling interest of FNAH. Inset names in the previous table indicate that shares are held by the company listed immediately above. All material subsidiaries have a 30 June reporting date. Transactions between MAM and foreign entities are subject to transfer pricing arrangements. The Group’s investments in other entities are set out in notes 7 and 8. Key Judgement Certain subsidiaries of the Group provide fiduciary and/or investment management services to funds in which the Group holds an economic interest. Such interests are not considered to be interests in controlled entities and consequently have been recognised in the Consolidated Statement of Financial Position as financial assets held at fair value through profit or loss. This classification involves the use of judgement in assessing whether the Group controls each relevant fund, including consideration of the nature and significance of various factors such as the exposure of the Group to variability of returns, compensation to which Group entities are entitled, the scope of the Group entities' decision-making authority and the rights held by third parties to remove the Group entities as Responsible Entity/Trustee or Investment Manager. Principles of Consolidation The consolidated financial report of the Group comprises the financial statements of the Company and its subsidiaries. Subsidiaries are entities over which the Group has the power to govern the financial and operating policies, is exposed to variable returns from its involvement in the entity and has the ability to affect those returns. Assets, liabilities, income and expenses of a subsidiary are included from the date the Group gains control until the date control ceases. All inter-entity assets, liabilities, equity, income, expenses and cash flows relating to transactions within the Group are eliminated in full on consolidation. When necessary, adjustments are made to the results of subsidiaries to bring them into line with the Group’s accounting policies. Foreign Subsidiaries On consolidation, the assets and liabilities of foreign subsidiaries whose functional currency differs from the presentation currency are translated into Australian dollars at the rate of exchange at reporting date. Exchange differences arising on translation are recognised in comprehensive income and accumulate in the foreign currency translation reserve within equity. On disposal of a foreign subsidiary, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the Consolidated Statement of Profit or Loss and Comprehensive Income. Magellan Financial Group Limited | Annual Report 2022 Page 74 Notes to the Financial Statements For the year ended 30 June 2022 21. Related Parties Magellan Financial Group Limited is the ultimate parent entity of the Group. The related parties of the Group include its subsidiaries, associates, key management personnel ("KMP"), close family members of KMP and any entity controlled by those entities. Transactions with Related Parties Management and performance fees from investment funds managed by subsidiaries of the Group are set out in note 4. Transactions with associates are set out in note 8. Other transactions that occurred between entities of the Group are fully eliminated on consolidation of the Group and include: Revenue recognised by parent entity Dividends1 Reimbursed expenses Expenses recognised by parent entity Expense reimbursements Equity contributions (from)/to subsidiaries Cash Non-cash Transactions between subsidiaries at international transfer prices Service fees and recharged expenses 30 June 2022 $'000 30 June 2021 $'000 411,795 300 495,474 253 38 20 (94,604) - 205,011 66,033 25,068 24,907 1 Comprising dividends from MAM of $388,000,000 and MCP3 of $23,795,000 (June 2021: $495,000,000 from MAM and $474,000 from MFGS). All transactions with related parties are conducted on standard commercial terms and conditions. Receivable and payable balances at year end are unsecured and will be settled in cash. No guarantees have been given or received between entities in the Group. KMP Remuneration Short-term benefits Salary Cash bonus Post-employment benefits Termination benefits Long-term benefits Share-based payments Other benefits Total remuneration paid to KMP 30 June 2022 $'000 30 June 2021 $'000 5,754 3,576 144 2,903 201 35 910 13,523 5,766 4,525 134 - 82 - 461 10,969 The KMP of the Group are listed in section 3.1 of the Remuneration Report and the remuneration of each KMP is included in section 3.5 of the Remuneration Report. Magellan Financial Group Limited | Annual Report 2022 Page 75 Notes to the Financial Statements For the year ended 30 June 2022 22. Financial Instrument Risk Management The Group's operating and investing activities expose it to various forms of financial instrument risk including: • • • the risk that money owed to the Group will not be received (credit risk); the risk that the Group may not have sufficient cash available to pay its creditors as they fall due (liquidity risk); and the risk that the value of financial assets and liabilities will fluctuate as a result of movements in factors such as market prices, interest rates and foreign exchange rates (market risk). The Board has an approved risk management framework including policies, procedures and limits and uses different methods to measure and manage these risks that are discussed in detail throughout this note. The Group's primary exposure to financial instrument risk is derived from the financial instruments that it holds as principal. In addition, due to the nature of the business, the Group's exposure extends to the impact on investment management and other fees that are determined as a percentage of funds under management and are therefore impacted by the financial instrument risk exposures of the Group's clients. This note deals only with the primary exposure of the risks from the Group's holding of financial instruments and not the secondary exposure impacting the Group's revenue. The investment portfolios of funds managed by MAM are monitored on a daily basis in accordance with the investment objectives and mandates of those funds. Further details of the risk management objectives and policies applied in respect of the Group's managed funds can be found in their product disclosure statements (“PDS”) and in the case of the Frontier MFG Funds, in their prospectuses. Credit Risk Credit risk refers to the risk that a counterparty will fail to meet its contractual obligations resulting in financial loss to the Group. Market prices generally take counterparty credit into account and therefore the risk of loss is implicitly provided for in the carrying value of financial assets and liabilities held at fair value. The Group’s maximum exposure to credit risk is the carrying amount of all cash and cash equivalents, financial assets, receivables and SPA loans recognised in the Consolidated Statement of Financial Position as well as the value of any undrawn loan commitments which are accessible to counterparties at reporting date. Additionally, MAM in its capacity as Trustee and Responsible Entity of the Magellan Funds (as set out in note 2) has appointed The Northern Trust Company (“NT”) as custodian. NT is required to comply with the relevant provisions of the Corporations Act 2001, applicable ASIC regulatory guides and Regulatory Instruments relating to registered managed investment scheme property arrangements with custodians. As at 30 June 2022, the credit quality of NT’s senior debt is rated by Standard and Poor’s as A+ and by Moody’s as A2 (June 2021: A+ and A2 respectively). Cash and Cash Equivalents The Group minimises its credit risk by ensuring cash and term deposits are held with high credit quality financial institutions as determined by a recognised rating agency. As at 30 June 2022, the Group's cash and term deposits were held with major Australian and international banks rated no lower than AA-by Standard & Poor's or Aa3 by Moody's (June 2021: AA- and Aa3, respectively). Financial Assets The Group mitigates its credit risk by ensuring the majority of its financial assets are held with Magellan Funds for which MAM is the Trustee or Responsible Entity. MFG 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 MFG’s investment assets. The IPBA with MLI is in a form that is typical of prime brokerage arrangements. MFG has granted MLI a fixed charge over the Company's right, title and interest in the assets held in custody with MLI, as security for the performance of its obligations under the IPBA. In the event of MLI becoming insolvent, MFG would rank as an unsecured creditor and, to the extent MLI has exercised a right-of-use over MFG’s securities, MFG may not be able to recover such equivalent securities in full. In addition, cash which MLI holds or receives on behalf of MFG 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, MFG would rank as an unsecured creditor and may not be able to recover the cash in full. At 30 June 2022 and 2021, MFG held a negligible cash balance with MLI. Loans and Receivables The Group manages credit risk by regularly monitoring receivables and SPA loan balances. Magellan Financial Group Limited | Annual Report 2022 Page 76 Notes to the Financial Statements For the year ended 30 June 2022 Fee receivables arise as a result of the Group's investment management activities and are typically paid between 15 and 45 days of being invoiced. These counterparties generally do not have an independent credit rating and the Group assesses credit quality taking into account each debtor's financial position, past experience and other available credit risk information. Historically, default levels have been insignificant and unless a client has withdrawn its funds, there is an ongoing relationship between the Group and the client. SPA loans are secured by the MFG shares issued to participants under the SPA as well as MFG 2027 Options issued to SPA participants in respect of those shares. Additionally, whilst the SPA loan is outstanding, the Group is entitled to both the dividends received from the secured shares and 100% of the after-tax cash retention bonuses paid to employees in September 2024 and September 2025. The Group's credit exposure is therefore limited to any shortfall represented by the