Company Reports

Magellan Financial Group is an active manager of listed equities and infrastructure. The firm historically had considerable success in growing funds under management, owing to its record of outperformance all the way from 2008 to 2019, product expansion initiatives, and strong distribution capabilities. Excess cash is invested in funds, listed shares, and unlisted investments under its principal investments segment.

No-moat Magellan’s Financial Group fiscal 2024 results slightly exceeded expectations, with underlying net profit after tax up 2% from the prior year to AUD 178 million, surpassing our forecast of a 1% decline to AUD 173 million. Earnings from funds management and principal investments modestly exceeded our expectations. A key surprise was the stronger-than-expected investment returns from principal investments, leading to an increased earnings contribution to 33% of group normalized pretax profits in fiscal 2024, compared with 22% in the prior year. Funds management earnings benefited from higher performance fees, which can be volatile.

Average earnings for the seven asset managers under our coverage—Challenger, GQG, Insignia, Magellan, Perpetual, Pinnacle, and Platinum—will likely improve over the near term to fiscal 2025, but moderate thereafter. This is partly due to our expectations for continuing net outflows, on average. While potentially lower rates in fiscal 2025 could lead to a cyclical flow uplift, any benefits may be short-lived, as asset class rebalancing activity subsides. Given the cohort’s largely average peer-relative returns, we expect their FUM share losses to exchange-traded funds and industry funds to persist. Competitive pressures are also likely to weigh on fees and earnings.

This note replaces the original version that accompanied our report "Industry Pulse - Australian Asset Managers: 2024 Q1," published March 14, 2024. We were recently made aware of inaccuracies in the net flow data for certain unlisted managers in that original report. As for our investment conclusions, we stand by our key assessments: the fair value estimates, moat, uncertainty, capital allocation, and star ratings for our Asset Manager coverage.

We recently published our inaugural Industry Pulse: Australian Asset Managers 2024 Q1. It has come to our attention that some the detailed industry data we presented may not be accurate, namely around asset manager inflows and outflows. As far as our investment conclusions are concerned, we stand by our key assessments, namely the fair value estimates and moat, uncertainty, capital allocation, and star ratings for our asset manager coverage. Key data for the companies we cover is captured separately and directly from the relevant companies, and we have no reason to believe it is incorrect. However, while we investigate to confirm the accuracy and presentation of the detailed underlying data, we have retracted the report from our products. We will seek to reissue a corrected report, along with an explanatory accompanying note, as soon as practical.

Share prices of ASX-listed asset managers fell for most of 2023 but broadly rebounded late in the year in anticipation of lower interest rates. Stabilizing interest rates generally enhances investor risk appetite, thus boosting fund flows, asset prices, and earnings for asset managers. Globally, net annual fund flows into open-ended, money market, and exchange-traded funds turned positive in March 2023 after close to six months of net outflows. This reflects a stabilizing US federal-funds rate and an increased likelihood of rate cuts in 2024. In Australia, the prospect of cuts in the Reserve Bank of Australia’s cash rate in the near term is likely positive for flows into Australian-domiciled funds—consisting of ETFs, industry funds, and active managers.

We retain our fair value estimate for no-moat Magellan at AUD 9.60 per share following release of first-half fiscal 2024 results. Operating segment pretax profits of AUD 116 million fell 8% from the prior comparable period, or pcp, which was slightly worse than we expected. This negative was offset by a reduction in the size of fund investments, which we had forecast to deliver returns below Magellan’s 9% cost of capital. Shares have rerated close to our fair value estimate and are now close to fairly valued.

Magellan Financial Group is an active manager of listed equities and infrastructure. The firm historically had considerable success in growing funds under management, owing to its record of outperformance all the way from 2008 to 2019, product expansion initiatives, and strong distribution capabilities. Excess cash is invested in funds, listed shares, and unlisted investments under its principal investments segment.

Our conviction in the thesis for listed wealth managers, asset managers, and their related service providers has strengthened after gathering insights from the recent 2023 Super & Wealth Summit, hosted by the Australian Financial Review. These firms are influenced by similar business drivers and industry trends. Most derive their revenue from funds under management and/or administration, or FUMA, which are driven by asset price movements and new fund flows from clients, and management fees or commissions on these FUMA.

Magellan Financial Group is an active manager of listed equities and infrastructure. The firm historically had considerable success in growing funds under management, owing to its record of outperformance all the way from 2008 to 2019, product expansion initiatives, and strong distribution capabilities. Excess cash is invested in funds, listed shares, and unlisted investments under its principal investments segment.

The sudden departure of CEO David George is unsettling amid no-moat Magellan's ongoing turnaround efforts. However, while we anticipate additional redemptions stemming from this event, we don’t think the value erosion will be as great as when Brett Cairns and Hamish Douglass—both longtime Magellan personnel—relinquished their CEO and chairman roles in late 2021 to early 2022.

