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Downside Risks Loom For Magellan Financial

Australia | Jul 08 2021


Downside risks are looming to consensus estimates for Magellan Financial in FY22 after a record quarter of outflows

-Global Fund materially below benchmark over one year
-Retail flows may have improved slightly during the month of June
-Magellan Financial's base remains resilient and balance sheet is strong

By Eva Brocklehurst

The June quarter provided the largest quarterly outflows on record for Magellan Financial Group ((MFG)). Morgan Stanley is one broker that does not believe the current share price captures the downside risks to consensus flows nor increased earnings volatility from growing principal investments.

The broker assesses global equity funds drew the bulk of the outflows and envisages downside risk to consensus estimates going into FY22. Funds under management (FUM) was up 3.6% in June to $113.9bn and up 7.4% over the quarter, driven by strong markets.

This was offset by -$351m of net outflows comprising -$260m in retail and -$91m in institutional. The last time Magellan had such a large retail outflow was in March 2020, the broker notes. The performance fees earned during the second half of $17.6m appear to be driven by the high conviction strategies.

Credit Suisse also considers consensus forecasts are too high, at net flows of $3-4bn per annum in FY22-23. This view stems from the June quarter outflows and the weak performance in the Global Fund, which was materially below benchmark on a one-year time horizon and more modestly below benchmark across three- and five-year horizons.

Over the longer term the track record is strong but the Global Fund has now underperformed -16.8% over one year, -1.2% per annum over three years and -0.3% over five years. Meanwhile, the Infrastructure Fund was -9.4% below benchmark for one-year but outperformed over longer horizons.

Morgans is more confident, assessing the net outflows  as "relatively minor" and reflecting the relative saturation of Magellan's funds in retail portfolios. The broker believes the base earnings are resilient and there are longer-term growth options from new products. The balance sheet is also strong.

The broker acknowledges relative investment performance needs to be better for sentiment to improve and market direction will influence the short-term earnings trajectory. Over the longer term, Morgans believes growth will be supported.

UBS notes retail flows improved slightly during June and does not consider the level of outflows in the June quarter material in the overall context, while acknowledging a softer medium-term performance is clearly having an effect and pointing out the company is no longer providing monthly flow numbers.

The broker notes the new FuturePay product procured $6m in net inflows in the first month, taking FUM to $17m. FuturePay is the company's retirement income product and has a target yield of around 4.25% per annum and a 1% management fee. Distributions will be paid monthly and grow quarterly with inflation.

Yet Macquarie highlights, while early investors receive some income certainty, any outperformance generated from their capital will be used to provide protection for subsequent investors, which reduces the appeal of being an early investor.

Loyalty Scheme

Credit Suisse notes the loyalty scheme's significance has deteriorated and it is likely to be discarded. Magellan has provided incentives to participate in fund raising by offering loyalty units valued at up to 7.5%. These were offered on close-ended LICs (listed investment companies) and have begun trading at a discount to net asset value.

Activist investors, the broker asserts, have now agitated for a transition to open-ended vehicles to close the discount. Credit Suisse suspects this will likely lead to outflows of -$100-200m, signalling the scheme is not as lucrative as previously expected.

FNArena's database has two Buy ratings, four Hold and one Sell (Morgan Stanley). The consensus target is $ 51.34, signalling -4.4% downside to the last share price. Targets range from $47.50 (Macquarie, yet to comment on the update) to $58.05 (Morgans). The dividend yield on FY21 and FY22 forecasts is 3.9% and 4.4%, respectively.

See also, Magellan Becalmed on April 13, 2021.

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