Magellan Financial Group 1Q22: waiting for a turning point
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 07 October 2021, 8:30 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- Magellan Financial Group (ASX:MFG) ended Sept-21 with A$113.3bn FUM, down -3.9% for the month; flat on the quarter; and up 11% on the pcp.
- FUM decline over the quarter was driven by retail outflows (~A$617m); Institutional outflows (~A$910m); and implied fund performance and FX moves (~A$3.1bn).
- Retail outflows represented ~2% of opening FUM (~8% annualised). Around 23% of the flows related to the MHH restructure (more one-off in nature).
- We acknowledge our Add recommendation has been on the wrong side of the share price momentum. We see value in MFG (<14x PE vs ~20x historical average) and longer term we think investments made in Associates presents solid optionality rather than meaningful risk (distraction) to the underlying business.
- However, we move to a Hold rating as we see negative sentiment prevailing until there is a better data point to provide investor confidence on MFG’s flows trajectory.
Event: 1Q22 FUM update
MFG closed Sept-22 with A$113.3bn FUM, relatively flat for the quarter and down 3.9% on Aug-21. FUM composition comprised Retail FUM of A$29.9bn (down 3% for the quarter); and Institutional FUM of A$83.3bn (+0.4% for the quarter).
MFG experienced 1Q22 net outflows of A$1.53bn comprising Institutional outflows of A$910m (pcp A$1.8bn inflow) and retail outflow of A$617m (pcp A$716m inflow).
MFG noted A$1bn of institutional outflows were the result of three clients rebalancing across Global Equities (A$410m), Infrastructure Equities (A$410m) and Australian Equities (A$180m), with all three clients retained (mandates >A$2bn each).
No institutional mandates were lost in the quarter and the Sustainable Strategy secured its first two mandates. Of the retail outflows, MFG stated that ~23% (~A$142m) related to the redemption from the High Conviction Trust (HCT), post restructuring to an active ETF.
Total outflows represented ~1.3% of FUM (5.4% annualised), with retail outflows representing 2% (8% annualised or 6% excluding HCT) and institutional 1.1% (4.4% annualised). If sustained at these levels (annualised), we estimate the revenue impact at ~6%.
Risks: will they eventuate or will it end up being sentiment driven
Several factors are playing into sentiment against MFG: investment underperformance (relative) in the main Global Fund and the potential for this underperformance to see accelerated or sustained outflows; lack of traction in new strategies to drive the next leg of FUM growth (ex market/investment performance); and the potential for (or at least more focus on) fee pressure.
Whilst we expected retail outflows, we note redemption in the main retail Global fund (MGOC) continued in Sept-21 (~A$165m outflow). Stabilisation of flows is important to any PE re-rate, however given the retail outflows have recently commenced, we believe this trend is likely to continue shorter term.
The focus on fee pressure has been reignited recently. We note MFG’s Global fund fee structure is at the upper end compared to peers, which is less defensible in periods of relative underperformance. We note MFG also provides a low-fee structure fund and we therefore see fee reductions as unlikely (sensitivity overleaf).
Forecast and valuation update: factoring in some more outflows
Our FY22-24 EPS is downgraded by ~7-12% based on a FUM mark-to-market and factoring in higher outflows.
Investment view: plenty of value, but prefer to see a base formed
At 14x PE, MFG is trading at a significant discount to its historical multiple (~20x) and our valuation.
Despite this, we think a positive re-rating will require evidence the risks (perceived or otherwise) are alleviating. We move to a Hold recommendation.
Price Catalysts: investment performance
Reversal of the short-term investment underperformance (alleviating market concerns of meaningful outflows); strong market performance.
Downside: market volatility / materially fall; sustained underperformance of major funds leading to material FUM outflow.
Upside: higher-than-expected inflows into new product launches; acquisitions; higher-than-expected fund performance/fees.
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