Home / Markets / The bull and bear case for Magellan

The Magellan Financial Group Ltd (ASX: MFG) share price has suffered a lot. There is both a bull and bear case for what happens next.

Magellan is one of the larger fund managers on the ASX, though its size is quickly diminishing. Others in the sector include Australian Ethical Investment Limited (ASX: AEF), GQG Partners Inc (ASX: GQG) and Platinum Asset Management Ltd (ASX: PTM).

Over the last six months the Magellan share price has declined by 59%.

Let’s look at why things could get even worse:

Bear case for the Magellan share price

A fund manager’s revenue and profit significantly rely on the amount of funds under management (FUM) that it has.

Magellan’s FUM had been rising over the years. But the last few months has seen a significant slump in FUM.

Some of Magellan’s most important investment funds have been underperforming the global share market benchmark by quite a lot. Being too defensive after the COVID crash and investing in Chinese shares may have been key causes of this underperformance.

Investors are only willing to put up with underperformance for so long.

At 30 November 2021, it had $116.4 billion of FUM. In December 2021, that had fallen to $95.5 billion after the loss of the St James’ Place mandate. In a recent update it said that at 23 February 2022, it had FUM of $77.2 billion.

That decline in FUM came from market movements, net outflows and notifications of intention to redeem.

Magellan is seeing billions of FUM walk out of the door. That means lower revenue and lower profit. It’s no wonder the Magellan share price has fallen so much.

It also doesn’t help that Magellan’s talisman, Hamish Douglass, has gone on a medical leave of absence. Mr Douglass should do what he thinks is best for his health, after intense pressure and scrutiny, but he has been the face and driver of Magellan. This is an example of key person risk. I hope he can make a swift recovery.

Without Hamish, more investors may get nervy. If performance keeps slipping then more FUM could leave.

Bull case

But I think there are bullish points for the Magellan share price too.

Magellan shares have now fallen a long way. At a certain point, it can become too cheap to ignore. The question is – how much further can it fall? Today’s price may well account for the likely loss of FUM. Any good news could be a catalyst for the start of a recovery.

The main thing Magellan can do to stem the flow is start generating good performance/outperformance. Magellan touts its long-term goal of 9% per annum after fees. It has still been hitting that goal. With increased volatility, the defensiveness of the portfolio could start doing well again in comparison to the benchmark. I believe that Chris Mackay and the investment team around him are very good investors. The return of Mr Douglass could also be a boost when/if that happens.

Magellan’s commitment to keep paying a high dividend should also help support the share price and attract income-focused investors. The dividend is extremely likely to be lowered in the next 12 months, to reflect the loss of FUM and profit. But against the current Magellan share price, it should still be a solid dividend yield.

Whilst the ‘external investments’ of Guzman y Gomez, Barrenjoey and FinClear are not significant parts of the Magellan value, they are growing in stature every six months, increasing that part of the underlying value of the Magellan share price. The company has indicated there are no plans for any more external investments.

Final thoughts on the Magellan share price

I think there is more FUM loss to come. June 2022 or July 2022 could represent the low point. But Magellan shares are now so low, I think it could be a medium-term opportunity if the investment team can sort out the underperformance.

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