Magellan funds at ‘high risk’ of further outflows, Macquarie says

Macquarie analysts warn of more outflows at the investment management giant, lowering earnings forecasts and valuations after $5bn exited its funds.

Magellan Financial chairman Hamish McLennan and interim CEO Kirsten Morton. Picture: Britta Campion

Magellan Financial is at “high risk” of further outflows having lost some $16.8bn since the start of the year, equities analysts at Macquarie have warned.

The investment bank, which competes against Magellan-backed Barrenjoey Capital Partners, cut its price target for the company from $19.25 per share to $12.40.

In a note to clients, Macquarie said it had “(increased) … outflow expectations” after Magellant told the ASX on Monday that another $5bn had exited its funds.

“We view the remaining $39.2bn of (funds under management) in the Global strategies as at high risk of further outflows,” the note reads.

“We estimate there is $21.8bn of insto and $17.4bn of retail FUM remaining and our current outflow expectations imply this reduces to $25bn over the next 6 months.”

“In the absence of improved investment performance we see limited scope for flows to beat our expectations,” Macquarie wrote in the note to clients.

Magellan shares fell further on Tuesday, down 0.9 per cent to $13.87.

The company’s market value dropped to levels not seen in more than seven years on Monday after it disclosed the significant fund outflows.

Magellan – now chaired by Hamish McLennan and led by co-founder Chris Mackay after the exit of star stockpicker Hamish Douglass – said it had experienced $5bn in outflows since its last update in February.

Hamish Douglass, former Magellan chairman. Picture: Britta Campion

The majority were in the company’s global equities strategies, which fell from $47.1bn late last month to $39.2bn. Those global equities strategies – Magellan’s flagship products – have lost more than half the funds they had at the start of this financial year. In July, the company reported $85.4bn under management in those funds.

Equities analysts at Morgans said they expected earnings to be 5.8 per cent lower this financial year than previously forecast, and more than 25 per cent lower in the next period.

Those forecasts factor in a further $8bn in outflows in the second half of the financial year, “however it is possible the majority of remaining Global insto FUM is redeemed,” wrote Morgans analysts Scott Murdoch and Jared Gelsomino.

Some $1.8bn in retail funds would exit the company this year, and $3.6bn in the 2023 financial year, Mr Murdoch and Mr Gelsomino told clients. “Magellan’s capital base is solid, however we still see earnings risk to the downside,” they wrote. “Until a clearer investment case can be made … we view the risk/reward as unfavourable.”

Markets had expected a level of outflows in February amid leadership turmoil and warnings from influential investment advisory groups, which have become increasingly wary of the company’s performance.

Last week, UBS equity analyst Shreyas Patel estimated that retail funds had experienced outflows of at least $1bn that month. “The key Global Fund … saw $725m net outflows alone, a sharp acceleration on December/January and likely to step up in March following rating agency downgrades,” Mr Patel wrote to clients.

Magellan’s listed Global Fund posted a 7.2 per cent loss in February, although it is up 9.1 per cent over the year. That, however, is half the performance posted by its benchmark index. Over the last decade, the Global Fund has performed as well as the market.

In its most recent update, influential advisory group Morningstar said that while the new investment team – which includes Mr Mackay, who had focused on MFF Capital since 2012, and former research head Nikki Thomas – had committed to the same strategy being pursued by Mr Douglass, “there are question marks over how it will be executed”.