-Hard to stage a comeback from here – but not impossible
-Pressure expected to remain for several quarters<\/strong><\/p>\n
By Sarah Mills<\/p>\n
More than a few eyebrows were raised yesterday when Magellan Financial Group ((MFG)) announced its September quarter funds under management (FUM) data. <\/p>\n
FUM fell -$4bn to $84bn in its Global Equities fund after investors switched allegiances in response to the fund’s poor performance.<\/p>\n
Net institutional outflows rocketed to -$910m in the September quarter from -$91m in the June quarter as three clients rebalanced portfolios; and retail outflows jumped to -$617m from -260m. <\/p>\n
Net flows in other segments were stable.<\/p>\n
Most of the outflows were clocked in the month of September, so while FUM rose 11% on the previous year, it fell -$600m in September.<\/p>\n
Credit Suisse suggests the outflows in isolation are only likely to reduce earnings by only -1% to -2% in FY22-24.<\/p>\n
But should investors turn tail in search of greater opportunity, or should fees be reduced, both would result in material falls in earnings per share. <\/p>\n
Morgans reports that every -10 basis point fee reduction translates to a -3.8% fall in EPS but says a fee reduction is unlikely for this very reason.<\/p>\n
While Credit Suisse expects institutional investors will continue to support the stock given downside protection, the broker expects this to be outweighed by redemptions relating to weak performance.<\/p>\n
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Key drivers suggest pressure on fees<\/u><\/p>\n
The outflows reflect a year of underperformance. The fund has posted its worst run on record, underperforming the benchmark in 10 out of 11 months, reports Macquarie. <\/p>\n
Credit Suisse reports the Global Fund’s has under-performed by about -19% over one year.<\/p>\n
About 23% of net retail outflows relate to redemptions from the High Conviction Trust when it was converted to an open-end active exchange-traded fund, providing an opportunity for investors to exit.<\/p>\n
At face value, this is likely a one-off occurrence, but sentiment could snowball.<\/p>\n
Credit Suisse doubts retail outflows will slow, forecasting continued deterioration over the next three years.<\/p>\n
Nearly all brokers believe the likelihood of continued outflows means the pressure on the fund to drop performance fees this half is very high.<\/p>\n
Morgans reports Magellan’s fees are at the upper end and less defensible given underperformance.<\/p>\n
Magellan explains<\/u><\/p>\n
Magellan advised the market that FUM flows no longer drive the economics of the business and that absolute performance is, instead, the unit holders’ focus.<\/p>\n
That may be the case, but sentiment often has little to do with economics and sentiment can be powerful driver in an uncertain share market.<\/p>\n
In its defence, the fund points out that it lost no institutional mandates in the quarter of FY22, and has gained its first two mandates for its new Sustainable strategy.<\/p>\n
Ord Minnett expects Magellan’s best-in-class distribution function will be tested as it defend its funds under management as will its investment style of attracting low downside capture.<\/p>\n
The broker suspects that the fund might be best off using its dividend reinvestment plant to reinvest in the share price rather than add incremental capital.<\/p>\n
Outlook weak as challenges compound<\/u><\/p>\n
Most brokers spy strong valuation support, but expect consensus downgrades as negatives compound and are likely to be unavoidable should performance fees be lowered.<\/p>\n
Investor fatigue, continued pressure on outflows and pressure on performance fees could feature during the FY22 first-half.<\/p>\n
Most expect no revival for several quarters.<\/p>\n
Morgans reports lack of traction in strategies to drive FUM growth and growing fee pressure, but sees fee reductions as unlikely.<\/p>\n
Still, things can turn on a dime<\/u><\/p>\n
The fund has been purchasing deeply discounted growth companies in a year of rotation out of growth and into value. A reversal in FY22 could revive fortunes.<\/p>\n
But the falls are set against high market uncertainty; the Fed intimating rate rises as supply-driven inflation hits the economy, deleveraging in China as the Evergrande concerns weigh on the market; and a flood of global debt.<\/p>\n
During FY21, the fund invested in investment bank Barrenjoey, financial services provider FinClear and food chain Guzman y Gomez.<\/p>\n
So the majority of brokers have plumped on the side of caution, despite nearly all appreciating the stock’s low valuation (the stock is trading on a price-earnings multiple of 13x).<\/p>\n
Fund manager WAM Capital ((WAM)) recently bought in to the fund for that very reason.<\/p>\n
Forecasts vary sharply<\/u><\/p>\n
Macquarie was the notable positive exception, upgrading the fund to Outperform from Neutral citing the 7% dividend yield and downside protection, but has cut its target price to $38.00 from $46.75.<\/p>\n
The broker describes the fund as bent but not broken, expecting one-year metrics should improve after November but still underperform benchmarks.<\/p>\n
Morgans downgrades from to Hold from Add, and cuts its target price to $42.85 from $54.85, waiting for sentiment to play out before committing.<\/p>\n
Ord Minnett retains a Hold rating and cuts its target price to $36.00 from $48.50.<\/p>\n
Credit Suisse retains a Neutral rating, expecting the Global Fund will continue to underperform and reduces the target price to $35 from $37.<\/p>\n
Morgan Stanley retains its Underweight rating and $34 target price. <\/p>\n
UBS retains its Sell rating and lowers the target price to $29 from $35.<\/p>\n
The FNArena broker database is split two Buy, two Hold and two Sell (or equivalent) ratings. A consensus target of $37.81 suggests 17.8% upside.<\/p>\n
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