Good afternoon, everyone, on behalf of the company, welcome to the Magellan Financial Group Interim Results Conference Call for the half year ended 31 December 2018. I am Sarah Thorne, and I lead Investor Relations at Magellan. The company's results will be presented today by the CEO of Magellan, Dr. Brett Cairns, and the Chief Financial Officer, Ms. Kirsten Morton. Hamish Douglass, Magellan's Chairman and Chief Investment Officer, is also in the room today. An investor presentation has been lodged with the ASX and is available on Magellan's website. We are not planning to step through the presentation on today's call. However, it is available for further information. Please note that there will be a Q&A session at the end of the call. For those of you joining us via the webcast, you can submit a question by typing it directly into the webcast portal.
For those of you who have joined through the teleconference, the teleconference administrator will advise you at the end of the call how you can ask a question. Please note that today's call is being recorded, and we may also have media on the line today. Please note that some of the information you may hear during our discussion today may consist of forward-looking statements regarding Magellan. No assurance is given that future developments will be in accordance with Magellan's expectations. Actual results could differ materially from those expected by Magellan. Thank you. I will now hand it over to Brett.
Thanks, Sarah, good afternoon, everyone, and welcome to our Interim Results Call, my first as Chief Executive Officer. It has been a little bit over four months since Hamish Douglass and I effectively switched roles. I became the CEO, and Hamish became the Chairman, and he, as Sarah mentioned, is in the room today. Much of this was discussed at our AGM last October. Of course, Hamish continues to be involved in the strategy of the business. Most importantly, he continues to be in his key roles of Chief Investment Officer and Lead Portfolio Manager for group's core equity strategies. This change was made to allow Hamish more time to focus on these roles, and this is important because it gets to the heart of our focus on delivering for our clients and their advisors.
I can report that the change in our roles has gone very smoothly, both within our firm and, I said, most importantly, with our clients. I would like now to briefly touch on some of the financial highlights for the six months to 31st of December. Average funds under management increased 35% to AUD 72.1 billion. This increase in average funds under management drove a 28% increase in the management and service fee revenue to a little bit over AUD 228 million. The slightly lower percentage increase in the management and service fees reflects a small reduction in margin due to the change in mix of our funds under management following the early acquisition in early 2018. Statutory profit after tax was up 225% to AUD 173.5 million.
This substantial increase reflects both business growth, but most importantly, the lower comparable number from last year, where the one-off costs we spent setting up the Magellan Global Trust were expensed. This is perhaps a good juncture to pause for a moment and discuss an accounting change, and then some of the metrics that we consider when we review the business. In this year's report, we've discussed this topic in a little bit more detail, and they also help shareholders as they evaluate the performance of the business. Firstly, a recent accounting change now requires unrealized gains and losses in our principal investments portfolio to be included, if you like, above the line in statutory profit. Previously, these market-to-market moves were below the line in comprehensive income. Given the size of our principal investments, this will add some noise to our reported earnings at various times.
Secondly, we now have intangible assets on our balance sheet following the acquisitions of Airlie and Frontier. As a result, we now also have an amortization expense for accounting purposes for those intangible assets that are considered to have finite lives, in our case, customer relationships. This amortization expense, however, is of course non-cash, and importantly, carries with it an implicit assumption that the customers leave and are not replaced. This is not how we view the business. Therefore, in our view, it is helpful to make a few adjustments to the statutory reported number by removing the unrealized gains and losses and the non-cash amortization expense. Further, to enable a better comparison, we also take out the one-off costs associated with investment in building the Magellan Global Trust.
When we do this, the adjusted net profit after tax becomes AUD 176.3 million, an increase of 62% over the similarly adjusted profit for the corresponding period last year. When we view this on a per share basis, the adjusted net profit rose at a slightly slower pace at 57%, primarily reflecting the additional shares issued for the Airlie and Frontier acquisitions. We also think it makes sense to go a step further and look at the business components, the funds management segment and the principal investment portfolio separately. Principal investments per share stood at AUD 1.58 after allowing for tax on unrealized gains. Basically flat on last year, albeit over the slightly greater increased number of shares on issue. The funds management segment profit before tax increased 62% to AUD 225 million. Without the impact of performance fees, which are lumpy, that increase was 41% to AUD 182 million.
