Company Reports

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.

With another successful year on the board, we increase our fair value estimate for Magellan Financial Group by 9.5% to AUD 23 per share. While fiscal 2016 earnings finished slightly below our forecasts, we do not view this as a reflection on the underlying business and growth potential, but fluctuating foreign exchange and equity markets. Looking to the future, we are comfortable higher margin retail funds will continue to rise and have made small upward revisions to our retail funds under management, or FUM, expectations over the long term. Being higher margin, the change increases average margins in fiscal 2021 to 78.5% from 77.5% previously. With FUM standing at AUD 40.5 billion as at 30 June 2016, Magellan enters fiscal 2017 with FUM 11% higher than going into fiscal 2016.

Despite net inflows of only AUD 158 million in May 2016, Magellan’s funds under management, or FUM, increased 2.7 billion in the month, a strong 6.7% increase to AUD 42.6 billion. As FUM grows, investment performance and movement in the Australian dollar (impacting the translation of FUM) are becoming much more meaningful drivers of FUM but can also increase monthly volatility. In fiscal 2015 and so far in fiscal 2016, stock performance and currency accounted for 59% and 36%, respectively, of the total uplift in FUM, well above the 24% average over the prior three years.

Magellan Financial Group's first-half fiscal 2016 net profit after tax increased 41% to AUD 109.3 million. Once again, a strong result being driven by increased funds under management, or FUM, which averaged AUD 38.8 billion during the half, up 44% on first-half fiscal 2015. Rapid FUM growth, which we have been accustomed to, slowed in first-half fiscal 2016. FUM increased 9% to AUD 39.7 billion during the six months to December 2015. Earnings growth will slow in the second half, cycling higher average FUM in second-half fiscal 2015. Management fees in the half increased 43% to AUD 128.3 million and are complemented by a 32% increase in performance fees to AUD 42.8 million. Cost growth of 51% exceeded revenue growth, but the operating margin remained high at 78.9%. A fully franked interim dividend of AUD 0.513 per share increased 38% on last year, with the 80% payout ratio of fund management earnings is at the top of the firm's 75% to 80% policy range.