difference between the face value of SPA loans and the aggregate value of the MFG shares, MFG 2027 Options, dividends and after-tax cash retention bonuses securing those loans for each SPA participant. At 30 June 2022, the total SPA loan shortfall was $11,614,000 (June 2021: $nil). As the SPA loans are full recourse, the Group is entitled to recover any shortfall from the SPA participant. Expected credit losses ("ECL") are estimates of the shortfalls expected to result from defaults over the relevant timeframe. Given the long-term nature of the SPA loans, the Group estimates ECLs over the life of the financial instruments. For an SPA loan the ECL is calculated by multiplying the shortfall amount to which the Group is exposed by the assessed probability of default. As there has never been an historical default of an SPA loan, the Group determines the default probabilities to apply to SPA loans having regard to the default probabilities published by the major Australian banks in respect of retail lending. At 30 June 2022, the Group applied probabilities of default to its SPA loans ranging from 2.5% to 4% (June 2021: 2.5% to 4%) resulting in an aggregate recognised allowance for ECLs of $375,000 (June 2021: nil). For each 1% increase in the applied probability of default, the Group's total allowance for ECLs would increase by $116,000. Undrawn Loan Commitments The Group has provided Barrenjoey with up to $50,000,000 of working capital finance under an unsecured revolving facility that matures in September 2023. Liquidity Risk Liquidity risk is the risk that the Group may not be able to meet its financial obligations in a timely manner or may be forced to sell financial assets at a value which is less than their worth. The Group manages liquidity risk by monitoring rolling cash flow forecasts in order to maintain sufficient cash reserves to meet future obligations and regulatory capital requirements. Additionally, the Group has access to an undrawn credit facility (discussed below) and liquid equity investments held in the Fund Investments portfolio. As at 30 June 2022, the Group had an obligation to settle trade creditors and other payables of $15,478,000 (June 2021: $13,043,000) within 30 days (refer to note 12). A further obligation of $18,483,000 (June 2021: $11,576,000) is payable between 30-150 days for the Group’s tax instalment and final income tax payment. On 6 September 2022, $127,526,000 is expected to be paid in respect of the Final and Performance Fee dividend (refer to note 19). Finally, the Group's obligation to fund the discount offered on MGF options (refer to note 14) is classified as a current liability because the Group has no control over when options might be converted by the holders of those instruments. The Group had cash of $419,922,000 (June 2021: $211,577,000) and a further $64,654,000 (June 2021: $114,122,000) of receivables to cover these liabilities. The Group's reported current assets of $489,560,000 and current liabilities of $201,296,000 result in a net current asset surplus of $288,264,000. Accordingly, the Group has sufficient liquid funds and current assets to meet its current liabilities. The Group has access to a $150,000,000 floating rate facility provided by a major Australian bank which may be drawn at any time up to 19 February 2024. During the year, the borrowing capacity under the facility was reduced from $210,000,000 following an assessment by management of the level of financial support deemed necessary to meet the Group's obligations under the MGF Partnership Offer and commitment to Magellan FuturePay. Commitment fees apply when the facility is undrawn. For the year ended 30 June 2022, these commitment fees amounted to $1,680,000 (June 2021: $2,135,000) and were recognised within finance costs. At 30 June 2022, the facility was undrawn and all financial covenants were complied with during the year. Magellan Financial Group Limited | Annual Report 2022 Page 77 Notes to the Financial Statements For the year ended 30 June 2022 Market Risk The value of the Group's financial assets and liabilities is exposed to movements in market prices, foreign exchange rates and interest rates. Price Sensitivity The value of investments held in the Fund Investments portfolio (refer to note 7) changes as a result of movements in equity prices in local currency (caused by factors specific to the individual stock or the market as a whole), exchange rate movements, or a combination of both. Additionally, certain financial liabilities held by the Group change as a result of movements in the estimated unit prices of the funds to which they relate. Over the past 10 financial years, the annual performance of the MSCI World Net Total Return Index has ranged between +39% and -14% (in USD) and +33% and -6% (in AUD). The past performance of markets is not always a reliable guide to future performance, and MFG’s Fund Investments portfolio does not attempt to mirror the global indices, however this wide range of historic movements in the indices provides an indication of the magnitude of equity price movements that could occur within the portfolio. For illustrative purposes, an increase of 10% in market prices would have had the following impact on the recorded value of the Group's financial instruments: Financial assets at fair value through profit or loss Financial liabilities at fair value through profit or loss Impact on net profit after tax/other comprehensive income and equity 30 June 2022 $'000 30 June 2021 $'000 26,561 (7,101) 19,460 31,677 (12,493) 19,184 A decrease of 10% in market prices would have an equal but opposite impact on net profit, comprehensive income and equity. Foreign Exchange Sensitivity The Group holds the following types of financial assets and liabilities for which fair value changes arise as a result of movements in foreign exchange rates: • • Cash and term deposits denominated in a foreign currency; Financial assets denominated in a foreign currency (refer to note 7) as well as related dividend/distribution receivables and outstanding settlements for sales/purchases; • Management and performance fees receivable denominated in a foreign currency; and • Payables denominated in a foreign currency. The Group’s foreign currency transactions are primarily conducted in the following currencies: Australian dollars, United States dollars, British pounds, Euros and New Zealand dollars. For illustrative purposes, if the Australian dollar strengthened by 10% relative to each currency to which the Group had an exposure, with all other variables held constant, the impact on net profit after tax and equity would have been: 30 June 2022 30 June 2021 Increase(decrease) Increase(decrease) Cash and cash equivalents Financial assets Receivables Payables Employee benefits Lease liabilities Total impact on net profit after tax and equity USD $'000 (626) (2,895) (1,694) 132 17 8 (5,058) GBP $'000 Other $'000 (6) (11) (234) 4 - - (247) (15) (42) (1) 18 - 5 (35) USD $'000 (548) (3,503) (674) 74 238 15 (4,398) Magellan Financial Group Limited | Annual Report 2022 GBP $'000 Other $'000 (7) (16) (907) 4 - - (926) (15) (82) (28) 21 - 8 (96) Page 78 Notes to the Financial Statements For the year ended 30 June 2022 A decrease of 10% in the Australian dollar relative to each currency would have an equal but opposite impact on net profit after tax and equity. The Group has indirect exposure to foreign currency via its investment in funds that are denominated in both Australian dollars, such as the Group's Australian funds, and US dollars, such as the Group's international funds (refer to note 2). This is because the underlying investment portfolios of these funds comprise equities predominantly denominated in foreign currencies and with operating exposure to global currencies. As a result, the fair values of these funds are influenced by currency movements. The sensitivity analysis disclosed above disregards the indirect impact of the foreign currency movement on the underlying fund portfolios. In addition to its investments, the Group’s management and performance fees are also indirectly exposed to fluctuations in foreign currency where fees are invoiced in a different currency to the underlying funds under management. As at 30 June 2022, approximately 82% of the Group’s funds under management was exposed to movements in the Australian dollar relative to other currencies (June 2021: 84%). Interest Rate Sensitivity The Group’s primary exposure to interest rate movements relates to its cash and term deposits. Term deposits are of relatively short duration and their fair value would not be materially affected by changes in interest rates. Cash and cash equivalents held by the Group are predominantly held with Australian financial institutions and the value of cash balances is sensitive to the RBA cash rate. The Group does not hold any financial assets or liabilities for which a change in value as a result of interest rate movements would impact on the Group's recorded net profit or equity. Fair Value Disclosures The Group classifies financial assets and liabilities that are measured at fair value into the following three levels, as prescribed under the accounting standards, to provide an indication about the reliability of the inputs used in determining fair value: • • • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. Fair value is based on the closing price of 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. Fair value is estimated using the redemption price provided by the unlisted fund. Level 3: valuation techniques using unobservable inputs such as is required where the Group invests in unlisted entities or unlisted funds which in turn invest in unlisted entities. The table below presents the Group's financial assets and liabilities measured at fair value according to the fair value hierarchy: 30 June 2022 Magellan Fund investments1 Seed portfolios Unlisted entities2 Financial liabilities at fair value through profit or loss Total financial assets and liabilities at fair value 30 June 2021 Magellan Fund investments1 Seed portfolios Financial liabilities at fair value through profit or loss Total financial assets and liabilities at fair value Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 310,361 4,708 - - 315,069 63,674 - - (133,349) (69,675) 364,690 11,065 (454) 375,301 76,768 - (157,093) (80,325) - - 695 - 695 - - - - 374,035 4,708 695 (133,349) 246,089 441,458 11,065 (157,547) 294,976 1 Fair value is determined by reference to the fund’s redemption unit price at reporting date and is categorised in level 2 as inputs into the redemption unit price are directly observable from published price quotations. 