No-moat Magellan’s recent funds under management updates post-fiscal 2023 highlight its vulnerability to prolonged market downturns. We trim our fair value estimate to AUD 10.20 per share from AUD 11.00 on higher-than-expected institutional redemptions. Net institutional outflows of AUD 1.7 billion in the September quarter exceeded our expectations, making up 68% of our prior full-year projection of AUD 2.5 billion.

Magellan Financial Group is an active manager of listed equities and infrastructure. The firm historically had considerable success in growing funds under management, owing to its record of outperformance all the way from 2008 to 2019, product expansion initiatives, and strong distribution capabilities. Excess cash is invested in funds, listed shares, and unlisted investments under its principal investments segment.

Magellan’s first-half fiscal 2021’s earnings results were pedestrian, with adjusted NPAT down 2% on the prior period to AUD 213 million. The main detractor was a 70% drop in performance fees to AUD 12.4 million given Magellan’s underperformance in 2020. A lack of detail on the upcoming retirement income product (including launch date and pricing) is somewhat disappointing, though it also presents potential upside risk to our forecasts. We marginally cut our fair value estimate by 4% to AUD 57.50 per share, from AUD 60.00 previously, after revising forecast fund flows, operating margins and working capital.

We marginally lift our fair value estimate on narrow-moat Magellan Financial Group to AUD 60.00 from AUD 58.00 previously, after incorporating the time value of money and adjusting our working capital assumptions. At present, shares are trading broadly in line with our fair value estimate, offering a fiscal 2021 dividend yield of 4.2%.

We think Magellan has built the foundations for strong future earnings growth from the significant scale it now has in its fund management business. Funds have been attracted by achieving excess returns with lower volatility and drawdowns relative to most peers. Additionally, the firm has benefited from an effective distribution team which has helped establish its brand. This places it in a strong position to benefit from Australia’s growing pool of self-managed superannuation funds that still have a relatively low allocation to global equities. In addition, the firm is generating solid returns in its principal investments business which invests in its funds, listed shares and some unlisted investments.

We think Magellan has built the foundations for strong future earnings growth from the significant scale it now has in its fund management business. This scale has been built over time by generating above-market performance on existing funds under management, or FUM, as well as attracting new FUM. Funds have been attracted by achieving excess returns with lower volatility and drawdowns relative to most peers. Additionally, the firm has benefited from an effective distribution team which has helped establish its brand. This places it in a strong position to benefit from Australia’s growing pool of self-managed superannuation funds that still have a relatively low allocation to global equities. It already boasts total FUM of above AUD 97 billion, consisting of its core global equities strategies, infrastructure equities strategies and Australian equities strategies. In addition, the firm is generating solid returns in its principal investments business which invests in its funds, listed shares and some unlisted investments.

Narrow-moat Magellan Financial Group delivered a strong set of results amid challenging market conditions, and unveiled new initiatives which we believe should help drive further funds under management, or FUM, inflows. Fiscal 2020 adjusted NPAT was up 20% from the prior year to AUD 438 million, 10% above our forecasts. Base management fees increased for the 11th consecutive year, this time by 26% to AUD 587 million. Average FUM grew 26% to AUD 95.5 billion, supported by the Magellan High Conviction Trust raising, consistent net flows and investment outperformance that helped Magellan soften the coronavirus hit.

Following the COVID-19 outbreak, equity markets are likely to remain volatile over the near term unless there are clear signs that the virus is successfully contained on a global scale and economic stimuluses are effective in limiting the severity of a global downturn. Revenue will be under pressure for asset managers Magellan Financial Group and Platinum Asset Management, which derive fee revenue from managing global equity portfolios. This includes base management fees that should reduce on the lower value of assets under management and performance fees that are likely to fall sharply.

Yet another strong result from narrow-moat Magellan Financial Group, this time with first-half fiscal 2020 underlying net profit after tax, or NPAT, increasing by 23% from the prior period to AUD 216.8 million fuelled by a rapid increase funds under management, or FUM. This prompts our fair value estimate increase to AUD 52.00 per share from AUD 47.00 previously. Higher than expected FUM growth being the primary driver. We now expect average FUM to grow by a CAGR of 14.4% to about AUD 149 billion by fiscal 2024, from our previous forecast of AUD 142 billion. In our view, a series of tailwinds are propelling Magellan’s FUM growth, notably: an enviable reputation of outperformance; strong distributional relationships, a favourable trilogy of low inflation, low interest rates, and low growth globally. This is leading to investor risk aversion and a chase for growth and yield which is increasing the demand for managers such as Magellan with a strong focus and history of protecting against downside risks and strong dividend growth.