Australia | Jan 16 2019
Wealth manager Magellan Financial's fund flows stood out in the December quarter and a better outlook has prompted several brokers to review their ratings.
-Strong first half expected and fund performance likely to enhance flows
-Fund flows are, nevertheless, emanating from a narrow business mix
-Flows likely to build at a slower rate than in the past
By Eva Brocklehurst
Magellan Financial ((MFG)) performed strongly over the December quarter, while many of its peers did not. This realisation has inspired several brokers to place the fund manager at the top of their pecking order.
A better outlook for fund flows has prompted Morgan Stanley to upgrade to Equal-weight, equal best in its view alongside Pendal Group ((PDL)). Global equities, in particular, have been strong for Magellan Financial.
Active ETF (exchange traded funds) flows have recovered, which suggests there is renewed retail demand. Moreover, brokers believe the business should benefit from the launch of the Airlie Australian equities to retail clients.
However, Morgan Stanley resists moving to Overweight because the flows are coming from a narrow business mix and there is no product with emerging market exposure. The company's advertised retail fees for global equities remain above peers, which signals a risk that prices will be reduced down the track, similar to what Platinum Asset Management ((PTM)) endured in 2017.
Morgan Stanley also points out that the core global equity strategies are nearing capacity with institutional clients, reducing the potential for large institutional mandate flows. Yet, institutional inflows show further capacity for existing clients, with St James Place expected to bring in $500m to $1.0bn per annum in future years, Credit Suisse asserts.
Credit Suisse believes there is an opportunity for a PE re-rating and retains an Outperform rating. The broker considers the concerns voiced over longer-term growth prospects are overplayed. While flows will build at a slower rate than in the past, opportunities still exist for Magellan.
Australian asset managers are trading near 15-year lows and, while a gradual recovery is expected, Morgan Stanley believes outflows will continue, and a substantial re-rating of the sector is unlikely in the near term.
While the outlook remains uncertain in 2019, Ord Minnett prefers those managers that carry strong alpha (performance relative to benchmarks) and momentum into the new year. Magellan's FUM is 22% higher at the end of the first half versus the prior corresponding half, which underpins around 20% profit growth in FY19.
Ord Minnett envisages more upside for Magellan versus Platinum Asset Management. Over the six months to December 2018 only Magellan produced a positive return (1.5%) and around 6.2% alpha versus the MSCI World index in Australian dollars.
Morgans upgrades to Add from Hold, although acknowledges heightened global market volatility poses a short-term risk. A strong first half is expected while the performance of its funds will enhance the stability of flows.
The longer-term options on the balance sheet include acquisitions and new product development. The main risks are a severe market downturn and sustained underperformance that leads to material outflows.
Morgans expects the first half result will provide few surprises, given FUM and performance fees are known and guidance on expenses has been provided. Any update on the demand for sustainable strategies or further utilisation of the balance sheet could be a catalyst, in the broker's opinion.
Two brokers on FNArena's database are yet to update on the latest quarterly from Magellan Financial. There are five Buy ratings and one Hold (Morgan Stanley). The consensus target is $29.24, signalling 6.6% upside to the last share price. The dividend yield on FY19 and FY20 forecasts is 5.8% and 5.9% respectively.
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