2 Comprises a shareholding in an unlisted company for which management has assessed the investment cost to be a reasonable reflection of fair value at reporting date. Magellan Financial Group Limited | Annual Report 2022 Page 79 Notes to the Financial Statements For the year ended 30 June 2022 During the year ended 30 June 2022, there were no transfers between any fair value hierarchy levels (June 2021: the investment in Magellan Global Fund was transferred from level 2 to level 1 as the investment was quoted on the ASX following the completion of a restructure in December 2020). The Group’s policy is to recognise transfers into and out of hierarchy levels as at the end of the reporting period. The fair values of all other financial assets and liabilities approximate their carrying values in the Consolidated Statement of Financial Position. 23. Commitments and Contingent Assets and Liabilities Commitments The Group has extended loan commitments to certain related parties, which remain undrawn at reporting date (refer to note 22). All other commitments relate to non-cancellable payments under short term and low value lease agreements as set out below: Within one year Later than one year but no later than five years More than five years Total Contingent Assets and Liabilities 30 June 2022 $'000 30 June 2021 $'000 21 - - 21 24 7 - 31 The Group has contingent assets and liabilities in respect of the following items: • Dividend Reinvestment Plans of Magellan Funds: In accordance with the terms of a deed entered into with MGF, the Group has agreed to pay MGF an amount equal to the MGF DRP discount. As a result, the Group has a contingent liability where MGF offers a discount to the Net Trust Value per unit on units issued under the MGF DRP in future periods. The quantum of the contingent liability is determined at each MGF distribution date and the amount is currently equal to a 7.5% discount to the NAV per unit multiplied by the number of units participating in the MGF DRP. It is not practical to estimate the future cost to the Group as there is uncertainty as to the level of participation in the MFG DRP, the NAV per unit and whether the MGF DRP will be offered. On 25 August 2021, the Magellan High Conviction Trust transitioned from a closed ended listed investment trust into an open ended active exchange traded fund. As a result, a previous deed between the Group and MHH for the Group to pay MHH an amount equal to the MHH DRP discount was terminated and the MHH DRP discount funding is no longer provided by the Group. For the year ended 30 June 2022 no amount was paid (or payable) by the Group for discounts relating to MGF and MHH DRPs (June 2021: $1,400,000). • Deferred proceeds in respect of GYG divestment: refer to note 8 • Deferred conditional bonuses and cash retention incentives: refer to note 13. Magellan Financial Group Limited | Annual Report 2022 Page 80 Notes to the Financial Statements For the year ended 30 June 2022 24. Parent Entity Information Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity Net profit after income tax expense for the year Total comprehensive income for the year 30 June 2022 $'000 30 June 2021 $'000 353,212 792,123 1,145,335 186,948 937,304 1,124,252 158,729 - 158,729 986,606 672,090 314,516 - 986,606 382,323 382,323 170,939 - 170,939 953,313 608,224 345,089 - 953,313 380,399 380,399 The financial information for the parent entity, Magellan Financial Group Limited, has been prepared on the same basis as the Group’s consolidated financial statements, except for investments in subsidiaries. Investments in subsidiaries are accounted for at cost less impairment expense, in the financial statements of the parent entity. Dividends received from subsidiaries are recognised in the parent entity’s profit or loss rather than being deducted from the carrying amount of the investment. Contingent Assets and Liabilities At 30 June 2022, MFG has a contingent liability in respect of the dividend reinvestment plans of Magellan Funds (refer to note 23). Magellan Financial Group Limited | Annual Report 2022 Page 81 Notes to the Financial Statements For the year ended 30 June 2022 25. Auditor Remuneration and Independence Australia - Ernst & Young Fees for audit and review of statutory financial reports of: MFG Group and controlled entities Magellan Funds in Australia Fees for regulatory audits required to be performed by the auditor Fees for other audit related assurance services1 Fees for other assurance services Fees for other services: Taxation compliance services2 Taxation advisory services3 Total Australia Overseas - Ernst & Young, Plante Moran Fees for audit of statutory financial report of: Frontegra Strategies LLC Magellan Funds in Ireland Fees for other services: Taxation compliance services2 Taxation advisory services4 Total overseas Total auditor remuneration 30 June 2022 $'000 30 June 2021 $'000 175 294 469 9 83 - 151 149 300 861 19 64 83 - 66 66 149 1,010 236 259 495 9 79 118 135 19 154 855 29 65 94 - 63 63 157 1,012 Percentage of total auditor remuneration paid as non-audit fees to the Group's auditors 44.5% 40.9% 1 Comprises various audits (ICR audits, debt covenant audit, compliance plan review, GS007 controls review) required under legislation, regulation or contractual arrangements where the Board determines the auditor is best placed to undertake those audits. 2 Comprises review of income tax returns for both the Group and the Magellan Funds and review of annual unitholder distributions of the Magellan Funds. 3 Comprises of transfer pricing review and withholding tax advice. 4 Comprises assistance with the UK and German tax calculations and lodgements for MFG Investment Fund plc. Independence and Non-Audit Services The Group’s external auditors are Ernst & Young and Plante Moran and the Audit & Risk Committee (“the Committee”) has responsibility for monitoring the independence and objectivity of the external auditors. All auditors confirmed their independence during 2022 and prior to issuing their opinions on financial reports. In addition, no Committee member has a connection with the external auditors. A key factor in ensuring auditor independence is the Committee’s consideration of the non-audit services performed by the auditors. The Committee preserves independence and objectivity by maintaining a policy on the engagement of non-audit services provided by an auditor and restricts the auditor to providing services that are closely related to the audit. Every audit and non-audit service is considered and approved in writing by the Committee, or the Committee’s Chairman acting as a delegate. This is based on a written recommendation from management. There is no delegation of approval provided to management for any engagement provided by the auditor. Particular consideration is also given to where the Group’s auditor also performs services for its associates and/or key third party providers, for example fund administrators and custodians. Where this occurs, the Group ensures the signing audit partner is not common to both parties. Approval is provided before work commences and reported to the Committee at the next scheduled meeting along with details regarding the nature of service, quantum of fee and projected total non-audit fees for the financial year. This is undertaken in addition to the auditor confirming that no prohibited non-audit services have been provided. The Committee considers there may be circumstances where the auditor may hold specific expertise, know-how or company knowledge which provides a compelling benefit to the Group through its appointment. In the current and prior financial year, non-audit Magellan Financial Group Limited | Annual Report 2022 Page 82 Notes to the Financial Statements For the year ended 30 June 2022 services provided by Ernst & Young were routine tax services, namely the review of the Group’s income tax returns and annual distributions of the Magellan Funds, ad hoc assistance with lodging foreign withholding tax registrations in Taiwan and routine tax surveillance reviews. The view was that Ernst & Young’s appointment in fact offered greater risk management by providing a higher level of detection of risks or errors given its holistic and detailed understanding of the Group and current issues along with the tax partner being an industry leader. Other non-audit services not required by regulation mainly comprises assurance services in respect of a review of controls and compliance plan and an audit of the indirect cost ratios for the Magellan Funds. The Committee considered these services were most appropriately performed by Ernst & Young as they support the statutory audits as well as provide the external auditor with relevant insights on aspects of the Group’s Australian business and are not considered to present a risk to auditor independence. It is important to note that the Magellan Funds do not incur audit or non-audit fees and therefore unitholders of the Magellan Funds do not incur this additional cost. Rather those fees are paid by the Responsible Entity of the Funds, MAM, a wholly owned entity of the Group. As a result, this significantly increases non-audit fees reported by the Group and these will continue to increase in future years when new funds are launched or the negotiated fee rate increases. Subject to the Group’s external auditors maintaining independence, the Committee considers it is most important to ensure that the highest level of risk management is provided to the Group and, where possible, that the services are delivered efficiently for the benefit of the Group’s shareholders. The Committee does not view auditor independence as a binary matter and therefore does not believe a fixed 50% threshold of non-audit fees exceeding total audit fees is the only relevant consideration when determining if non-audit services are excessive and, by