Each of these measures, which I've just discussed, provide useful information and should all be considered. When we view it overall, we believe the business has had a solid six months and remains well-positioned. With our new dividend policy, the directors have declared an interim dividend of AUD 0.738 per share, which is a 66% increase over the prior corresponding period. It's important to remember that last year's dividend was paid under the previous lower payoff policy and therefore has positively affected the comparison. Also please note that we effectively paid a top-up component to last year's final dividend to bring the full year in line with the new policy. As such, this will negatively impact the comparison next period.
As per our dividend policy, dividends relating to crystallized performance fees after tax will be declared and paid in August. Alongside our final dividend and therefore not included in this interim dividend, crystallized performance fees at 31 December 2018 stood at AUD 42.7 million. Before handing over to our CFO, Kirsten Morton, allow me to make a few additional comments regarding the business and the strategy. Earlier this last year at our full year financial results presentation, Hamish spoke about the key drivers creating shareholder value at the time, mainly looking after our current clients and the funds that we already manage by achieving our stated objectives for each of our strategies. Nothing has changed, and this remains our core focus.
With funds AUD 73 billion, investment performance, both positive and negative, is an extremely powerful contributor to the changes in fund, with flows now tending to be more incremental in comparison. With this in mind and noting the volatility of global markets in this environment over the last few months, we are pleased with the investment performance achieved by Hamish and the investment team. Hamish and his team have spoken many times about the importance of managing downside risks, and this remains a central plank to our investment approach. Our investment goals focus on achieving satisfactory risk-adjusted returns over medium to long term, whilst minimizing risk of permanent capital loss. Both limbs of this goal are equally important in our view.
Notwithstanding our focus on what we already have, we are of course working on other opportunities, the hurdle is high as we do not want to distract from what we're already doing. We are at various stages of several new product developments and are taking a cautious and very deliberate approach to that development. We are not in the product proliferation business, and we want our offerings to meet a need and help solve a problem. For example, one area we are looking closely at is retirement income. This is a large and growing area and one that is not easily solved. As was in the case when we developed the Active ETF or developed the partnership approach to Magellan Global Trust, our aim is to develop something that meets the job to be done.
Whilst we're making progress, we're not finished, there's still a chance we may not get there. Such initiatives are not without risk, take time to execute and build traction, they are important for building a robust business over time. Patience and focus is key to this. It was this time last year, we announced the acquisitions of Airlie and Frontier, I can happily report both those acquisitions have gone extremely smoothly. Various operation integrations have been completed, and both businesses are working very well. John, David, Matt, and Emma, and the team at Airlie remain very focused on their clients and have been instrumental in developing and launching the Airlie Australian Share Fund. Likewise, Bill Forsyth and the Frontier team have made a very positive impact to our North American distribution activities. Finally, a few words on our retail and institutional funds management business.
For the six months, retail net flows were AUD 475 million, which averages out monthly flows of AUD 79 million for the period. This compares with AUD 55 million per month last year. It is worth noting that while our global equity strategies are well penetrated in the financial advice channel, we do, however, see meaningful opportunities in the retail space. Notably, we continue to build out our self-directed strategy. Our new unit class in the Magellan High Conviction Trust has been well received by advisors. Our infrastructure strategy, led by Gerald Stack, is growing solidly, and we now have the Airlie retail fund available to advisors and their clients. Launched in June, it is very early days for the Airlie fund, and it will take time to build a track record and join approved product lists and model portfolios.
