No Quick End To Outflows At Magellan

Australia | Jul 12 2022


Outflows continue at Magellan Financial amid weak markets. With further outflows likely ahead, analysts continue to wait for performance improvement before considering a more positive outlook on the stock.

-Outflows from Magellan Financial continue in the fourth quarter
-Flows of -$5.2bn did demonstrate improvement on third quarter outflows
-Risk remains for further outflows given $17bn global equity funds under management

By Danielle Austin

Another quarter of outflows has been reported by Magellan Financial ((MFG)), as weak markets impacted on funds under management. The company reported outflows of -$5.2bn for the quarter, but the result was a notable improvement on the -$ outflows reported for the March quarter.

Fourth quarter flows, comprised of -$1.7bn in retail outflows and -$3.5bn in institutional outflows, drove the company’s annualised outflow rate to -30%, and saw the company close out the year with funds under management of $61.3bn.

It was noted a 160-basis points outperformance by the Global Fund in June supported a small funds under management beat, which was offset by larger net outflows moving into FY23.

For investors, the question remains whether Magellan Financial’s current valuation captures potential further downside for the company.

Risk of further outflows remains

With $17bn remaining of Magellan Financial’s global equities funds under management and $16bn remaining of retail funds under management, analysts noted sizeable risk remains for the company to lose further funds through outflows.

Analysts highlighted global equities funds are at greater near-term risk of outflow, but retail funds, while likely stickier, are still expected to see sizeable outflows.

With four of FNArena’s database brokers updating on Magellan following the release of fourth quarter results, the analysts across these brokerages were largely in agreement that improved performance would need to be evident to support a more positive outlook on the stock. Two of these brokers are equivalent Neutral rated and two are equivalent Sell rated, while between them the brokers carry an average target price of $11.43.

Macquarie estimates outflows equated to -$1.2bn in April, -$2.5bn in May and -$1.5bn in June. Not only does the broker anticipate outflows will reach -$10.2bn in the next financial year, with an expected -$4.8bn in the first quarter, it sees further potential downside to forecasts.

The broker has adjusted its earnings per share forecasts -2.1% for FY22 and -10.2% for FY23, and -10.0% for the years following, attributing the declines to lower performance fees and expected funds under management declines driven by market movements.

Importantly for investors, the Macquarie analysts find the downside to Magellan’s outlook is already captured in the current share price following a recent de-rating. Macquarie is Neutral rated with a target price of $11.50.

Magellan Financial’s funds under management as at the end of the fourth quarter were a miss on Morgan Stanley’s expectations, but the broker acknowledges that performance not only improved in the quarter, but longer-term performance also looks to be improving.

The Morgan Stanley analysts also noted distributions of $0.4bn for July were in-line with forecast. Morgan Stanley is Underweight rated and holds a target price of $11.00.

Fourth quarter outflows were slightly worse than Credit Suisse analysts had predicted, but this broker has highlighted sizeable risk remains to Magellan Financial’s retained funds under management. Credit Suisse is estimating global equities outflows of -$8.5bn in FY23, as well as retail fund outflows of -$5.0bn.

Credit Suisse anticipates catalysts will continue to be negative in the near-term and drive ongoing outflows, and fund performance improvement would be necessary for the broker to take a more positive outlook on the stock. Credit Suisse remains Neutral rated, while its reduced target price of $12.00 was largely attributed to its updated sum of the parts valuation.

Noting that Magellan Financial’s funds under management position declined -8% during the period, and updating forecasts to account for fourth quarter results, Ord Minnett has lifted its expected outflows in the coming financial year by $5bn. The broker is now forecasting the company will deliver outflows of -$12bn in FY23, representing its more cautious view on the year ahead.

Ord Minnett highlighted it is yet to see evidence of sustained improvement in flows, or of a return to inflows, and that it remains concerned about the impact of pricing pressure in a competitive environment on flows. Ord Minnett is Lighten rated with a target price of $11.20.

The lowest target price, on our observation, is now Jarden's with its previous target of $10.10 lowered to $9.75. No surprise thus, Jarden, not part of the core seven brokers monitored daily by FNArena, has an Underweight rating for the stock, which in easy stockbrokers lingo is equivalent to Sell.

Jarden too sees continued material outflows colouring the asset manager's outlook and without any immediate plans to reset costs for operating the business. The one positive remark made in Jarden's latest update is it believes the majority of sizeable institutional outflows are now in the past.

Still, a further -$8.2bn in institutional outflows is anticipated for FY23, equal to circa -21% of institutional funds under management.

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