Magellan Financial’s June Funds Surprise

This story features MAGELLAN FINANCIAL GROUP LIMITED. For more info SHARE ANALYSIS: MFG

Just when investors thought it was safe to go back in the water, Magellan Financial Group reported weak June funds flows, yet brokers remain divided.

-Things had been looking up for Magellan
-June FUM startles consensus
-Brokers divided

By Sarah Mills

After Magellan Financial Group ((MFG)) had underperformed the market by roughly -27% in FY23, there were signs in May that perhaps the blood-letting had been staunched, the company reporting zero outflows. 

But the company’s June funds under management (FUM) and outflows report put paid to that idea.

Net outflows in June were -$2.1bn (-61% of annualised FUM, observes Jarden) and sharply worse than consensus expectations of -$0.1bn. This compared with zero outflows in May.

The company still appears to be mired in flow-quicksand, despite improvement in its flagship fund’s performance, which triggered mark to markets by some brokers.  

Many of the company’s other funds are struggling to make headway and confidence is low. Yet brokers are divided.

While most see little chance of a major recovery any time soon, some maintain the share price has most likely bottomed, believing Magellan’s balance sheet may yet prove its saviour.

Macquarie Smells Blood

Macquarie estimates Magellan holds $5bn of institutional FUM in Global Equities, after losing -$2.1bn of annual opening FUM in June.

The broker now expects net outflows of -$4.5bn in the December half, forecasting -$2.4bn from retail and -$2.1bn from institutional.

Macquarie considers the Infrastructure fund’s $16.1bn FUM to be the least at risk.

While Magellan delivered $11m of performance fees in FY23, Macquarie says investors will be looking for a sustained recovery in relative investment performance and upgraded fund ratings, “which takes time”.

And time is money. So while the broker upgrades FY23 EPS forecasts 3.3%; it downgrades FY24 EPS forecasts -6.3%; and -16% to -18% thereafter.

Macquarie downgraded the fund manager to Underperform from Neutral in response to the update and cut the target price to $7.25 from $7.50.

Jarden’s Rule Of FUM

Jarden observes Magellan Financial's flagship fund did tick upwards on a three-year relative basis in the June quarter, yielding some welcome performance fees.

But institutions continued to withdraw mandates from the global franchise, and the Australian franchise hasn’t fared much better after the retirement of key man John Sevior.

Retail outflows were relatively stable month on month, but still constituted about 26% of assets under management, observes Jarden.

Given the risks to institutional flows and associate profits, the broker sees no reason to change its Underweight rating and its earnings forecasts are below consensus. Jarden cut its target price to $8.35 from $8.50.

Mark To Markets And Intriguing Balance Sheet

Two brokers conducted sector round-ups this month and marked to market.

Magellan fared better in this respect but it didn’t spare the company from flow-driven downgrades.

UBS downgraded earnings forecasts to reflect outflows and lower performance fees but retained the faith, noting markets were driving mark-to-market gains in cash and investments.

UBS is a more optimistic than peers, believing unnamed catalysts may emerge to unlock balance sheet value, which it maintains has been largely overlooked by the market.

Undaunted, the broker holds a Buy rating and raises its target price to $10 from $9.50.

Morgans Believes Outflows May Have Peaked

Morgans also finds succour after marking to market and likes to believe the worst is over, suspecting the company may have hit peak institutional outflows.

If anything, the broker spies risk in Retail FUM.

But the broker retains a Hold rating for now and shaves its target price to $9.85 from $10.14.

Rounding Up The Ratings

All up, the average target price for Magellan Financial Group barely moved, rising to $8.84 from $8.82, thanks largely to UBS’s big tick up.

That figure includes pre-FUM rating updates from Ord Minnett and Morgan Stanley (the latter not having revisited the company since February).

Ord Minnett last updated on June 21 and it too suspected a recovery might be in the wings but doubted the fund manager would regain its competitive strengths in a hurry. 

The broker downgraded to Hold from Accumulate after the share price broke through its sell trigger, and cut the target price to $7.25 from $7.50.

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