We also expect to have the fund available on the ASX in the coming months. On the 29th of January this year, we announced that the Magellan Global Trust would conduct a Unit Purchase Plan, allowing eligible unitholders to subscribe up for an additional AUD 15,000 worth of MGG units at a 5% discount to the net asset value. Magellan Financial Group will fund this 5% discount in order to minimize the dilution within the trust. We believe this is important and is consistent with our approach to the original IPO and also how we deal with the discount applied to the ongoing DRP. We view this as a partnership with our investors, and we will act accordingly. The amount of this consideration will depend on the take-up and will not be known until the offer closes.
It will be included in our expenses in the 2019 financial year. We view this cost as an investment in building the Magellan Global Trust, which we believe delivers a sensible return on capital and strategic benefit. Early feedback has been positive, it is much too early to project what the ultimate take-up may be. In our report, we noted the theoretical maximum our expense could be roughly AUD 25 million. This comes from the limitation imposed upon such purchase plans that no more than 30% of the current units on issue can be issued, which in our case equates to around AUD 500 million. We do not expect to raise AUD 500 million. It is highly unlikely it would require a take-up of over 75%.
Whatever the expense ends up being, it will not sit in our funds management segment and therefore not impact on dividends. Our institutional business remains strong with funds under management a little bit less than AUD 52 billion for more than 140 clients. With our institutional businesses well diversified by client, with only four clients representing individually more than 2% of the total management and service fee revenue. We closed the global equity strategy managed by Hamish to new institutional investors on the 31st of December 2017. We have reserved capacity for some existing institutional clients that is yet to be utilized. Our sustainable strategies have now developed a credible 2-year track record and are progressing well.
Notwithstanding three years or even longer track records are often required by many potential investors, these strategies deliver a thoughtful and differentiated sustainable investment approach. We were pleased to welcome our first client into our new sub-fund during the half. Our global listed infrastructure strategies continue to perform extremely well. Gerald and his team have developed a differentiated approach to listed infrastructure investment and have produced a consistent long-term outperformance. We are well-positioned in the institutional market as interest in that sector continues to increase. Lastly, we would note there are some selective opportunities to use capacity readily. With all that, I'd like to now hand over to Kirsten, who can run through some of the financials. Kirsten.
Thank you, Brett. Magellan's had a solid start to the financial year. As Brett outlined, we reported net profit after tax of AUD 173.5 million, an increase of 225% from the prior corresponding period. Reported net profit includes non-cash amortization expense and unrealized loss on our principal investment portfolio, and in the prior year, one-off offer costs on the Magellan Global Trust. Brett also outlined why we have made these adjustments, and after excluding these items, adjusted net profit after tax rose 62% to AUD 176.3 million. Our reported diluted earnings per share was AUD 0.982. Excluding those previously outlined items, adjusted diluted earnings per share was AUD 0.998, reflecting our 57% increase from the prior corresponding period. Brett also mentioned that the directors have declared an interim dividend of AUD 0.738 per share, an increase of 66% from the 2018 interim dividend.
The increase in the dividend reflects Magellan's revised dividend policy to pay out 90%-95% of funds management profit, excluding crystallized performance fees. At the full year, we will also pay a performance fee dividend of 90%-95% of the net crystallized performance fees after tax. The payment of dividends by the group will of course be subject to corporate, legal, and regulatory considerations. The interim dividend is franked at 75%. As previously advised, given the move to a higher payout ratio and the interplay with our status as an offshore banking unit, dividends are likely to be partially franked. Our effective tax rate was 22.6%. This effective tax rate reflects the benefit of our offshore banking unit license. Moving on to the funds management business, which as Brett outlined in his CEO letter, is our core operating business.
Revenues in the funds management business increased 45% to AUD 273.2 million. The growth in revenues reflected 28% increase in management fees, crystallized performance fees of AUD 42.7 million before tax, and it's important to note that performance fees do fluctuate materially period to period. Service fees of AUD 2.4 million, which remain flat on the prior corresponding period, and an increase in interest and other revenue to AUD 2.4 million. This increase is predominantly driven by revenues we now receive from Frontier's third-party fund manager distribution business. Expenses in the period decreased 4% to AUD 48.3 million. The decrease is driven by a decline in marketing expenses, primarily reflecting the group's decision to withdraw from the Cricket Australia partnership in March 2018 and also related marketing initiatives and the cessation of U.S. marketing and consulting fees following the group's acquisition of Frontier.
