Magellan Flagship Fund : 2016 AGM - Chairmans Address & Portfolio Managers Comments

27 October 2016

ASX Limited

ASX Market Announcements Office Exchange Centre

20 Bridge Street

SYDNEY NSW 2000

In accordance with ASX Listing Rule 3.13.3, please find attached a copy of the Chairman's Address and the Managing Director/Portfolio Manager's Comments.

Yours faithfully,

Important Notice

This document has been prepared by Magellan Flagship Fund Limited ABN 32 121 977 884 ('MFF').

While the information in this document has been prepared in good faith and with reasonable care, no representation or warranty, express or implied, is made as to the accuracy, adequacy or reliability of any statements, estimates, opinions or other information contained in this document.

This document may contain forward looking statements. These forward-looking statements have been made based upon MFF's expectations and beliefs concerning future developments and their potential effect upon MFF and are subject to risks and uncertainty which are, in many instances, beyond MFF's control. No assurance is given that future developments will be in accordance with MFF's expectations. Actual results could differ materially from those expected by MFF.

This document does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, Information Memorandum, Prospectus or other offer document relating to a financial product or service.

Past performance is not necessarily indicative of future results and no person guarantees the performance of any financial product or service or the amount or timing of any return from it. There can be no assurance that the financial product or service will achieve any targeted returns, that asset allocations will be met or that the financial product or service will be able to implement its investment strategy and investment approach or achieve its investment objective.

The information contained in this document is not intended to be relied upon as advice to investors or potential investors, who should consider seeking independent professional advice depending upon their specific investment objectives, financial situation or particular needs. To the extent any general financial product advice is provided in this document, it is provided by MFF as a corporate authorised representative of Magellan Asset Management Limited ABN 31 120 593 946 AFSL 304 301

MFF recorded a net loss after tax of $9.9 million for the year ended 30 June 2016 (compared with a net profit after tax of $187.1 million for the previous year).

MFF's balance sheet is strong. As at 30 June 2016 the $786.4 million Total Equity comprised Retained Profits of $259.9 million and Contributed Equity of $526.5 million. Investments were $1004.4 million and Borrowings $107.9 million. MFF has substantial deferred tax liabilities (approximately $108.4 million as at 30 June 2016) which reflect more than $340 million of net unrealized gains compared with the cost of our investments. Current tax incurred was again below 1c per share.

MFF uses "mark to market" accounting for both investments and foreign exchange. Thus MFF's profit and loss starts each new financial year at zero, based off the market values at the end of the previous financial year. Hence significant fluctuations in reported year to year results are inevitable.

The 2015/16 result represents a decline after expenses and tax of approximately 1.25% based on our net assets. Negative marks to market on some of our investments modestly exceeded positive marks to market, and the benefits from currency movements were far smaller than in the previous year, and actually were negative in the second six months.

Quality businesses, valuation and risk controls continue to be key metrics for MFF's portfolio management. MFF's primary focus is to seek out investments in advantaged

companies at attractive prices. In the higher markets in recent years this has been much harder, and MFF has been very patient with both buying and selling.

Your Board and management have also overlaid risk controls including borrowing and position size limits. Your Board considers that MFF's high risk standards and investment processes continue to be well maintained. Your Board also remains pleased with Mr Mackay's focus as Portfolio Manager.

Your Board is updated regularly by the Portfolio Manager on his assessment of the risks and potential upside for the holdings, and potential holdings. We remain very pleased with the composition of the portfolio. We continue to caution against elevated investor expectations. Risks associated with the sustained low interest rates and higher asset prices continue.

Dividends

The Directors have declared a fully franked dividend of 1 cent per share, to be paid in November 2016. Imputation credits of approximately $3.8 m as at 30 June 2016 allow us to fully frank the dividend. The Directors' continued preference is for a regular six monthly dividend at 1 cent per share, subject to corporate, legal and regulatory considerations, with continued operation of the Dividend Reinvestment Plan (at zero discount to the applicable market price). Although we note and respect the desire of some shareholders for higher dividends, we also note that MFF's retained funds continue to be put to good use with strong medium term returns.

Capital Structure

A bonus issue of options was undertaken in October 2012 on a 1:3 basis to shareholders and the bonus options are quoted on the ASX (Code: MFFO). The adjusted exercise price of the options is $0.9964 and the expiry date is 31 October 2017. As at 30 June 2016 approximately 75.6 million options were unexercised.

We do not currently have any plans to raise additional new capital or otherwise alter MFF's overall capital structure. MFF has liquid investments, debt markets remain favourable and the MFF 2017 options are nearer their expiry date. Capital structure can be reviewed promptly if circumstances change, for example if a general fall in markets leads to far more attractive investment opportunities and the most sensible funding is not sale of existing investments, or additional use of MFF's borrowing capacity.

Your Board favours the possible benefits of greater scale but only if this is in shareholders overall interests. Your Board seeks to ensure that shareholders have equal opportunity to participate in entitlements or bonus option issues, and to realise market value for their entitlements and options.

The Portfolio Manager maintains a search for significant investments which might provide MFF with a meaningful flow of income, but market prices for these type of investments are unfavourable compared with the benefits of MFF's portfolio, including its liquidity aspects.

Service Arrangements

The key operating subsidiary of Magellan Financial Group was originally the manager of MFF, and since 2013 has provided research and other services as MFF's key service provider. Your Board has agreed to extend the arrangements on financial terms including a fixed fee arrangement for 3 years from 31 December 2016, comprising base fees of $4 million per annum and possible performance fees of $1 million per annum.

On-market Share Buy-back

Shareholders benefitted from the share buybacks we conducted in recent years at prices well below recent prices. It did not make sense to buy back shares in the past 12 months and so no shares were bought under the ongoing buyback authorisation.

MFF provides regular, very high levels of transparency about MFF, our portfolio, decisions made, prospects and risks in addition to detailed statutory information so that investors can make informed decisions about their investments. In addition to the Annual and half yearly reports, we release detailed figures each week including pre and post-tax figures, details of adjustments for exercise of the MFF options, updates in relation to the portfolio holdings, as well as extensive monthly commentaries.

MFF's processes continue to target strong medium term investment performance and for this to translate into share price performance over time. We note that notwithstanding MFF's repeated cautionary statements about elevated investor expectations, the share price raced ahead at the end of Calendar 2015 when the AUD was lower, and this has contributed to the lower share price this calendar year.

We welcome the questions we have received during the year and those specifically for the meeting. We will seek to address many in the formal comments and in Q+A, as well as questions from the floor and the phones.

An important question from a shareholder asked whether MFF non-executive directors take part of their fees in shares to align with shareholders. In the case of MFF the alignment is very strong: all the Directors have large shareholdings (multiples of their fees) that they have held for the long term and have increased during their time on the Board. These shares have all been paid for from our own resources on the same terms as other shareholders, and the Company has not incurred any outlay on Board or Executive share or option plans.

I now invite Chris Mackay to make some remarks and we look forward to your questions.