BUY HOLD SELL -Magellan Financial Group (ASX: MFG)
Magellan Financial (MFG) – Is a specialist fund manager offering four core investment strategies – Global Equities, Global Listed Infrastructure, Sustainable, and Australian Equities (via Airlie Funds Management). The divisions target retail investors in Australia and NZ and institutional investors around the globe.
The bulk of its revenues come from management fees which are derived from its funds under management (FUM), the remaining 2.3% of revenue comes from its Principal investment’s arm. At the end of May, FUM totalled $109.93bn vs $110.43bn at the end of April. FUM is a function of investment performance and client inflows. A falling FUM points to weakness in those areas and while that is not the end of the world, in the context of a market that just printed its best financial year in 34, it leaves you feeling a little unsatisfied. Performance fees are another lumpy contributor to revenue but as they are inconsistent and uneven, they are not something that should be given too much weight. Performance fees in the first half were $12.4m vs $41.7m a year earlier.
Management breaks out the Warren Buffet quotes to describe its investment universe, citing ‘economic moats’ and sustainable advantages, effectively handballing all the hard work to the eighth wonder of the world – i.e. compounding. While that sounds like a cop-out, people pay for consistency.
It recently released a retiree income product called FuturePay, which an independent reviewer praised for its ability to produce income and access to capital through retirement. No comment on expected flows however, which is what the market will be paying attention to. Of more interest is its Principal Investments segment, which in the last financial year bought a 40% interest in financial services firm Barrenjoey and an 11% interest Mexican restaurant franchise Guzman y Gomez for ~$95m. Whilst it is growing, it’s not yet a core earnings driver.
- ROE is exceptional at 39% and expected to see further improvement.
- It sits on PE multiple of 23x. Peers in JHG and CGF sit on multiples of 10.6x and 14.2x respectively so you are paying a premium.
- A gross yield of 5.3% is well above the market average of 3.8%. MFG’s policy is to pay dividends between 90 to 95% of net profit
- It has ~$1bn in net assets and says a strong balance sheet is a crucial factor in withstanding any market conditions. $114.5 million is classified as intangible and arose following the purchases of Airlie Funds Management and Frontier Group, relating to goodwill and customer relationships.
WHAT SORT OF INVESTMENT IS MFG?
MFG is a fund manager with share price performance tied to its ability to attract inflows from retail and institutional investors via its reputation and fund performance. Some might shy away from the business given waning fund performance, but it is important to consider MFGs position in the domestic financial advisor network, a crucial factor Henry pointed out in a recent discussion and one reaffirmed by the AFR’s Joe Aston. Advisors have a fondness for Hamish Douglas, and MFGs perception as a high quality and reliable offering fosters loyalty. Aston noted that even chronic underperformance won’t cause a stampede of outflows. That said, constant underperformance is likely to erode loyalty over time. Looking ahead, product expansion through things like low-cost ETF’s and FuturePay will be a key to earnings going forward as competition from passive investments grows.
MFG is up ~25% from its March low vs the ASX 200 up ~8%, the low coinciding around the time of Blackrock’s purchase of ~3.5m shares, coincidence? Currently ~20% off its year high achieved back in August of 2020. RSI reveals it is in overbought territory. It satisfies Chris’ 3MA criteria. The question is, can it keep the momentum going? The US and domestic markets are behaving themselves which adds a bit of a tailwind, no obvious reason to doubt the trend at the moment.
Magellan’s recent funds under management (FUM) update and launch of its retirement income product prompted brokers to revisit their ratings. UBS retained a NEUTRAL stance but cautioned retail net outflows of $40m marked a fourth consecutive month of outflows. The broker pointing to elevated risked of that trend continuing. Macquarie mirrored UBS’ sentiment, NEUTRAL rating maintained. Ord Minnett assessed the retirement-income product (FuturePay) would only see support from a small fraction of the superannuation market. Morgan Stanley believes FuturePay will have a muted competitive influence on Challenger (CGF) given its not capital guaranteed.
Hamish Douglas is the co-founder, chairman and CIO with a cult-like following, branded the greatest of all time as a mechanic of the funds business. Brett Cairns is the CEO and has been with MFG since 2007.
A trend that would be encouraging if it was the share price, alas it points to developing bearish sentiment.
Exposure to global markets, a well-regarded team and ~$110bn under management lay the foundations for a strong investment case. That said, the MFG offering doesn’t engender a feeling of excitement, but maybe that’s the intention – security and consistency the pillars supporting the business. Its Principal Investment’s segment adds more flavor and spice but it’s not a key earnings driver – not yet anyway. Brokers see it fairly valued given slowing FUM growth. The growing appetite for low-fee products like ETFs are expected to erode margins but given its sticky customer base, there is no obvious reason to sell if you own MFG. The current trend and macro backdrop are supportive. HOLD.