The decline in these expenses was partially offset by a 22% increase in employee expenses and a 22% increase in funding, administration, and operational expenses. Employee expenses represented 64% of our overall costs during the period. Approximately half of the remaining expenses are variable in nature, either moving in line with changes in funds under management or being a function of a number of investors that we have in our funds. The other half of our non-employee-related expenses we would describe as fixed in nature, such as occupancy expenses or IT costs. The business has been developed to build scalability, which is reflected in the fund's management cost-to-income ratio of 20.9%, which has improved from 28.1% in the prior corresponding period. This excludes the positive benefit of performance fees. Total group expenses in the 2019 financial year are still expected to approximate AUD 105 million.
This excludes non-cash amortization expense and also the expense relating to the Magellan Global Trust Unit Purchase Plan, which Brett discussed earlier. Once the Unit Purchase Plan has closed, we will let the market know the associated cost of the offer. As Brett flagged earlier, the cost of the Unit Purchase Plan will not be included in the funds management segment and therefore will not affect the dividend. Now turning to capital management. The group maintains a strong balance sheet with net tangible assets of AUD 534.2 million.
Investment assets representing cash equivalents, and financial assets are AUD 451.4 million. Cash at 31 December 2018 was AUD 159.8 million, with AUD 130.7 million of that due to be paid to shareholders on the 28th of February for the interim dividend. The group had total net principal investments of AUD 281 million. Our principal investments includes investments in Magellan's listed and unlisted funds.
We do intend to allocate any surplus cash generated after allowing for the payment of dividends to principal investments. We aim to earn satisfactory returns for our shareholders, and the board has established a pre-tax return hurdle of 10% per annum over the business cycle for the principal investments, which to date we have achieved. Over the last one, three, and five years, the pre-tax returns are 7.4%, 9%, and 11.6% per annum respectively. Since inception from the 1st of July, 2007, and excluding the group's investment in MFF Capital Investments, the portfolio has returned pre-tax 10.8% per annum. With that, I'll now hand back to Sarah.
Thank you, Kirsten and Brett. With that, we will now go to questions. Could the operator please instruct teleconference participants how to ask a question?
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We'll go to the first question on the phone, please.
Thank you. Your first question comes from Andrei Stadnik from Morgan Stanley. Please go ahead.
Hello, good day. It's Andrei Stadnik here from Morgan Stanley. Can I ask two questions if I can? Can you talk about the advantages you're finding on the U.S. distribution side from full ownership of Frontier?
I think the advantages are that we've obviously got Bill working within us, as opposed to being employed by us through our services arrangement. We're seeing it much better organized. We're seeing some opportunities as I think come through, both from the third-party part of that business and also as we look to explore distribution of our own products as well. It's still very early days, Andrei , on that. We do think it's of value to us. Andrei , maybe I can comment.
It's Hamish as well here. Obviously, Bill has been absolutely instrumental in building our business in the U.S., and he has very deep and trusted relationships with our core clients in the U.S. That is strategically very important to us. Bill has effectively come on board for a minimum of eight years. With Magellan, he's fully integrated the business there.
Part of his business was actually attracting third-party fund managers to the Frontier platform. He's already shown Brett and I a number of opportunities as maybe where either they just become clients of Frontier or maybe Magellan could do something with those people. We haven't done anything, the nature of his contacts and his business, he has his tentacles into places that we'd never get to see. I'm not about to say we're going out to rush out, Bill does look to, in his third-party business, take on new managers. He sees a lot of people, and that's quite interesting. The core thing about it is he's the key guy who had the key relationships in our North American businesses. We look to do new things in sustainable and infrastructure and other places.
He's effectively giving the leadership to that team to make sure we keep developing our funds under management in the North American market.