inference, whether auditor independence is at risk. Oversight of External Auditors A key part of the Committee’s work consists of overseeing the relationship with the Group’s external auditors, including safeguarding independence and approving non-audit fees and their appointment. Ernst & Young was appointed external auditor of the Australian entities and Irish funds in 2008. The external audit was last put out to tender in 2018, which aligned to the auditor’s 10 year anniversary, and Ernst & Young was reappointed auditor as it scored highest across all requirements and the Board was satisfied that appropriate safeguards were in place to ensure the required independence of Ernst & Young. The next external audit tender will take place within 10 years of Ernst & Young's re-appointment. Ms Clare Sporle has served as lead audit partner since August 2019. In accordance with the Corporations Act 2001, the next rotation of the lead partner is planned to occur after the completion of the 30 June 2024 financial year audit. In 2012, Plante Moran was appointed auditor of a US subsidiary, Frontegra Strategies Inc., and an audit tender will occur in 2022, in line with the 10 year anniversary. As there is no contracted tenure with the Group’s external auditors, an audit tender can be called at any time. Magellan Financial Group Limited | Annual Report 2022 Page 83 Notes to the Financial Statements For the year ended 30 June 2022 26. Subsequent Events Other than the items noted below, 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 results of those operations or the state of affairs of the Group in subsequent financial periods. Final Dividend and Performance Fee Dividend Refer to note 19 for details of the dividend declared in respect of the six months ended 30 June 2022. Magellan FuturePay Closure On 12 July 2022 the Group announced the termination of Magellan FuturePay which took effect on 20 July 2022 (“Closure Date”). Investors in Magellan FuturePay on the Closure Date received a final payment comprising their pro-rata share of the net proceeds on wind-up. Investors who would otherwise have received less than their original investment, after taking into account distributions received, also received an ex gratia payment from the Group. The total ex gratia payment funded by the Group was $88,000. The final distribution was paid to investors on 27 July 2022. Due to the closure of the fund, the Group has been released from the following financial obligations: • • The commitment to provide up to $50,000,000 to assist Magellan FuturePay capitalise the FuturePay Support Trust was terminated with effect from the Closure Date. At the date of termination, the unutilised portion of the commitment was $48,567,000. The funding facility extended to Magellan FuturePay by the Group was terminated with effect from 12 July 2022. At no time during the financial period was the funding facility utilised. Funds Under Management On 4 August 2022, the Group reported to the ASX that its funds under management was $60.2 billion as at 29 July 2022. Magellan Financial Group Limited | Annual Report 2022 Page 84 Directors’ Declaration For the year ended 30 June 2022 In the Directors’ opinion, a. the financial statements and notes set out on pages 45 to 84 are in accordance with the Corporations Act 2001, including: i. ii. giving a true and fair view of the Group’s financial position as at 30 June 2022 and of its performance for the year ended on that date; and complying with Accounting Standards, the Corporations Regulations 2001, International Financial Reporting Standards as disclosed in note 1 and other mandatory professional reporting requirements; and b. there are reasonable grounds to believe that 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 year ended 30 June 2022. This declaration is made in accordance with a resolution of the Directors. Hamish McLennan Chairman Sydney 17 August 2022 Magellan Financial Group Limited | Annual Report 2022 Page 85 Magellan Financial Group Limited | Annual Report 2022 Page 86 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Independent auditor’s report to the members of Magellan Financial Group Limited Report on the audit of the financial report Opinion We have audited the financial report of Magellan Financial Group Limited (the Company) and its subsidiaries (collectively, the Group), which comprises the consolidated statement of financial position as at 30 June 2022 and the consolidated statement of profit or loss and comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a. Giving a true and fair view of the consolidated financial position of the Group as at 30 June 2022 and of its consolidated financial performance for the year ended on that date; and b. Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the audit of the financial report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the Magellan Financial Group Limited | Annual Report 2022 Page 87 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. 1. Management and performance fee revenue Why significant How our audit addressed the key audit matter The Group’s key revenue streams are management and performance fees earned by Magellan Asset Management Limited (MAM), a consolidated subsidiary, through the investment management agreements in place with third parties and Magellan Funds. For the year ended 30 June 2022, management fees were $588,594,000 and performance fees were $11,472,000 which equates to 106.3% and 2.1% of total revenue and other income respectively. Revenue from management and performance fees is earned and calculated in accordance with the Investment Management Agreements and Constitutions of the funds. Performance fees, however, are dependent on the portfolio outperforming certain hurdles and are only recognised in the statement of profit or loss and comprehensive income when MAM’s entitlement to the fee is highly probable, which is at the end of the relevant performance period. Due to the quantum of these revenue streams and the impact that the variability of market-based returns can have on the recognition and earning of performance fees, this was considered a key audit matter. Disclosures relating to these revenue streams are included in Note 4 to the financial report. Our procedures included: • Recalculating management fees, on a sample basis, in accordance with contractual arrangements; • Assessing the performance fees recognised for the period to 30 June 2022 from funds and mandates, on a sample basis, and assessing whether they met the relevant recognition criteria. This included assessing the inputs into the calculation model, its clerical accuracy and examining the methodology applied in accordance with contractual arrangements; and • Assessing the adequacy of the disclosures in Note 4 to the financial report in accordance with Australian Accounting Standards. Magellan Financial Group Limited | Annual Report 2022 Page 88 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 2. Investments in associates Why significant How our audit addressed the key audit matter The Group classifies investments in entities over which it has significant influence as associates in the statement of financial position and applies equity method accounting in line with AASB 128 Investments in Associates and Joint Ventures. The Group’s associates account for 13.1% of total assets. The Group recognised a gain of $17,002,000 on dilution of its interest in an associate and a gain of $33,655,000 on disposal of its interest in an associate. Together with the equity accounted profits this made up 11.9% of the Group’s net profit before tax. The Group’s accounting for its associates, including the determination that the Group has significant influence over the entities, equity method accounting and impairment assessments was considered a key audit matter due to the quantitative impact on the Group’s financial statements. Our procedures included: • Evaluating the Group’s assessment of significant influence over the investments, and the accounting treatment and presentation thereon; • Testing the appropriateness of the equity accounting for the Group’s investments in associates. We issued audit instructions to associate’s auditors covering matters significant to the Magellan audit. We performed a review of the auditor’s final report to assess whether procedures were performed in line with instructions and the conclusion reached was appropriate for the purposes of our audit; • Assessing the gain on dilution of the Group’s interest in an associate by confirming the change in shareholding and the value of the dilutive share issuance with the associate’s auditor; • Assessing the gain on disposal of an associate by obtaining the relevant transaction agreements, agreeing the cash movement to bank statements, and recalculating the gain; • Evaluating the Group’s assessment of impairment indicators relating to their investments in associates; and • Assessing the adequacy of the disclosures in Note 8 and Note 21 in accordance with Australian Accounting Standards. 3. Investment existence and valuation Why significant How our audit addressed the key audit matter The Group has a significant investment portfolio consisting of listed equities and investments in Magellan Funds. As at 30 June 2022, the value of these non-current financial assets, as shown Our procedures included: • Obtaining and considering the assurance reports on the controls of the Group’s administrator in relation to investment Magellan Financial Group Limited | Annual Report 2022 Page 89 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation in Note 7 to the financial report was $379,438,000, which equates to 30.6% of the total assets held by the Group. As described in Note 7 to the financial report, the Group’s investments are classified as ‘financial assets at fair value through profit or loss’ (“FVTPL”) in line with AASB 9 Financial Instruments. Pricing, exchange rates and other market drivers can have a significant impact on the value of these financial assets and the financial report, therefore the valuation of the investment portfolio was a key audit matter. management services and considering the auditor’s opinion, their objectivity and the results of their procedures; • Agreeing all investment holdings to third party sources at 30 June 2022; • Agreeing the fair value of investments in the portfolio held at 30 June 2022 to independent pricing sources for listed securities/funds. For unlisted funds, on a sample basis, we agreed the investment prices to available redemption information; and • Assessing the adequacy of the disclosures in Note 7 and Note 22 to the financial report in accordance with Australian Accounting Standards. 