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Treasure Chest: Undervalued Fund Managers

Treasure Chest | Mar 21 2022

This story features MAGELLAN FINANCIAL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MFG

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Morningstar assesses the outlook for fund managers is brighter than implied by current share prices.

Whose Idea Is It?

The analyst at Morningstar

The subject:

Fund managers

Considering the announcement that Hamish Douglas has resigned from the board of Magellan Financial ((MFG)), it’s of some comfort to shareholders that Morningstar believes key person risk is mitigated by recent efforts to promote the investment team.

In research released just prior to the announcement, Morningstar rates the group as its top pick among A&NZ asset managers and believes in the capabilities of co-founder Chris Mackay, long-time alumni Nikki Thomas and head of Macro research, Arvid Streimann.

The current share price rather harshly implies to the analyst that the group will keep underperforming and fail to attract any new money over the next five years.

In fact, current prices for Magellan Financial, Pinnacle Investment Management ((PNI)), Pendal Group ((PDL)) and Platinum Asset Management ((PTM)) suggest the market is expecting an average profit decline of -6% per year for these asset managers over the next five years, according to Morningstar.

The analyst considers a profit decline of that magnitude is very unlikely as it would require ongoing outflows and below-index returns. By contrast, the four fund managers as a group are forecast to grow earnings per share at an average rate of 7% per year through to fiscal 2026 due to above-consensus investment returns. In addition, the asset managers are expected to benefit from leverage against fixed costs due to a growth in funds under management (FUM) and revenue.

In order of preference, Morningstar has Magellan as its top pick, followed by Pinnacle Investment Management, Pendal Group and Platinum Asset Management.

More info:

Morningstar forecasts that Magellan will deliver returns averaging 15% per year over the five years to fiscal 2026, as opposed to consensus which appears to be pricing-in below-index returns.

Over the long run, the analyst assesses that asset prices converge and those managers with undervalued portfolios like Magellan are likely to outperform. When the market is relatively cheap, asset managers should expect higher returns in future, and the reverse if the market is expensive.

By comparison to the 12-month broker consensus target price of $13.51 for Magellan within the FNArena database, which implies -15% downside to the latest share price, Morningstar has a $33 fair value estimate.

In reviewing Pinnacle Investment Management, the analyst predicts market share gains and believes the fund manager's affiliates are highly competitive in terms of performance and fees. A $13.90 fair value is set which compares to the $15.08 consensus target price in the FNArena database. The latter suggests 44% upside when compared to the latest share price.

In common with Pinnacle, Morningstar notes Pendal Group has a diversified clientele and a product breadth which opens opportunities for new money. However, the asset manager is ranked below Pinnacle due to potential outflows from institutional rebalancing and/or platform consolidation activity.

The analyst’s $8.50 fair value estimate is still above the FNArena database’s 12-month consensus target price of $6.98, which implies 42.6% upside to the latest share price.

Finally, Platinum Asset Management is Morningstar’s least preferred pick and the only no-moat asset manager under its coverage of the genre. Even then, the current undervaluation within portfolios supports higher future investment returns, and a fair value of $3.70 still exceeds the broker consensus target price of $2.52 within FNArena’s database. The latter suggests 11.40% upside to the current share price.

The downside for Platinum is the lack of market recognition for its contrarian style, thereby impacting an ability to outperform and attract fund inflows, explains the analyst.

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