Thank you. Second question, just can you talk a little bit about how do you ensure staff alignment and engagement? How do you lock in your staff as shareholders? Because I think some people might be a bit surprised that you've managed to maintain AUD 105 million operating cost guidance despite near record performance fees in half.
Yeah. It's simply I don't pay myself anymore, Andrei . No, I'll hand it to Brett.
Well, that is part of it. Obviously, I think what you're asking is that why don't the costs sort of seem to go up with management fees and performance fees and these sorts of things? We, at the very early stages on this, when Alan was reversing along the board, there was a very deliberate philosophical strategy on how we wanted the business to effectively participate in those types of areas. We pay our staff, we think very, very well. Bonuses and those sorts of payments are obviously part of what we pay. As you rightly point out, we also want people to be part of the ownership structure of the company and allow people to participate in that way as well, which has worked extremely well.
It's a partnership between both sort of payment as an employee and also as an owner. I mean, as I've written many times, we want people to think and act like owners. We think that works well. It's not a formulaic cut of performance fees or management fees that you might see elsewhere. It's a much more partnership approach. Hamish, I don't know if you've got any thoughts on that because we've talked about this.
Well, I think the uniqueness that when we IPO'd the business before we had any funds under management, and we enabled all the shareholders with our share purchase plan, which is very unique in its nature, the way that we provide the interest-free loans, and we make it voluntary, and every year we give another participation. We've got a huge amount of participation in the firm in the equity.
For a lot of people, the equity they have in the firm is very material in terms of their net worth. There's absolutely an alignment in terms of a huge part of their own net worth is aligned with them as a shareholder. Of course, they're an employee as well. People are very clear of how the remuneration works in here. It's not tied to funds under management outside our infrastructure business. It's not tied to that. It's tied to performance, and it's tied to what they're doing on a day-to-day basis. I think we thought upfront about the alignment. Frankly, a lot of financial services firms, the employees and the shareholders are not aligned. That's one of the big problems. We knew that was one of the big problems.
Many of us used to work in investment banks and saw that firsthand. We didn't want that at Magellan, and we set it up with a different philosophy, that it was going to be a partnership between the shareholders and the employees, and we wanted as many employees as possible to become shareholders so they were partners.
L ook, Andrei , this perhaps is not as well appreciated. We don't pay bonuses in shares. That share purchase plan is voluntary. It is different if people purchase something voluntarily versus being given something. There is a subtle but at least a very important alignment issue around all that. To date, that's worked extremely well.
Even if you think about the alignment, Andrei , I think I wrote right at the beginning, if anyone wants to go back, the things about our views on options, to say that we wouldn't issue our employees options ever. The reason we did that is because we think options have asymmetrical payoffs with the shareholders. From a shareholder's perspective, if something goes wrong, the employee bears no risk. If it all goes well, and it could be to do with the employees or not to do with the employees, they're going to get a massive payoff.
We said we just don't like the symmetry of option schemes being issued to employees. Obviously, employees would have made, including myself, enormous amounts of money if we had an option scheme, but we just didn't think they're the right type of instrument to align employees and shareholders together. It goes right back to the inception of this firm.
Thank you.
Thank you. Your next question comes from Kieren Chidgey with UBS. Please go ahead.
Hi, guys. Just got a couple of questions. Starting on expenses and following the previous question, but maybe coming at it from the opposite angle. The retained cost guidance of AUD 105 million for the full year seems to imply around a double-digit increase second half on first half. Just wondering what underlies that, particularly given your staff numbers look fairly flat over the last half.
Do you want to take that, Kirs?
You want me to take it?
Yeah. Look, at the end of the day, I'll make a comment on that. I wouldn't get too carried away. You're talking about very small numbers. You're talking an AUD 1 million here or there when you're annualizing. We're at AUD 48 million, and of course.
