Magellan Financial funds under management tumbled by $17.8bn after St James’s Place, other losses

The under-pressure fund manager is at risk of more net outflows, after retail investors pulled funds and added to the loss of a key St James’s Place mandate.

Magellan boss Hamish Douglass is on notice to steady the ship. Picture: Britta Campion

Magellan Financial Group risks a period of further notable outflows after its funds tumbled in the December quarter, with retail investors pulling more than $1bn from the wounded money manager – in addition to the loss of the key $23bn St James’s Place mandate.

In a December quarter update, Magellan said funds under management totalled almost $95.5bn, down $17.8bn from $113.3bn three months earlier, the lowest balance since the depths of the Covid-19 crisis, when they slumped to $94bn in March 2020 as financial markets tanked.

The funds update triggered analysts to warn of renewed pressure on Magellan to cut fees and that further retail and institutional fund outflows may occur over the final six months of the fiscal year.

Magellan’s announcement, lodged with the ASX on Friday, said excluding the termination of the St James’s Place institutional mandate of $23bn the firm saw net outflows of $1.09bn from retail investors and institutional outflows of $459m. Those institutional outflows comprised of $256m from Magellan’s global equities strategy and $215m from infrastructure equities. Australian equities saw an inflow of $12m.

Magellan’s benchmark the MSCI World Net total return USD index was up 7.8 per cent in the December quarter.

Magellan’s executive chairman Hamish Douglass is under immense pressure to stem fund outflows and steady the Magellan ship, following a turbulent period for the company that has been marred by poor fund performance.

Magellan’s shares slid 5.4 per cent to $19.29 on Friday, marking the lowest closing price since October 2015.

The fund outflows come after the abrupt exit early last month of chief executive Brett Cairns. In December, Mr Douglass was also forced to confirm he had separated from his wife Alexandra, which prompted the release of a statement saying they remained “extremely close” and the family had no intention of selling their Magellan stake.

ECP Asset Management’s portfolio manager Jared Pohl on Friday said his firm sold out of its Magellan position late last year.

“The reason you own any fund manager is that they are able to grow their assets under management. Magellan has been extremely successful in this regard historically. One of the key assumptions in our thesis was that reliable absolute returns with downside protection in market drawdowns is what investors were buying,” he added. “Their recent underperformance and the announcement of a material contract loss late last year says that downside protection alone was not sufficient enough.

“Our confidence then, in their ability to continue to raise funds in their core and adjacent products has therefore weakened significantly and so we had to exit our position.”

Investors are reeling after Magellan’s loss of the St James’s Place mandate on December 17, which the company previously said accounted for about 12 per cent of its annual revenue.

Credit Suisse analysts said the Magellan December quarter outflows were worse than expected, although fee margins bettered expectations.

“We estimate retail outflows deteriorated over the course of the quarter, peaking in December which suggests higher levels of retail outflows could continue into the second half of 2022. The fall in the MFG share price could also drive further retail outflows given retail shareholders (who are also often direct investors in the funds) may lose confidence in the products,” the analysts said in a note to clients.

Credit Suisse cut its Magellan price target to $21 from $22 and maintained a “neutral” rating on the stock.

The analysts warned, though, of more downside risks to Magellan including that further outflows could occur on weak investment performance, the potential for ratings houses to downgrade the global fund and the potential for first-half losses in Magellan-backed investment bank Barrenjoey.

Analysts at Jarden Australia are estimating Magellan will suffer outflows of $6.5bn this fiscal year, excluding the St James’s Place mandate.

UBS analysts cautioned of a “worrying trend” in retail investor outflows.

“Excluding the $23bn SJP mandate loss, net outflows were $1.55bn for the December quarter … Whilst a similar run rate to the $1.53bn of outflow experienced in the September quarter, the composition was of lower quality with the key higher margin retail net outflows accelerating from $0.6bn in the September quarter to $1.1bn in the December quarter,” they said.

“Expressed as a percentage of the circa $30bn retail book the pace of outflows has increased from 8 per cent per annum of FUM to 14 per cent per annum over the quarter. We believe this increases pressure for MFG to address its high retail fee structure (flagship fund 135 basis points versus median 90 basis points) or risk persistent net outflows.”

While it was too early to see evidence of further losses of institutional mandates after the St James’s Place termination, the UBS analysts said that could emerge through 2022.

“We continue to see earnings risks skewed to the downside reflecting performance headwinds in global equities, institutional and retail net outflows, risk of retail fee compression, and negative operating leverage.”

A Magellan CEO search is underway, with financial chief Kirsten Morton being handed the reins in an interim cap­acity.

Magellan’s update said for the six months ended December 31 base management fees were about 62 basis points, per annum, of the average of month-end funds under management.

Funds under management averaged $112.7bn for the six month period.

Magellan said it is entitled to performance fees of about $11m for the six months ended December 31, although those fees “may fluctuate significantly” from period to period. The firm’s average base management fees are about 65 basis points per annum, reflecting the $95.5bn in funds under management.

“The run rate of base management fees based on closing funds under management at 31 December 2021 is broadly in line year-on-year,” Magellan said. The company reports interim earnings on February 17.