Magellan plummets on downgrade while GQG shines as outflows haunt industry

Magellan shares suffered their steepest drop in 13 weeks after Citi downgraded the once-favourite fund manager to “sell”, while rival GQG impressed with $US9.9bn net inflows.

Citi analysts cautioned that the market is getting ahead of itself regarding Magellan Financial Group, whose chairman is Andrew Formica. Picture: Britta Campion

Shares in Magellan Financial Group have suffered their steepest drop in 13 weeks, tumbling more than 7 per cent on Monday after Citi downgraded the once-favourite fund manager to “sell”.

Meanwhile rival GQG Partners impressed with $US9.9bn in net inflows.

A Santa rally in December that lifted most financial stocks had pushed Magellan shares 30 per cent higher to $9.65 at Friday’s close. That triggered a warning by Goldman Sachs that “the market is getting ahead of itself”.

The embattled fund manager reported higher funds under management metrics than expected of $35.8bn for December. But the totals were driven by rising equity markets and came accompanied by ongoing – albeit reduced – net outflows of $300m.

The fund’s global equities strategy also underperformed with a 0.7 per cent reversal, compared with the 5.2 per cent gain in the MSCI World index during the month.

“Magellan’s weak performance during the six months to December 2023 is reflected in its expectations for performance fees to be immaterial in the first half of the 2024 financial year,” Citi analysts said after Friday’s gains. Magellan reports its first half results on February 16.

Listed fund managers are facing a brutal cocktail of industry challenges. Competition from exchange-traded funds and super funds – former partners, now rivals – is squeezing fees, while rising costs, high interest rates, and leadership transitions add further pressure.

Yearly net inflows into open-ended managed funds have evaporated from $30bn in 2001 to redemptions totalling $37bn in the 11 months to November, according to Morningstar data compiled by Betashares.

That includes a 63 per cent increase in net outflows from the $22bn that exited the industry in 2022.

A note from Goldman Sachs over the weekend also reminded investors of several uncertainties surrounding Magellan, including a pending CEO replacement, and risks around the upcoming conversion of Magellan Global Fund closed class units, into open class units in the same fund.

“We remind that this could be a catalyst for further outflows by enabling unitholders to exit at net asset value rather than a discount to NAV,” Goldman Sachs wrote in a note to clients.

“Funds under management exposed (to that potential exit) is about $2.7bn of retail funds,” it said.

Shares in the embattled fund manager closed down 7.4 per cent at $8.94 each in a weaker overall market on Monday, the sharpest fall since the stock lost 18.5 per cent on October 6 over September’s $2bn outflow.

At the other end of the spectrum in the industry, Magellan’s rival, ASX-listed global investment fund GQG Partners on Monday stood out as one of the few active managers to secure significant net inflows in challenging times during 2022 and 2023.

“On a full year basis, we expect to be among the top firms in net fund inflows for active equity managers, both in Australia and the US, as measured by the leading industry benchmarking firms,” the company told the ASX on Monday.

Shares in the Florida-headquartered GQG rose as much as 3 per cent to $1.71 as it showed it bucked the industry trend with net inflows of $US0.9bn in December for total net inflows of $US9.9bn in 2023.

It ended 2023 with a record $US120.6bn in funds under management (FUM), up 37 per cent from a year earlier.

“It’s a great result, we’re very proud of it obviously,” GQG Partners managing director for Australia and New Zealand, Laird Abernethy, said.

“Not that we measure ourselves in terms of FUM or flows. We have delivered really strong risk adjusted returns to our clients, and that’s our number one measure.”

The GQG Partners Global Equity Fund underperformed the benchmark with a 2.74 per cent total return in November, according to the latest fact sheet published for that month. But the performance beat the benchmark over the three month, one year, three years and five year time horizons.

Mr Abernethy said delivering solid risk-adjusted returns while keeping fees as competitive as possible was a key feature of its strategy.

“We aim to be at or below median of full fees in every market within which we operate,” he said. “It’s a second consideration, but a really important consideration.”

GQG’s ASX statement said the firm was starting 2024 with a “promising” pipeline for potential new business. The fund had a lot of “interest” from potential investors in the US, Asia Pacific and Europe, the Middle East and Africa, Mr Abernethy said.

Beside its ambitions to keep growing organically, the firm was also looking at inorganic growth opportunities.

“Whether that is through M&A or whether it is through a liftout of capability from another manager, or whether it is just through individual hires … it’s all on the table.”

GQG shares closed 1.2 per cent higher on Monday at $1.68 each, below their 2023 peak of $1.76 and 2021 listing price of $2 per share.