We're 105. We're more than doubling in the second half. There are some expenses in the second half that do land. Often some sponsorship stuff and things land in the second half, not in the first half. There is just a seasonality a little bit. We're saying approximately or 105, and in terms of those percentage terms, AUD 1 million or AUD 2 million can actually, which are tiny in the scheme of our overall business, can make a difference. Other than a little bit of seasonality, I think what we give on percentage terms, but in the scheme of the group's overall profitability, if expenses of AUD 1 million or AUD 2 million different in the second half, it will make no difference to the overall group result. Approximately, 105. There are some swings and roundabouts that we put a bit of conservatism on exchange rates.
We've got a bunch of costs in U.S. dollars, where the U.S. dollar ends in the second half can move those U.S. dollar expenses around somewhat. It's not just that. You can think of some technology costs and things and subscriptions and things that may be in U.S. dollars. There is a little bit of seasonality, but it's not like we're suddenly seeing a big acceleration in costs in the second half, if that's what you're asking, if there's some trend going on.
Yep. All right. Okay. Second question, just on some recent press reports around you guys having a look at the retirement products space. Just wondering whether or not you can elaborate on any high-level plans around that and also from a capital point of view, I imagine anything you'd be thinking about is a fairly capital light strategy there. Just keen on your thoughts.
Yeah, look, whilst I've mentioned it there, I said that we're somewhat down the path on that. I'm reluctant to get into too much detail on it. Yes, it's capital light. Obviously, in the paper, it was being equated to annuities. It's not an annuity structure in that sense.
There are things that we still need to sort out on that. I'm reluctant to say that we're that far down the track we're about to go. We are making progress on that. It may take an investments, co-investment, it may take different forms and all that, but you're right. We're a capital light business, and that's the way that we'll look to attack this problem. We're looking at it, as I said in the notes, to try and understand where we can make a difference and actually add a solution to that. It's not an easy problem to solve. We definitely are making some progress, so possibly in the next 6 months or so, we may have something more to say.
Yeah. I've only got some comments. It's very important for people to understand the opportunity there. Obviously, with the aging populations, there is a mass transition from accumulation to a pension drawdown phases. We own a massive amount of accumulation models, and super in our strategy is. As people age and go into retirement, typically, if you don't have a lot of money, you tend to change your allocations. You tend to de-risk. You tend to come out of equities. People with not a lot of money probably will go into an annuity. They tend to be very capital intensive and very expensive, and I think that's why you're asking a capital question. They do a job for those particular, an important job for those people.
If you've got more money and you want something that's slightly de-risking, there is just a massive gap about a good product that really solves the problem. I won't go into the whole problem that people have in retirement. Frankly, there's been virtually no innovation in this space, I would say, Brett, in 20 or 30 years, in a real sense, in what products are around. You've got a number of income products around and then a number of trumped-up income products trying to seek for yield, and you've got annuities. Then people kind of cobble together solutions, but a more holistic product that does something different and tries to serve objectives, we haven't really seen, and we actually haven't really seen anywhere in the world. That's why it's taken so long.
Brett and Patty's been working on this for over two years, in looking and really defining what the problem is and then what the options are. We're not there yet, but he's saying there. My evaluation of what they're working on is, I'm very encouraged, is all I would say to you. What we're thinking of something is very innovative. There's no black box type stuff that you would think of. A lot of people are coming up with investment banking, structure this and structure that to solve this problem. Those tend to not to be great solutions if you want to really take them out to the market. A lot of work, and obviously we have to get through regulators and other things in exactly what we're doing in the space. You asked about capital intensity.
We're not going to launch a life product around that, if that's the question you're asking here. Would we make an investment? We made an investment in the Magellan Global Trust of after-tax, AUD 50 something million. Would we make an investment of some form? We're investing in the UPP in things aligning with the interests. Absolutely, we would. Are we getting something that would be capital-intensive in the scheme of Magellan? That's not what we're thinking. No. We really don't want to go into any more details around what we're thinking in the space. It is a very large space and one that has not been addressed by any investment houses across the board. A lot of people are looking at this problem, by the way. It's not like we've suddenly magically come up and looked a problem that no one else is.