4. Goodwill impairment assessment Why significant How our audit addressed the key audit matter Goodwill has been recognised as a result of the Group’s historical acquisitions, representing the excess of the purchase consideration over the fair value of assets and liabilities acquired. On acquisition date, the goodwill has been allocated to the applicable Cash Generating Units (“CGUs”). The group has goodwill of $105,288,000 as at 30 June 2022. Goodwill must be tested for impairment on at least an annual basis. The determination of recoverable amount requires judgement on the part of management in both identifying and then calculating the value of the relevant CGUs. Recoverable amounts are based on management’s view of variables and market conditions such as future price and assets under management growth rates, the timing of future operating expenditure, and the most appropriate discount and long-term growth rates. As such it was considered a key audit matter. Our audit procedures included the following: • Assessing the Group’s determination of the CGUs to which goodwill is allocated; • Assessing the methodology used in the impairment model to calculate the recoverable amount of each CGU; • Agreeing the projected cash flows used in the impairment models to the Board approved plan of the Group; • Comparing the Group’s implied growth rate assumption to comparable companies; • Considering the accuracy of historical cash flow forecasts; • Assessing the methodology and assumptions used in the determination of the discount rate, including comparison of the rate to market benchmarks; • Testing the mathematical accuracy of the impairment model for each CGU; • Considering the Group’s sensitivity analysis and evaluating whether any reasonable foreseeable change in assumptions could lead to a material impairment; and • Assessing the adequacy of the disclosures in Note 9 in accordance with Australian Accounting Standards. Magellan Financial Group Limited | Annual Report 2022 Page 90 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Information other than the financial report and auditor’s report thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2022 annual report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ► Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Magellan Financial Group Limited | Annual Report 2022 Page 91 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation ► Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. ► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. ► Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. ► Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. ► Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. For the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosures about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communications. Report on the audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 22 to 42 of the directors’ report for the year ended 30 June 2022. Magellan Financial Group Limited | Annual Report 2022 Page 92 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation In our opinion, the Remuneration Report of Magellan Financial Group Limited for the year ended 30 June 2022 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Clare Sporle Partner Sydney 17 August 2022 Corporate Sustainability and Responsibility Report For the year ended 30 June 2022 Magellan is committed to acting responsibly and ethically in all areas of its business. Magellan seeks to engender a culture of building trust with everyone who does business with the Group. Responsible Investment Magellan is committed to responsible investment and became a signatory to the United Nations supported Principles of Responsible Investment (“PRI”) in March 2012. The PRI is the globally recognised accord for responsible investing. Magellan’s Responsible Investment Principles, which are available on the Group’s website, outline and summarise Magellan’s approach to responsible investing, ESG integration, engagement and proxy voting. Environmental, Social and Governance (“ESG”) issues are considered to be a natural component of Magellan’s investment process, as gaining a robust understanding of these issues is a key part to assessing the outlook for future cash flow generation and risks facing investors. Magellan’s investment process seeks to identify high quality companies and places lower value on pro-cyclical companies in the resource, materials and oil and gas sectors. This approach is a natural filter which tends to reduce exposure to carbon intensive companies and material ESG issues. The Magellan Investment Team’s research reports also include a discussion of climate change risks and opportunities facing companies, if material, and includes a company’s emissions intensity. Magellan maintains an ESG Policy, which outlines how ESG issues are incorporated into Magellan’s investment analysis framework and investment process. In September 2016, Magellan launched the first of a series of Sustainable investment strategies that implement a proprietary low carbon overlay. Magellan believes it is highly likely that the world will move further towards addressing climate change risks by reducing carbon emissions. Climate change is therefore an increasingly important issue for global companies and investors, with the potential to affect profoundly business models through government regulation (e.g. carbon pricing), technology and changes in consumption patterns. Importantly, there are also significant opportunities for companies to profitably deploy capital into areas that meet the needs of a decarbonising world. These factors directly and indirectly impact the relative cost of companies’ products and services, customer demand and pricing power. Magellan’s Sustainable strategies provide investors with a high quality, attractive risk-adjusted return-focused portfolio with materially lower carbon factor risk than global markets. As a long-term investor, Magellan is committed to engaging with portfolio companies on material ESG matters. During the financial year ended 30 June 2022, Magellan engaged with many portfolio companies on a number of material ESG topics. These are summarised in the table below: Strategy1 Global High Conviction Core International Sustainable Core ESG Select Infrastructure Core Infrastructure Engagement (#S) Engagement (% ESG Discussed) Portfolio (% Companies Engaged on ESG) Climate Change Diversity, Equity & Inclusion Social Licence Labour Mgmt2 Responsibility for Content & Data Privacy Governance ~400 ~400 ~400 ~300 ~300 ~300 ~300 62% 62% 69% 59% 59% 79% 79% 88% 100% 60% 94% 59% 97% 54% 47% 54% 35% 53% 32% 88% 47% 44% 46% 26% 31% 23% 21% 12% 21% 15% 13% 25% 10% 65% 31% 24% 31% 17% 17% 16% 32% 16% 15% 38% 8% 14% 10% 0% 1% 85% 100% 50% 92% 45% 79% 42% 1 The level of engagement reflects the importance of a particular risk to the company and sub-industry. In addition, the level of engagement on ESG issues is also considered in the context of the relative size of Magellan’s investment. Including supply chain management 2 Magellan Financial Group Limited | Annual Report 2022 Page 93 Corporate Sustainability and Responsibility Report For the year ended 30 June 2022 Magellan considers proxy voting rights as an important power which, if exercised diligently, can enhance client returns. Magellan believes these should be managed with the same care as any other asset managed on behalf of its clients. Magellan maintains a Proxy Voting Policy and a set of Corporate Governance Principles which outline its approach to proxy voting and engagement with portfolio companies. A summary of proxy voting for the period ended 30 June 2022 is provided below: Category1 Board Related (1,530) Compensation (319) Shareholder Proposals (114): - Environmental (12) - Social (59) - Governance (43) Capital Management (130) Audit/Financials (329) Other (122) With Management Against Management 98% 88% 78% 58% 85% 74% 94% 95% 92% 2% 12% 22% 42% 15% 26% 6% 5% 8% 1 Statistics based on ballots that are not subject to re-registration requirements. In addition, Magellan’s Australian Equities business, Airlie Funds Management, also maintains a set of Responsible Investment Principles, an ESG Policy and a Proxy Voting Policy which outline how the Airlie Investment Team integrate ESG risks and opportunities into their investment decision making and how it acts as a responsible owner by engaging with portfolio companies and voting proxies. Consideration of ESG issues is a component which is implicit in Airlie’s investment philosophy and selection process with the aim to account for all relevant ESG issues in the same balanced way it does other key risks facing a company. These policies can be found on the Airlie website: www.airliefundsmanagement.com.au. Airlie recognises corporate governance is an important part of share ownership and that Airlie has a responsibility to act with the best interests of clients in mind. One way Airlie represents its clients in matters of corporate governance is through the proxy voting process. A summary of Airlie’s proxy voting for the period ended 30 June 2022 is provided below: Category1 Board Related (169) Compensation (135) Shareholder Proposals (23): - Environmental (9) - Social (7) - Governance (7) Capital Management (18) Audit/Financials (13) Changes to Company Statutes (16) Other (6) With Management Against Management 97% 87% 91% 100% 86% 86% 100% 100% 81% 100% 3% 5% 9% 0% 14% 14% 0% 0% 19% 0% 1 May not add to 100% as Management do not provide a recommendation for all resolutions. Environment Magellan understands the importance of mitigating its impact on the environment and is committed to environmental sustainability. Magellan welcomes the reporting framework of the Task Force on Climate-related Financial Disclosures (TCFD) and looks to align its