Magellan: Higher-Than-Expected Redemption Spook Market but Overall Rate Slowing

No-moat Magellan’s MFG 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.

We now anticipate fiscal 2024′s institutional net outflows to be AUD 6.8 billion, or 17% of FUM. This accounts for investor aversion to risk assets and Magellan’s weaker track record relative to precoronavirus levels, making it challenging to retain FUM and thus weakening earnings. We expected lower volatility this fiscal half as interest rates stabilize. However, the continued hawkish stance of central banks implies the possibility of unexpected volatility, which could lead to additional redemptions not previously foreseen.

Nevertheless, net outflows are moderating, declining to 7% of FUM in the September quarter, down from 12% in both the June quarter and the previous corresponding period. We expect this trend to persist if investor confidence in risk assets returns and performance stabilizes.

Despite a challenging quarter marked by redemptions from growth asset classes, most peers experienced this cyclical headwind. Large passive and active investment firms in Australia similarly saw net outflows over the quarter and 12 months ending July 2023. Among those are Vanguard, Blackrock, BT, Fidelity, and Schroders. We expect rates to stabilize and potentially decline in 2024 as inflation normalizes and economic growth softens. This could reignite investor appetite, helping to improve industrywide flows. In turn, we expect this to moderate outflows from Magellan to below AUD 3 billion per year starting fiscal 2025.

We also believe redemptions from Magellan are becoming more concentrated in specific strategies, rather than being spread across a wide range.