There's a lot of focus by a lot of houses in this space.
Thanks.
There's a lot of progress on it, I can tell you.
One final quick question, if I can. Just interested in the progress in marketing and institutional response around the sustainable strategies and also what the remaining in-store capacity is, Hamish, under your existing global strategies, in terms of the reserve capacity?
Yeah. On the sustainable one, I would say that the reality is we're very light touch so far with our institutional marketing because they're just at a two-year track record. A lot of institutions have really got a minimum of three years. It's more talking to consultants and others. Other people have probably expressed through relationships that they're very interested in sustainability. In terms of a wide institutional marketing effort, you want to use your cards pretty wisely with the relationships, and we know that many of them have a minimum requirement. I would say, but with the people we're talking to, we have a pretty good feeling about that. We've always been very realistic around that three to five-year track record. The track records are actually developing very nicely in the U.S. and the global strategies.
These are classic snowball things, that you have to get the track records and then they build up from there. It's all progressing how we think. I don't want to mislead you either, that we're not yet at two years on either of those strategies. On global institutionally, all I will say is we're closed for new business institutionally in things. We do have amounts reserved for some of our key institutional clients. St. James's Place would be one of those, obviously, because they're a flow business where they've got reserve capacity. I don't want to get into the exact numbers behind what the reserve capacity numbers are.
Thank you.
Thank you. Your next question comes from Matthew Dunger with Bank of America. Please go ahead.
Thank you very much. It's Matt Dunger from Bank of America Merrill Lynch. Just on slide seven, you show us the funds under management summary. I can see the average base fee down two basis points, half on half. Obviously, a little bit of a mix shift out of retail and into institutional. Are you able to give us any more color around what's driving margins?
No, I think I said in the. It's basically Airlie. You're right, it's a shift from a percentage point of view, if you like, into institutional and base fee rate.
Within infrastructure and global, there has been no pricing change on any of our institutional product. There's none in retail, and there's been no pricing change in that. It's really just a mix shift with Airlie coming in. Typically, Australian institutional equities are at lower margins than infrastructure and global equities are.
Okay, brilliant. Thank you.
Thank you. There are no further questions at this time.
We have some questions in the queue. Your next question comes from Nick McGarrigle from Ord Minnett. Please go ahead.
Good day. Just a boring one from me. I noticed that the dividend was 75% franked. I just wanted to get a comment on that, particularly in light of the pretty significant franking that advanced at the end of 2018.
Look, Nick, it depends when you look at it, obviously, but the way we view this at least is if you look at our payout ratio and our average tax rate on a sustained basis, you come up with roughly 75% of what the franking credit could be. The rules really are, you just need a positive dollar in the franking balance at 30 June that we could pay things out more now, but we'd have to balance that up on average over time. The timing of when you pay the franking and those sorts of things washes through. On a sustainable basis currently where our tax rate looks like it is, broadly 75% looks like it's where it's going to flatten out to. That's where we've set it at.
Okay. No problem. It's sort of a sustainable number going forward, rather than sort of paying out what you can now and then.
It's a sustainable number looking forward.
Yes, it is. Sure. There's risk around Well, not risk, but it could change if the OBU rate changes, the OBU changes, our mix of on to offshore changes. It's driven by average tax rate.
Another question just around the performance fee, which was a reasonable size for the half year, obviously. There seems to be some mandates there that manage against a relative only hurdle rather than an absolute. Can you give us some color on that? I understand the Colonial funds are against a single hurdle. Is there any other significant ones that we should be thinking about?
Well, there are. Obviously, we've got the funds, we've got the relationship with AMP and Colonial and BT, where we have separate retail mandates. A number of them have performance fees attached to them. Some of them are subject to just a single hurdle, some of them are subject to double hurdles. We have performance fee arrangements with a number of institutional clients, some of those performance fee arrangements are quite bespoke, depending on what the client's objectives are. They're all different index. Some of them are just over absolute numbers, some of them are over just index numbers. There is actually a mixture, particularly on the institutional side of the book. We've never given an exact breakdown of how that works, and individually it's not material.