reporting to this framework, whilst recognising that certain requirements are yet to crystalise. Magellan’s Board of Directors assesses the Group’s appetite for climate-related issues under “environmental risk” as part of an annual review of risks impacting the Company. Given the nature of Magellan’s business and as a services firm of 135 employees, with approximately 85% of employees based in the head office in Sydney, Magellan has a relatively small environmental footprint and the Board has determined that this risk is not material to Magellan’s operations. Environmental risk is reviewed annually by the Board as part of the review of the firm’s risk management framework. There are three main areas where Magellan’s environmental footprint lies – premises, energy and travel. Magellan aims to ensure that, where possible, business operations are conducted in an environmentally sustainable way. For example, Magellan’s head office is a Magellan Financial Group Limited | Annual Report 2022 Page 94 Corporate Sustainability and Responsibility Report For the year ended 30 June 2022 5-star NABERS2 rated office building. Magellan also continues to build awareness amongst its employees and focuses on areas where it can make an impact, including recycling and minimising printing. Magellan is a signatory to the Carbon Disclosure Project’s (“CDP”) climate change program. CDP holds the largest global collection of self-reported climate change, water and forest-risk data in an effort to transform the way the world does business to prevent dangerous climate change and protect natural resources. Magellan also recently gained membership to the Investor Group on Climate Change (IGCC) and has also become a signatory to the Net Zero Asset Managers Commitment. Greenhouse Gas (“GHG”) emissions by Scope (metric tonnes CO2e) Scope 1 Scope 2 Total GHG emissions Total per employee Total per A$ million of revenue Calendar Year 2017 Calendar Year 2018 Calendar Year 2019 Calendar Year 2020 Calendar Year 2021 0 134 134 1.29 0.4 0 135 135 1.07 0.3 0 139 139 1.07 0.2 0 122 122 0.90 0.2 0 113 113 0.81 0.1 As outlined in the table above, Magellan’s GHG emissions are relatively small, particularly on a per employee and per A$ million of revenue basis. Magellan’s Scope 1 & 2 emissions intensity for calendar year 2021 of 0.1 tonnes CO2e per A$ million dollars of revenue puts Magellan among the lowest emissions intensity companies globally. Within Magellan’s Funds Management business, as discussed in the section titled “Responsible Investment”, Magellan considers Environmental issues as a natural component of its investment process, particularly where such issues may impact the future cash flows of the companies in which it is invested. Research reports compiled by the Investment Team include a discussion of climate change risks facing companies, if material, and includes a company’s emissions intensity. If a material risk is identified, the Investment Team will incorporate cash flow impacts (either to capital expenditure or earnings margins) to reflect the cost to the company of addressing or remediating the exposure. In general, the majority of Magellan’s investment universe is unlikely to be exposed to material transition risks, however there are some companies in the infrastructure, industrials and transportation sectors which have a greater exposure to transition risks. These risks will be incorporated into Magellan’s assessment of future cash flows when transition risks are assessed likely and material. Magellan aims to engage with portfolio companies where it considers a material potential environmental issue has arisen with the objective of reducing risk exposures and enhancing certainty of long-term cash flow generation. Further, within the Airlie investment process, when assessing company specific risks and opportunities associated with climate change, the Airlie Investment Team considers factors such as emissions intensity, physical and transition risks as well as the quality of the company’s climate change mitigation activities within its assessment of business quality. Additionally, the Airlie Investment Team will test a company’s stated transition plan, the costs of the plans and include carbon prices when incorporating the risks and opportunities as part of the valuation process. The development of Magellan’s Sustainable strategies offers investors the opportunity to invest in a high quality, attractive risk-adjusted return focused portfolio with materially lower carbon factor risk than global markets. 2 NABERS is a national rating system that measures the environmental performance of Australian buildings, tenancies and homes. NABERS is managed nationally by the NSW Department of Planning, Industry and Environment, on behalf of Federal, state and territory governments. Magellan Financial Group Limited | Annual Report 2022 Page 95 Corporate Sustainability and Responsibility Report For the year ended 30 June 2022 In May 2017, Magellan became a signatory of the PRI’s Montreal Pledge. Under the Pledge, Magellan commits to measure and publicly disclose the carbon footprint of its actively managed investment portfolios which are outlined in the table below: Carbon footprint as at 30 June 2022 (tonnes CO2e per $US million revenue)1 Magellan Global Fund Magellan Sustainable Fund Magellan High Conviction Fund Magellan Infrastructure Fund Airlie Australian Share Fund MFG Core International Fund MFG Core ESG Fund MFG Core Infrastructure Fund Magellan FuturePay US Sustainable strategy 114 17 13 751 108 120 29 1,016 510 20 1 Portfolio carbon intensities are calculated using the weighted average carbon intensity method. Note: Certain information ©2021 MSCI ESG Research LLC. Reproduced by permission. It is important to note that the above reported carbon intensities are at a point in time, and that over time these could lie within a range of intensities, depending on the strategy, the investment universe and relative valuations within that universe. Much higher carbon intensities do not, of themselves, indicate companies exposed to higher decarbonisation risks. Indeed, the opposite could be true, for example regulated utilities companies that currently have fossil fuel power generation would likely report high carbon intensity, but these utilities could be investing substantial capex into renewable energy sources and earning an attractive regulated return on those investments. Over time, these utilities would show material reductions in their carbon intensity as renewables became an increasing part of their energy generation mix. People As a funds management company, Magellan’s people are integral to the success of the business. Magellan takes an active involvement in staff wellbeing, staff engagement and career development. Remuneration Magellan’s Remuneration Report on page 22 of this Annual Report outlines Magellan’s approach and philosophy to employee compensation. The remuneration philosophy is centred on fair compensation for performance and contribution that achieves business outcomes and is underpinned by four principles: • • • • Promoting staff behaviour that is in the best interest of clients; Attracting and retaining outstanding staff; Building a culture that rewards performance while maintaining Magellan’s reputation and mitigating risk; and Encouraging staff to think and act like long-term owners of the Group. During the period, Magellan introduced a staff engagement and retention program to retain staff and maintain business stability during what has been a challenging period. Under the program, staff will benefit from three initiatives, comprising: • • • A retention bonus plan paid in two instalments in September 2024 and September 2025, subject to standard conditions including that they remain employed by Magellan on those dates; Amendments to the terms of loans offered to employees under Magellan’s voluntary Share Purchase Plan (SPP), described in section 3.2 of the Director’s Report, including to extend the maximum life of the loans and to remove the requirement to direct a portion of an employee’s annual bonus towards the repayment of their SPP loan; and The issue of up to 10 million options to staff pursuant to an employee share option plan (subject to standard conditions around vesting and continued employment). These initiatives are in addition to Magellan’s competitive remuneration packages and are a part of Magellan’s overall goal to be an employer of choice. During the period, Magellan made a decision to suspend further offers of voluntary SPP loans to staff. However, the Board believes options issued to staff with a strike price at a significant premium to recent trading prices and a 5-year term creates significant alignment of the long-term interests of staff with shareholders. As at 30 June 2022, approximately 85% of employees had an individual shareholding in Magellan. Magellan Financial Group Limited | Annual Report 2022 Page 96 Corporate Sustainability and Responsibility Report For the year ended 30 June 2022 Magellan is focused on ensuring pay equity at the time of hire. Magellan also conducts an annual review of employee remuneration which compares employees in the same role and level to highlight any pay inequalities and adjusts compensation based on this review if required. Variances in compensation should reflect relative performance of employees. Engagement and Retention Magellan implements a number of other initiatives to promote staff engagement and retention. Magellan’s employee engagement strategies are based on equality principles which are applied to remuneration, benefits and total rewards, training and development, health and safety and access to flexible working. Magellan launched its inaugural Employee Pulse Survey in December 2021 and an employee intranet was rolled out in June 2022 as a medium for timely communication and feedback. Magellan’s Investment Team, Distribution Team and the Airlie Team hold offsite team meetings on a regular basis. Middle and senior management seek regular feedback from employees and Magellan also undertakes annual performance reviews with all employees to discuss performance against a set of internal performance objectives and to identify development areas as well as any training requirements. Based