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Stock Of The Day - Magellan Financial (EXPENSIVE)

Magellan Financial Group Limited is an active international equity and infrastructure investment manager. Near-term earnings growth is underpinned by strong growth in funds under management, or FUM, complemented by increasing performance fees. A long record of investment outperformance supports further growth in FUM. Major earnings risks flow from the need to deliver good investment returns and the volatile nature of large institutional mandates. Attractive long-term industry dynamics are supported by increasing numbers of Australian investors seeking international equity exposure to diversify typically Australian-centric portfolios. Magellan does not focus on short-term performance, instead seeks high-quality stocks likely to produce strong long-term returns through the business cycle.
 

Magellan Global Fund FUM & Net Inflows (Source - Company Reports)

Magellan is really in a sweet spot, benefiting from strong investment performance, a lower Australian dollar, and growing demand for international equity exposure from Australian retail investors. Magellan announced FUM of AUD 35.8 billion at 31 March 2015. Despite the high concentration of FUM in global equity funds, about 26% of total FUM is sourced from sticky, higher margin domestic retail investors. Total inflows of AUD 336 million and AUD 122 million in positive revaluations for March boosted total FUM by a net AUD 458 million. Institutional net inflows were AUD 77 million lower, at AUD 160 million, while retail net inflows, which we typically view as stickier and usually higher-margin, almost doubled, to AUD 176 million.


Total Funds Under Management as of APRIL 2015 (Source - Company Reports)

April saw institutional net outflows of A$73m with “minor rebalancing by a number of clients”. In our view, a narrow product range with no European equities or Asian equities funds is also a headwind in the current environment. Longer term, a normalising 3 Year track record likely makes it tough for MFG to sustain elevated institutional flows. This was just the third monthly outflow in the past three years. After averaging ~A$150m per month in FY13/14 and A$100m in 1H15, March retail flows into the Global Fund were A$117m. The new Exchange Traded Managed Fund (MGE) contributed A$38m, down from A$74m in March, with the initial demand rush abating and the daily run rate settling.


Magellan Global Fund Exposure (Source - Company Reports)

The recent launch of the ASX-listed Magellan Global Equities Fund (MGE) potentially opens up access to Magellan's successful unlisted Global Fund to individual investors comfortable with trading ASX-listed securities. This unique product initiative has the potential to attract substantial domestic fund flows from retail investors, especially those seeking to diversify their portfolio exposure away from the highly concentrated Australian market.


Magellan Financial Daily Chart (Source - Thomson Reuters)

Despite its very strong operational performance, Magellan carries higher risk than the larger more diversified medium risk asset managers. This is due to the firm’s relatively short life, explosive growth, key personnel risk, and reliance on a small number of investment strategies. Magellan is very different from most Australian-based asset managers, as it is focusing almost entirely on international equities, and raises most of its wholesale FUM from international institutional investors.

Despite solid growth in higher-margin retail funds under management, or FUM, weighted average margins are declining due to strong growth in lower margin institutional FUM. Margin pressure from within the retail and institutional client base would reduce profitability. A shift in institutional investor demand for quality global equity strategies would depress institutional flow. Contrary to larger peers, Magellan's FUM is concentrated in seven international equity and infrastructure funds. This concentration risk increases the volatility of FUM going forward. We believe the stock is expensive at current price and would review the stock at a later date.