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Magellan’s fair value cut as fund outflows tipped to continue

Lewis Jackson  |  12 Oct 2021Text size  Decrease  Increase  |  
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A run of poor performance has led Morningstar to cut its fair value for Magellan on concerns investors will take their money elsewhere. But analysts remain bullish, saying the market is overly pessimistic.

“We believe this pessimism is overdone," says Morningstar equity analyst Shaun Ler.

"At current prices, it's like you're buying a Ferrari at Honda prices.”

He lowered the global asset manager's fair value estimate by 9% to $50.50 last Wednesday after forecasting $7.5 billion net will exit Magellan Financial Group (ASX: MFG) in the next three years.

The stock closed Tuesday at $33.04, a 34% discount to the updated fair value.

However, Ler remains bullish, saying the market is pricing in far worse: the fund manager missing its 9% return target, measured across all its funds, and outflows continuing for five years, to the tune of $20 billion.

Ler forecasts Hamish Douglass’ stable of funds will return 9% per year on average between FY 2022-26. New products such as Magellan FuturePay and the MFG Core Series will help fund flows turn positive from FY 2025 by drawing in those wanting low-cost investments and retirement income.

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He points rising interest for Magellan owned Australian equities manager, Airlie, which saw more net inflows in the June quarter ($28 million) than in its first two years of life. 

The updated forecast comes as the fund manager announced net outflows of $1.5 billion for the September quarter, adding to the $351 million it lost the quarter before. Roughly $142 million of the September outflows followed Magellan’s decision to change its Listed Investment Company (ASX: MHHT) into an active exchange traded fund.

Total funds under management sat at $113 billion as of 30 September.

Investors are worried the famed stock picker has lost its touch. After being hurt by the value rally, two of fund’s top picks, Alibaba and Tencent, got embroiled in China’s technology sector crackdown.

The flagship Magellan Open Class fund (ASX: MGOC) had a 9.2% weight to Alibaba and Tencent as of 30 June, according to Morningstar data.

In an August update the fund announced it had sold its Tencent position due to the risk of future regulatory interventions. It maintained its position in Alibaba Group.

The Open Class fund returned 7.57% in the last year, trailing the benchmark MSCI World index by 20.17%. It also lags on a 3-and-5-year basis by 3.03% and 1.26%, respectively.

The drop in performance has flowed through to fees and profits . Performance fees dropped 63% in FY 2021, while underlying profit fell 6%.

Equity investors aren’t impressed and Magellan Financial Group has shed 47.8% this year.

But Ler doesn’t see any “serious flaws” in Magellan’s approach to investing. Poor performance is confined to the rout at Alibaba and Tencent and has not spread to the broader portfolio.

“People will switch to a better performing fund manager, but the logic is a little like buying high and selling low,” he says.

“A manager who outperforms in one year is likely to underperform subsequently.”

The flagship global strategy is currently about 5% undervalued versus the market based on Morningstar fair value estimates.

Institutional clients are sticking around for now. Magellan didn’t lose any institutional mandates in the September quarter despite net institutional outflows of $910 million.

These clients usually contract Magellan to deliver absolute returns of 10%, says Ler, not beat a benchmark. The fund manager has delivered that on a 3-year basis and beyond.

One consequence of the underperformance will be lower fees, says Ler. Magellan’s clients now have the leverage they need to push them lower.

He’s expecting management fees across the group to fall to 0.55% from 0.61% between now and FY 2026.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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