on Magellan’s relatively small size by number of employees (135 employees as at 30 June 2022), Magellan considers that these forums are appropriate to receive transparent feedback from employees. Magellan strongly believes that staff engagement and satisfaction go well beyond direct financial compensation. Magellan’s annual leave policy encourages staff to take their full statutory requirement over each annual period by providing an additional week of leave if they do so. Other health and wellbeing benefits include annual executive health checks for staff aged 45 years+, annual skin checks and annual flu vaccinations. The Group’s recognition and rewards program includes whole of company semi-annual celebrations (Australia & NZ), Annual CEO award, $25k service award for 10 years of service, Magellan gift for significant birthdays and bespoke arrangements recognising gratitude for exceptional employee efforts. Magellan is committed to providing a flexible and family friendly working environment. Magellan recognises the importance of family friendly working conditions and offers a range of initiatives to support its employees before and after the birth/adoption of a child. Magellan’s aim is to reduce the impediments parents face in returning to work and give employees the flexibility to choose the arrangements which best suit their circumstances. Magellan’s Paid Parental Leave Policy provides up to 15 to 18 weeks (depending on the length of employment), for permanent employees who have the primary responsibility for the care of their child and who have worked for Magellan for at least 12 months continuously at the time of the birth or adoption of that child. Employees receive superannuation payments on both their paid and unpaid portion of parental leave for the first 12 months of parental leave. Employees on paid parental leave are eligible for the annual remuneration review and variable incentive whilst on leave. In addition, if an employee returns to work during the period of paid parental leave, Magellan will continue to pay the remaining period of paid parental leave in addition to their base salary and other entitlements. Magellan offers a “Keep in Touch” Program with employees who are on paid parental leave. Magellan also offers a childcare reimbursement of up to $150 per day for primary carers for the first 26 weeks after returning to work, when returning to work within 12 months from the commencement of paid parental leave. All primary and secondary carers are entitled to a 12 month subscription to Juggle Street to source local nanny or babysitting options for their families. Magellan understands the importance of family and provides family leave for all permanent employees. Under family leave, if personal/sick leave has been used, employees can apply for family leave. Family leave is paid leave so employees can take time out to care for a family member or manage a family situation. The amount of family leave an employee can take will be reviewed by Magellan management on a case-by-case basis. At Magellan, culture is very important and the Group continues to monitor retention rates. Under the equality principles, Magellan aims to understand the reasons for any resignations via exit interview data. Diversity Magellan is committed to workplace diversity and recognises the value of attracting and retaining employees with different backgrounds, knowledge, experience and abilities. Magellan maintains a Workplace Diversity and Inclusion Policy that outlines the Group’s commitment to diversity and inclusion in the workplace and provides a framework to achieve the Group’s diversity goals for the business. The Group’s policy is to recruit and manage on the basis of competence and performance regardless of age, race, gender, nationality, religion, sexuality, physical ability or cultural background. The policy can be found on Magellan’s website: www.magellangroup.com.au. Magellan Financial Group Limited | Annual Report 2022 Page 97 Corporate Sustainability and Responsibility Report For the year ended 30 June 2022 The Board annually reviews the measurable objectives it sets to achieve improvement in the diversity of employees and has set objectives for female representation of 33% for independent directors, 40% for senior management (classified by Magellan as direct reports to the CEO) and 40% for the overall Group. The gender representation across the Group as at 30 June 2022 is shown below: Non-executive independent directors (5 total) 40%40% 60%60% KMP (3 total) 67%67% 33%33% Senior management (10 total) 40%40% Group (135 total) 46%46% 60%60% 54%54% 0 20 40 60 80 100 Female Male Magellan also participates in the annual Workplace Gender Equality Reporting process, which under the Workplace Gender Equality Act 2012, requires non-public sector employers with 100 or more employees to submit a report to the Workplace Gender Equality Agency (“WGEA”). Magellan’s participation not only meets its Australian compliance obligations, but also contributes to the WGEA’s dataset on gender equality in Australian workplaces. The process also allows us to identify gender equality issues and put action plans in place. A copy of the report can be found under the Shareholder Centre on Magellan’s website: www.magellangroup.com.au. Magellan has introduced a MFG Asset Management Internship Program with an aim to promote, engage and attract more diverse talent into investing roles, with an initial focus being on women. Magellan’s Internship Program will be designed to provide students with an understanding of what it’s like to work within Magellan’s Investment Management team and working life at Magellan. The pilot program in 2022 will consist of: • • A four-week paid internship for one (female) student within the Investment team; and A partnership with the University Network for Investing and Trading (“UNIT”) on promoting Investment Management as an engaging career choice. Magellan’s intention is ultimately to rollout the Internship Program across various sector teams within Magellan’s Investment Team. Health and Safety The health and safety of the Group’s employees is of paramount importance. Following successful implementation of working from home arrangements during the first wave of the COVID-19 pandemic in March 2020 (and during the subsequent state-by-state lockdowns of 2021), Magellan has continued to offer employees the flexibility to work from home. Whilst working from home, the Group’s employees have stayed connected via virtual communication platforms and working remotely has not changed Magellan’s commitment to maintaining its high level of client service and compliance obligations. Magellan’s Employee Assistance Program, a free counselling service available for employees and their families, has been promoted during this time. To further support employee wellbeing, during the year, Magellan provided employees with access to The Resilience Project corporate program. This digital program focuses on helping employees develop mental health strategies during uncertain times, using evidence-based practices in resilience including gratitude, empathy and mindfulness. In late 2021, Magellan initiated its Return to Workplace Plan. Magellan recognises individual employees have different preferences about working from home and working from the office, but also believes there is great importance for the company's culture of working together in the office. Magellan, therefore, has initiated a flexible working approach for all employees, whereby employees are asked to be in the office three days a week and, in agreement with their manager, can choose to work from home or in the office for the remaining days of the week. Of course, employees are asked to work from home during any governmental public health orders or guidance. Magellan maintains a Work Health & Safety Policy which outlines the obligations and responsibilities of Magellan and its employees with respect to compliance with the Work Health & Safety regulation. Magellan Financial Group Limited | Annual Report 2022 Page 98 Corporate Sustainability and Responsibility Report For the year ended 30 June 2022 Magellan also undertakes annual workplace conduct training to ensure that all employees and the Board clearly understand what is expected from them in terms of behaviour and conduct and that the workplace remains a safe environment for all employees. Magellan’s Workplace Conduct Policy details the Group’s approach in relation to harassment in the workplace, including bullying, discrimination, sexual harassment, workplace violence and vilification, and provides procedures for dealing with complaints. Community Magellan believes an active contribution to community is important. Magellan does not generally make corporate donations as the Group believes it is more appropriate to focus on delivering satisfactory returns and leave it to individuals to determine the charities to which they donate. Magellan prefers to focus its efforts on employee participation in fund raising initiatives. Magellan’s efforts over the past financial year include employee participation in Steptember raising funds for Cerebral Palsy. Magellan is also a participating fund manager in the Future Generation Global Investment Company Limited (“FGG”). FGG is an ASX listed investment company that invests in global equities investment strategies managed by prominent, Australian fund managers. Participating fund managers manage the capital entirely pro-bono so that 1.0% of net assets each year can be donated to Australian non-profit organisations committed to young Australians affected by mental health issues. In the 2022 financial year, this equated to approximately $1.1 million in respect of funds managed by Magellan. Magellan is a foundation member and received an initial allocation of ~10% of the assets under management at the time of the initial public offering of FGG. Magellan is also a Core Fund Manager to Hearts & Minds Investments. Hearts and Minds Investments Limited (“HM1”) is an ASX listed investment company and as a Core Fund Manager, Magellan provides HM1 with its top three security recommendations on a quarterly basis. HM1 foregoes any investment fees and instead makes a donation equal to 1.5% of net assets each year