Magellan delivers solid result despite tough market conditions
And its new suite of retail listed products should drive future funds under management, says Morningstar.
Magellan Financial Group (ASX: MFG) has proved it will take more than a global pandemic to erode its earnings.
The global equity manager delivered a strong set of results amid challenging market conditions, lifting adjusted net profit after tax by 20 per cent to $438 million and growing average funds under management to $95.5 billion.
Additional flows, supported by the Magellan High Conviction Trust (ASX: MHH) raising and investment outperformance led to an increase in base management fees for the eleventh consecutive year, up 26 per cent to $587 million.
The fund manager also used to result to unveil a new series of low-cost exchange quoted open-ended funds—branded as MFG Core Series—and a retail version of its Global Sustainability strategy.
Morningstar regional director Adam Fleck has increased his fair value estimate for Magellan to $58 per share from $52 after incorporating stronger future net flow growth. At 3pm yesterday, MFG was trading at $64.54, a 10 per cent premium to Fleck’s fair value estimate.
"Our prior concerns on Magellan's moderating growth are abating, with management swiftly evolving its strategy to adapt to a new era of more demanding customers, a more crowded investment landscape and growing investor preference for low-cost funds," he says.
Importantly, Fleck has praised Magellan's willingness to move beyond relying on its strong track record to attract new investors. He adds that recent initiatives, like listing new retail strategies on the ASX while bearing the listing costs and providing loyalty discounts have proven effective at attracting new money.
"These are sensible strategies, as retail money is higher margin and often stickier," he says.
"Magellan's brand strength and track record give us confidence that its future endeavours to raise new money should be well-received."
Read Adam Fleck's full report: Magellan flexing its brand power and track record in search of more FUM, FVE increased
Fleck expects to see retail net flows to swell to $590 million per quarter over the next five years, above the five-year average of about $350 million and his prior forecast of $490 million.
He forecasts retail funds under management to account for at least 30 per cent of total funds by fiscal-2025.
Fleck's forecasts assume a take up rate of about 25 per cent of the fund's latest partnership initiative and excludes potential inflows associated with Magellan's delayed retirement income strategy.
Trailing returns | Magellan Global Fund
As of 31/07/2020
Source: Morningstar Direct
Going for growth
The launch of lower cost products is a first for Magellan and comes as active managers face increased competition from popular lower-cost index-fund alternatives. Its suite of global equity funds apply annual management fees of 1.35 per cent, plus a performance fee, which is high relative to its global peers.
Fleck says high fee margins have discouraged fee-conscious investors and precluded Magellan from being considered for low-cost model portfolios.
Magellan was light on the details in the ASX announcement, describing its MFG Core Series as an approach that "actively constructs diversified portfolios of high-quality companies leveraging Magellan’s research, and manages them using a proprietary process".
The series will be priced at 0.5 per cent.
Magellan's new Sustainable fund is also on trend, as investors increasingly seek to align their values with their investments. Sustainable ETFs have been growing at 79 per cent over the past five years, compared with 26 per cent for other ETFs, according to research from online investor adviser Stockspot, and outperformed their peers during the March COVID sell-off thanks to large weightings to healthcare and technology stocks.
The new funds come hot on the heels of the quotation of its Airlie Australian Managed Fund and the proposed restructure of its $11.6 billion global flagship fund into a single trust.
Under this arrangement, announced last week, Magellan will incorporate the open-ended Magellan Global fund, open-ended Magellan Global Equities active ETF (ASX: MGE) and the close ended Magellan Global Trust (ASX: MGG).
Magellan intends to make MFG Core and Magellan Sustainable available to investors via the exchange by the end of the year.
Magellan also provided an update on its highly anticipated income retirement income product. The fund was due to debut in the second half of 2020. It's now pending regulatory approval with a launch date unknown.
This article is part of Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.