Company Overview - Magellan Financial Group Limited (Magellan) is an Australia-based fund management company. Magellan’s objective is to offer international investment funds to high net worth and retail investors in Australia and New Zealand, and institutional investors. Magellan operates in three segments include funds management, principal investments and corporate. Funds management activities are undertaken by the controlled entity, Magellan Asset Management Limited (MAM). The principal investment portfolio consists of investments in the unlisted funds, the Frontegra MFG Funds and in a select portfolio of Australian and international listed companies, cash and fixed interest securities, other investments. Corporate includes interest income on Non-executive Directors’ Share Purchase Plan (SPP) loans, costs associated with the Board, ASX listing, audit and regulatory compliance activities of the Group.

Analysis - Magellan Financial Group Ltd (ASX: MFG) is introducing currency hedged version of ASX quoted Magellan global equities fund (ASX: MGE) which would start trading from August 10^th. MGE was launched on March 2015, and showed an outstanding performance by growing to around $257 Million with over 4450 unit holders as at July 31^st, 2015. By launching an ASX quoted solution for MGE, investors can now sell or buy the fund’s units based on the market pricings. MGE has 21% exposure in Information technology segment, while Financials, Consumer Discretionary and Internet & ecommerce segments accounted 12.1%, 9.5% and 6.8% respectively. USD has 50.8% exposure in the fund, while the Emerging market and EUR represents 12.9% and 9.3% respectively. eBay, Home depot and IBM Corp are the top three holdings of the fund representing 7.6%, 4.1% and 4.7% respectively. Meanwhile, Magellan is planning to seed the new fund with $15 million capital through its own capital. 


Magellan’s EQMF’s competitive advantage (Source: Company Reports)

Magellan Global fund, the group’s unlisted retail fund has been showing solid performance over the years, wherein the fund generated 11.7% per annum since its inception (from July 1^st, 2007), as compared to the 3.9% of Index performance for the same period. Magellan Global fund also delivered and 28.9% per annum and 18.3% per annum net of fees for three years and five years (for period ended on Jan 2015), against the Index performance of 25.2% and 13.7% respectively. eBay, Lowe’s and Microsoft were the top three holdings of the fund representing 5.8%, 5.7% and 5.6% respectively, as of January 31^st 2015. 


Magellan Global fund Performance chart (Source: Company Reports)

First half of 2015 performance

Magellan Financial Group reported an outstanding first half of 2015 performance, wherein the revenues surged 91% to $128.5 million from $67.1 million of the same period in 2014. This revenue spurt was mainly driven by the performance fees revenue increase to $32.63 million from $1.89 million in the first half of 2014 as well as management fees revenues which rose 51% to $89.6 million in 1H15 from $59.5 million in 1H14. The rise in average funds under management on the back of solid net inflows as well as investment performance drove these revenues. Moreover, the decrease in Australian dollar during the period also contributed to the funds under management.

The average funds under management increased 53% on a year over year basis to $27.6 billion during the period. The average AUD/USD exchange rates fell to 0.8903 for the six months period ended on December 31^st 2014, as compared to 0.9214 for the six months period ended on December 31^st 2013. As a result, the cost to income ratio decreased to 19.4% in 1H15 from 29% in the first half of 2014.

Meanwhile, the employee expenses increased 25% yoy to $14.7 million during the period as the average number of employees rose to 75 in 1H15 from 57 employees in 1H14. Increase in remuneration also contributed to the rising employee expenses. The employee expense by total expense decreased to 60% in first half of 2015 against 64% in same period in 2014. Magellan Financial Group estimates its total employee expenses to surge 35% for the entire fiscal year as compared to the 2014 fiscal year. The marketing and consulting fees also surged 48% yoy to $2.27 million during the first half of 2015.

MFG was managing over $31.6 billion (over USD 25.9 billion) as of December 31^st, 2014. The group managed $8.4 billion under the retail funds, and witnessed a net inflows of over $0.7 billion for the first half of 2015 against the net inflows of $1.2 billion during the same period of 2014. The average net inflows stood at around $123 million for six months period ended on December 31^st 2014, as compared to $198 million for the six months period ended on December 31^st 2013. MFG has a positive outlook on the net inflows into global equities from the investors and is accordingly increasing its presence in the bank or AMP related advice markets. The group made agreements with AMP and BT/Westpac to introduce new funds according to their platforms and replicate Magellan Global Fund like Colonial First State Magellan Global Fund Option (which had $1.1 billion funds under management as of December 31, 2014) as well as the Colonial First State Platform. Magellan Global fund had over $7.6 billion of funds under management as at December 31^st, 2014 and witnessed a decrease of total net inflows to $610 million during the period against the total net inflows of $1 billion of the comparable period earlier year. The average retail monthly net inflows also decreased to around $102 million against the average retail monthly net inflows of $167 million in 1H14. 


MFG maintains a well balanced portfolio (Source: Company Reports)

As per the Institution highlights, there were $23.3 billion of funds under management as of December 31^st, 2014 with >90 clients, while the net inflows were $2.9 billion during the first half. The average monthly net inflows from equity institutional accounts stood at $92 million in 1H15 against $141 million for 1H14. The group has shifted its Global equity strategy by opening a sister global equity strategy, Magellan Global plus for Institution account investors. Magellan Global plus strategy would be similar to its Global equity strategy. However, it would be investing in firms with >USD 25 billion market cap against the earlier Global equity strategy of at least USD 10 billion market cap. The total funds under management were $3.4 billion for prospective institution investors for global equity and plus strategy.


MFG Daily Chart (Source -Thomson Reuters)

With regards to the regional institutional fund highlights, the United States witnessed institutional net inflows of $1 billion during the period resulting the total funds under management to $5.9 billion, as compared to the $4 billion as at June 30^th, 2014. The UK business delivered solid performance with the total funds under management rising to $11.4 billion as at December 31^st, 2014 against $7.9 billion as at June 30^th, 2014. The St. James Place contributed to the overall growth, as the account increased to $5.7 billion at December 31^st, 2014 versus $4.8 billion at June 30^th, 2014. Moreover UK infrastructure fund (duplicating Magellan core Infrastructure) also rose to $2.6 billion at December 31^st, 2014 from $2.2 billion at June 30^th, 2014. Meanwhile, total funds under management from Australian and New Zealand investors reached $3.7 billion at December 31^st, 2014. MFG continues to focus on Australia and Singapore markets going forward. 


Institution Monthly Flows (Source: Company Reports)

Outlook

Magellan Financial Group stock delivered a year to returns of 13.6% against the broader index performance of 1.6%. However, the shares have been consolidating over the last three months posting a slight returns of 0.7% only impacted by the net institutional outflows in the months of April and June. On the other hand, investors need to note that the Institutions keep rebalancing their portfolios for various reasons and institutions has always been historically attracted to Magellan. Moreover, the shares surged over 9.1% in the last four weeks alone, as the group is launching Magellan global equities fund (ASX: MGE). We believe that the funds under management inflows will be better during the second of the year, thus driving the stock higher in the coming months.

Based on the foregoing, we give a “BUY” recommendation to the stock at the current levels of  $18.78.

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