Magellan Financial sees green shoots as Macquarie warns outflows to continue

Macquarie has warned that Magellan’s troubling outflows will continue to remain elevated until performance improves, as the fund manager sees green shoots in its global unit.

Green shoots at Magellan Financial’s global funds division could trigger broker upgrades as the fund manager continues to battle with an outflow in funds under management.

But analysts at Macquarie says the fund manager will continue to see outflows persist at current levels until performance metrics improve.

It comes as Macquarie lowered its target price on the embattled fund manager from $9.60 to $7.50, while maintaining a neutral recommendation, as a result of recent sector downgrades and the broker’s cut to earnings forecasts at Magellan in FY23 and FY24.

Macquarie said that Global Fund performance metrics have shown some improvement in recent months largely as a result of foreign exchange, but it needed to sustain its winning run before a rerating could occur.

Macquarie said that much of that winning streak had been a result of Magellan having 1.3 per cent of funds unhedged and exposed to currency movements compared to the industry average of 0.1 per cent.

On a three-year metric, the fund manager was still performing 9 per cent below benchmarks, according to Macquarie.

“Magellan’s valuation is not stretched with the core funds management business trading on 8.3 times FY24 price-earnings ratio after adjusting for Principal and net fund investments at carrying value,” Macquarie said.

“However, we believe recent improvements in performance will need to be sustained for at least three to six months before we see a rerating.”

The outlook of equity markets, investments, net flows, staff turnover and M&A action were upside and downside risks Macquarie noted that could impact or aid Magellan.

Shares in Magellan rose 1.3 per cent to $7.79 on Monday, but remain 10 per cent lower from the start of the year 52 per cent off from this time in 2022.

Magellan however continues to trade at levels not seen since 2013 as the company suffers from investors pulling funds from the manager, which have gone from $118bn in August 2021 to $43.2bn as of March 31. That includes a $23bn mandate pulled by St Jame’s Place in December 2021.

Magellan’s Australian equities business, Airlie, had $6bn in funds under management at the end of March compared to $9bn on February 28. Industry fund behemoth HESTA pulled its mandate from Airlie following the retirement of veteran John Sevior.

“We expect retail outflows to persist at current levels until we see sustained improvement in performance metrics. Institutional outflows are likely to be less material going forward ($6-7bn remain in Global Equities), with the most immediate risk being additional mandate losses from Aus Equities,” Macquarie said.

“We forecast ~$2.9bn of outflows in 4Q23 (institutional: $1.5bn; Retail $1.4bn).”

The past two years have marked a horror period for Magellan that included the exit of former chief executive Brett Cairns, and chairman and chief investment officer Hamish Douglass who also co-founded the company.

Magellan chief executive David George, who has been in the top job since July last year, certainly has a big task ahead. He has stuck to a strategy to get the company firing again and take funds under management back to $100bn by 2027.