Australia | Apr 13 2021
This story features MAGELLAN FINANCIAL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MFG
Soft flows continue to weigh on Magellan Financial Group and there is limited scope for a re-rating over the near term
-Retail net flows distorted by partnership
-Buybacks may weigh on Global Fund
-Is the stock expensive?
By Eva Brocklehurst
Fund flows for Magellan Financial Group ((MFG)) are proving erratic, with brokers finding it difficult to separate the underlying retail trend from the recent capital raising for the Global Fund partnership.
Funds under management for March were $106.1bn, up 5.4%, underpinned by positive market movements and some institutional inflows. Nevertheless, retail outflows occurred for the second consecutive month.
Morgan Stanley asserts it was the capital raising for the Global Fund ((MGF)) partnership that actually drove retail flows and, given this slightly displaced regular retail inflows, the extent of any slowdown in the underlying retail performance is unclear.
Institutional inflows of $346m were below estimates as well and the broker notes the performance of the Global Fund remains soft while the Infrastructure Fund ((MICH)) has improved modestly.
UBS calculates the -$15m in retail outflows in the month were largely comprised of global equities offset by net inflows into infrastructure and Australian equities. Lower margin core-series inflows of $17m in March listed on Chi-X were delivered largely to the infrastructure product.
The broker observes retail net flows are distorted by the partnership offering in February as this is likely to have captured some of the flow, agreeing the underlying retail trends need to clear before making an assessment going forward.
That said, UBS highlights the company's strong track record, although the flagship Global Fund has underperformed by -19.3% over one year while the Infrastructure Fund underperformed by -15.1%.
Performance fees are likely to be reduced in the second half and Credit Suisse suspects these are unlikely to be accrued in the Global Fund or Infrastructure Fund, although the former could stage a recovery in performance fees in FY22. Around $5-10m of accrued performance fees are in high conviction funds.
Credit Suisse asserts company's share buybacks are a vexed issue and could begin to weigh on the business, as the discount to asset values is likely to prevent options being exercised. The $3.1bn listed closed-end Global Fund is trading at a -10% discount to net asset value (NAV).
As the broker further explains, there are options on issue that allow their holders to buy up to $2bn of the Global Fund at a -7.5% discount to NAV. These are out of the money at the current price and unlikely to be exercised. Moreover, to address the discount Magellan is buying back units.
Credit Suisse reiterates a Neutral rating, acknowledging Magellan is a high-quality business which has a strong distribution channel. Nevertheless, the weaker fund performance makes the broker cautious about the short-term flows especially as most options are out of the money and the retirement income product is 6-12 months away.
In March, Macquarie downgraded to Neutral, assessing that given the track record in distribution capabilities, retail flows were not holding up as well as was anticipated. The broker also reduced performance fee expectations for the second half and concluded there was limited scope for a re-rate in the short term.
Macquarie had upgraded previously on the basis that inflows would be resilient. Yet on further assessment, although valuation relative to recent history appears attractive, there is limited scope while performance metrics and flows are under pressure.
UBS is mainly concerned that with the company now reporting flows on a quarterly basis rather than monthly, an extended period of investment underperformance could translate into sustained net outflows.
The switch to quarterly flow reporting will reduce disclosures but Morgan Stanley notes this is consistent with most peers and funds under management reporting will remain monthly. The broker maintains an Underweight rating, assessing the stock remains expensive compared with peers on 20x FY22 PE (price/earnings ratio) estimates and believing there is better value elsewhere in the sector.
FNArena's database has two Buy ratings (Ord Minnett, Morgans both yet to comment on the update), four Hold and one Sell (Morgan Stanley) for Magellan Financial Group. The consensus target is $50.41, suggesting 4.9% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.4% and 4.8%, respectively.
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