to certain charities. Cybersecurity and Privacy The cybersecurity threat environment is constantly evolving and managing cyber risk is one of Magellan’s highest priorities. To protect client information and corporate data, Magellan employs leading cyber security solutions and maintains a formal information security governance framework. Complementing the data protection and monitoring mechanisms it has in place, Magellan is continuously assessing its multi-layered protection measures against the ever-changing threat environment. Magellan established an Information Technology Risk Committee (ITRC) in early 2017 as a key governance body to enhance the governance and oversight of Magellan’s information technology risk management activities. The committee comprises key executives within Magellan and meets quarterly to discuss cybersecurity risks, controls, policies, regulatory requirements, and any changes to the environment that might affect the Group’s overall cybersecurity posture. Magellan’s Board is provided with the minutes of these meetings and any analysis undertaken. Magellan’s cybersecurity defence framework is aligned to the Australian Cyber Security Centre’s ‘Essential Eight framework’ and it has implemented all Essential Eight strategies. Magellan has also mapped its approach to the National Institute of Standards and Technology (NIST) cyber security framework. All client data is held in ISO27001 certified data centres located within Australia. Magellan applies the principle of role-based least privilege with respect to data and systems access to ensure staff can only access the minimal data set required to perform their role. Privileges are regularly re-certified. As an independent assessment of the Group’s cybersecurity protection, Magellan engages an external consulting firm specialising in IT security to conduct annual ‘penetration testing’ of the Group’s environment. Magellan maintains a Cybersecurity Incident Response Plan that is tested annually and contains defined security roles, responsibilities, and procedures to follow if an event should ever occur. As part of the Group’s Cybersecurity Program, all employees are required to complete cybersecurity awareness training upon joining the firm as part of their induction process and on an annual basis thereafter. This ensures staff are aware of cyber-attack techniques and of the need always to follow security best practices. Magellan also performs periodic social engineering tests on employees using simulated email phishing and telephone-based phishing, to test the efficacy of the Group’s cyber-awareness training. Third party risk management is a key component of Magellan’s information security program. All third-party relationships undergo a rigorous security risk assessment as part of the due diligence process before being engaged. This includes an assessment of their cybersecurity posture and data privacy/data access controls. The Group repeats the technology-focused due diligence process for all critical third-party service providers on an annual basis. Magellan Financial Group Limited | Annual Report 2022 Page 99 Corporate Sustainability and Responsibility Report For the year ended 30 June 2022 Modern Slavery Magellan published its first Modern Slavery Statement in 2021. The Statement can be found under the Responsible Investing section of Magellan's website: www.magellangroup.com.au. All staff complete annual training on modern slavery. Magellan Financial Group Limited | Annual Report 2022 Page 100 Corporate Information As at 17 August 2022 Directors Hamish McLennan – Chairman Robert Fraser – Deputy Chairman and Chairman of MAM David George – Chief Executive Officer and Managing Director Robert Fraser – Deputy Chairman and Chairman of MAM John Eales AM Colette Garnsey OAM Karen Phin Company Secretary Marcia Venegas Registered Office Level 36, 25 Martin Place, Sydney NSW 2000 Telephone: +61 2 9235 4888 Email: info@magellangroup.com.au Website www.magellangroup.com.au Securities Exchange Listing Magellan Financial Group Limited shares and options are listed on the Australian Securities Exchange (ASX: MFG and MFGO) Corporate Governance Statement The Corporate Governance Statement for MFG can be found at the Shareholder Centre at www.magellangroup.com.au Auditor Ernst & Young 200 George Street, Sydney NSW 2000 Share Registry Boardroom Pty Limited Level 12, 225 George Street, Sydney NSW 2000 Telephone: +61 2 9290 9600 Email: enquiries@boardroomlimited.com.au InvestorServe is Boardroom's free, self-service website where shareholders can manage their interests online. The website enables shareholders to: • • • • • view share balances change address details view payment and tax information update payment instructions update communication instructions Shareholders and option holders can register their email address at boardroomlimited.com.au to receive shareholder communications electronically. Electronic delivery of CHESS holding statements and notifications The ASX has now launched the ASX CHESS Statements Portal, giving share and option holders the ability to receive electronic notifications about their holdings. This shift away from paper-based communications may make it easier for investors to manage their holdings and benefit the environment by reducing waste. To access the portal and electronic notifications, investors will need their broker to opt them in. Investors should contact their broker to see if they have this service enabled. If an investor has not opted in, they will continue to receive CHESS holding statements and notifications by mail. Once an investor has opted in, investor statements and notifications will be available through the ASX CHESS Statements Portal and they will no longer receive paper statements. Magellan Financial Group Limited | Annual Report 2022 Page 101 Shareholder Information As at 11 August 2022 Analysis of Holdings Fully paid ordinary shares Holdings ranges 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 securities Number of holders 40,279 12,919 1,520 1,003 87 55,808 2,823 Number of shares 14,545,335 28,385,712 11,139,184 23,837,570 107,181,073 185,088,874 54,737 Percentage of shares on issue 7.86 15.33 6.02 12.88 57.91 100.00 MFG 2027 Options Holdings ranges 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Total Options issued to employees under the MFG ESOP Holdings ranges 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Total Number of holders 53,720 1,434 184 191 15 55,544 Number of options 5,963,670 2,822,861 1,290,546 5,336,322 7,802,301 23,215,700 Percentage of options on issue 25.69 12.16 5.56 22.98 33.61 100.00 Number of holders - 6 7 82 24 119 Number of options - 30,000 70,000 4,202,500 4,375,000 8,677,500 Percentage of options on issue 0.00 0.34 0.81 48.43 50.42 100.00 Magellan Financial Group Limited | Annual Report 2022 Page 102 Shareholder Information As at 11 August 2022 Twenty Largest Holders Fully paid ordinary shares Holder Name Midas Touch Investments Pty Ltd HSBC Custody Nominees (Australia) Limited Magellan Equities Pty Limited JP Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited BNP Paribas Nominees Pty Ltd National Nominees Limited Mr David Doyle Aljamat Pty Ltd Jash Pty Limited Netwealth Investments Limited Nota Bene Investments Pty Ltd BNP Paribas Nominees Pty Ltd Hub24 Custodial Services Ltd Emmanuel Capital Pty Ltd ACE Property Holdings Pty Ltd Glenn Hargraves Investments Pty Ltd Est. Mr Philip Alan Kenneth Naylor Mr Domenico Giuliano Mr Christopher Andrew Anderson & Mrs Virginia Ivy Anderson Marsev Pty Limited Total shares held by the 20 largest shareholders Total ordinary shares on issue MFG 2027 Options Holder Name Midas Touch Investments Pty Ltd Magellan Equities Pty Limited HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited JP Morgan Nominees Australia Pty Limited Marsev Pty Limited Q & N Investments Pty Ltd UBS Nominees Pty Ltd Mr David Doyle National Nominees Limited Aljamat Pty Ltd Jash Pty Limited Nota Bene Investments Pty Ltd Netwealth Investments Limited Mr Ernst Kohler Mr James Henderson Allen Dinwoodie Investments Pty Ltd Mr Nicholas Dermott McDonald HSBC Custody Nominees (Australia) Limited - A/C 2 Emmanuel Capital Pty Ltd Total MFG 2027 Options held by the 20 largest option holders Total MFG 2027 Options on issue Number of shares Percentage of shares on issue 21,242,277 19,849,303 17,025,961 10,310,475 7,783,892 3,478,146 1,864,281 1,500,000 1,310,000 1,163,886 917,868 825,000 746,006 630,000 600,000 575,000 566,089 559,218 540,000 539,944 92,027,346 185,088,874 11.48 10.72 9.20 5.57 4.21 1.88 1.01 0.81 0.71 0.63 0.50 0.45 0.40 0.34 0.32 0.31 0.31 0.30 0.29 0.29 49.73 Number of options Percentage of options on issue 2,419,598 2,128,248 717,783 551,143 395,627 203,761 200,436 195,093 187,500 167,973 163,750 145,486 134,375 123,180 105,420 100,000 100,000 100,000 78,786 78,750 8,296,909 23,215,700 10.42 9.17 3.09 2.37 1.70 0.88 0.86 0.84 0.81 0.72 0.71 0.63 0.58 0.53 0.45 0.43 0.43 0.43 0.34 0.34 35.73 Magellan Financial Group Limited | Annual Report 2022 Page 103 Shareholder Information As at 11 August 2022 Substantial Shareholders Shareholder Hamish Douglass, Midas Touch Investments Pty Ltd and associates1 Chris Mackay, Magellan Equities Pty Ltd and associates2 1 Date of last substantial shareholder notice lodged on 1 July 2022. 2 Date of the last substantial shareholder notice lodged on 2 October 2020. Voting Rights Number of shares 21,452,502 17,522,248 Percentage of shares on issue 11.59% 9.46% Under the Company's Constitution, the voting rights attaching to ordinary shares at a meeting of shareholders are: 1. each shareholder is entitled to vote in person, by proxy, by attorney or by representative; 2. on a show of hands, each shareholder present in person, by proxy, by attorney or by representative is entitled to one vote; and 3. 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. Neither the MFG 2027 Options nor options issued to employees under the MFG ESOP confer on the holder a right to receive notices of general meetings (except as may be required by law), nor any right to attend, speak at or vote at general meetings of the Company. Magellan Financial Group Limited | Annual Report 2022 Page 104 

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