That's why you see different performance, why they're hard to forecast and they're lumpy, and some of them trigger at different times of the years. Some of them have six-month periods, some of them have longer periods. Some of them have maybe September end, some of them are June end, September end. It really depends when performance, what the measurement periods, when performance is hitting, what their hurdles are. We've just got a myriad of those different things. That's why it's lumpy and you trying to track exactly where performance is and what performance fees would be in a six-monthly period, can actually be pretty hard because we may have performance fees calculated over a two-year period with some institution, and you don't know when that period end is for crystallization of that.
Yeah. No, fair enough. Can you give us an update on the self-directed retail channel strategy? I get sponsorships were a reasonable part of sort of getting into that new market of self-directed investors, have you sort of reformulated the approach to market beyond obviously the listed ETF strategy attraction? Are there any sort of broader thoughts on that market?
Yeah, look, I'm sure Hamish will jump in here as well, the short answer is that we've sort of reviewed that. We're obviously being approached from everything from the rather under ten national netball team for sponsorship through to larger sponsors. We're obviously not looking to do that. The nature of the way that we're looking to rejig the marketing, we're very much more targeted. I know we've spoken about this, Hamish even spoke about this at the last results and at the AGM. It's much more targeted in that sense. Nick, we're doing a lot more around the events which perhaps Hamish can talk about within that. The self-directed stuff is very important to us, we continue to build unitholder bases across all the listed and those sort of products and part of UPT and those sorts of things fall into that.
We're going to try and build those things over time. As Hamish rightly points out and happily invest in those types of things to build a broad retail unitholder base. It will take time and those types of large one-off events like the cricket which was a bit more opportunistic, were part of that, it's not all of it. Hamish, I'm sure that
Yeah. This is something we've obviously spent a lot of time thinking about. I think brand is incredibly important when you go to the direct market. I think we're in a very fortunate place in terms of people who are interested in equities and brand recognition. The cricket did move things forward in a much broader sense.
I think in a brand coming to newspaper coverage and things, we've got a very good brand recognition there. First of all I'd say is brand there. How do you get people who are interested to get to you? One of our real insights, and it's really starting to build it up now through these listed funds and through some other things we're doing, is a very big client base 60 odd thousand people directly, obviously a lot more indirectly. You saw us when we did the roadshow, we actually had two client events and including advisors where we had 1,500 people. That was a bit of a pilot program.
Actually, we know that a huge amount of people who come into Magellan, who are individuals, come in because they've spoken to a friend who's had a good experience in Magellan, and we know a huge amount of viral referencing plus brand is incredibly important. What we're very focused in is how do we keep building up the base of investors that we have direct, and this is what the Global Trust and the Active ETFs were very important to. How do we really communicate with that? Because, if every one of those investors told 10 friends, you're talking about over half a million people that would be getting influenced. We think we've got a very decent base that's now built up.
We now have to work out how we actually really interact with that base and communicate with that base to become very loyal advocates in the space. We know direct people are underweight global equities, but are actually, a lot of them are very interested in that space. I think you'll see, probably next year, us do something much bigger in that sort of direct client space in terms of what we may. To do that well takes a lot of planning, but we're very focused on that. Are we going to start sponsoring new cricket teams and things to do that for that brand awareness? No, we're not. Are we going to be putting a lot of newspaper ads, sorry for the people from the AFR, in the AFR or something as a strategy?
We actually think that's incredibly inefficient and not a great communication forum. I don't think people reading an ad in the newspaper has that direct communication feel. As we're doing those things, we're thinking about it. This isn't easy because there's no real template of how you can talk to a mass of people who are individuals. Therefore, you have to get to the crowd of them, and you have to get that crowd working with you.
That's great. Thanks a lot.
As far as where we're up to at this point in time, we're happy with the evolution of where it's heading. Particularly delighted with the list of platforms that we now have.
Okay. Thank you all for joining us.