Compnay Overview - Magellan Financial Group Limited is a fund management company. The Company's objective includes offering international investment funds to high net worth and retail investors in Australia and New Zealand, and institutional investors across the globe. Its segments include Funds Management, Principal Investments and Corporate. The funds management activities of the Company are undertaken by the controlled entities, Magellan Asset Management Limited (MAM) and MFG Services LLC (MFGS). MAM's funds management activities comprise acting as trustee, responsible entity and investment manager for the managed investment schemes offered primarily to Australian and New Zealand investors. MFGS acts as a service company providing MAM with services of investment analysts and distribution personnel based in the United States. The principal investment portfolio comprises its investments in the Australian Stock Exchange (ASX) Quoted Funds, the Unlisted Magellan Funds and the Frontier MFG Funds.

MFG details
 
Well balanced and positioned to grow with rise in Funds under Management:For April 2017, Magellan Financial Group Ltd (ASX: MFG) reported about 5.4% Month on Month growth in total Funds under Management (FUM) at $50.4 billion against $47.8 billion as at March 2017. Total net inflows stood at $109 million against an outflow of $27 million during March. However, net retail inflows into Global Equities strategies declined to $38 million against $69 million in March, while net retail inflows into Infrastructure Equities and net institutional inflows for April were reported to be $26 million ($19 million in March) and $45 million (outflows of $115 million in March), respectively. Another division, principal investments include investments in Magellan Funds, listed shares, a small number of unlisted investments and surplus cash after allowing for the group’s working capital requirements.
 

Funds under management as of April 2017 (Source: Company Reports)
 
Continuous focus on the institutional business: Long-way back (2011), Magellan had entered the US distribution relationship with Frontier Partners for the exclusive marketing and distribution of Magellan’s global equities and global listed infrastructure strategies. MFG also has been acting as sole sub-adviser to three mutual funds in the US and continues to build out internal US distribution team. It reported a solid institutional client base of 120 investors as of December 2016 and continues to witness solid institutional interest in global equities & global listed infrastructure capabilities.  Further, the company has completed seeding for two of the three new institutional strategies, which represent the next generation of global equity products for the group and targeting to tap global institutions. Moreover, company’s advantage lies in its specialized equity strategies as its Global Equity is a focused strategy with relatively concentrated portfolio of typically 20-40 high quality securities with minimum market cap of US$10bn, while Infrastructure Invests in companies that generate over 75% of their earnings from the ownership of infrastructure assets. As of April 2017, FUM in institutional division grew by 24.4% year on year (yoy) to $35.4 billion against $28.4 billion in April 2016. Another notable advantage for MFG is that the majority of revenues is generated from USD investments while operating expenses are incurred in AUD.
 

 Funds Management business performance (Source: Company Reports)
 
Retail business to benefit from compulsory superannuation trends: Magellan’s retail business works through three broad distribution channels including Independent financial advice firms / broker-advised, Bank/AMP aligned advice market and Self-directed market. The company is continuously expanding its retail strength by partnering with more than 500 firms and solid relationships with four out of the top six major firms, having over 6,800 active advisers. Further, diverse set of the Magellan Global Funds are available at Commonwealth Bank, BT/Westpac, and the group launched a similar version of the Magellan Infrastructure Fund on the Colonial First State platform in May 2016. As of April 2017, FUM in retail division grew by 30.4% yoy to $15.0 billion against $11.5 billion in April 2016. The group has more than 14,500 unitholders, and >60% SMSFs with ~$797 million of FUM across three exchange traded managed funds.
 

Business break-up (Source: Company Reports)
 
Outperforming benchmark indices since inception: Despite the volatility in global equity markets due to weakening macroeconomic environment in western countries coupled with geopolitical risks, Magellan Financial has built a long term robust track record by outperforming global bench mark indices in respective categories since inception. The group is very cautious over permanent capital loss and accordingly, adjusts their risk profile, while aiming returns over a medium to long term. However, the group reported a flat performance for fiscal year of 2016 on their Magellan Global Fund, which delivered a negative 0.1% return roughly in line with benchmark. But, their Magellan Infrastructure Fund had generated solid 17.8% returns which is 12.6% better than benchmark. MFG has been performing well in their Global Equity as well as Infrastructure funds by generating over 19% and 15% per annum, respectively, in the last five-year period. Meanwhile, MFG launched Magellan Global Equites in March 2015, and ‘MHG’ currency hedged version in August 2015. Within around one and a half year, these funds collectively comprise greater than 13,500 unit holders and over $700 million of net assets indicating their brand value.
 

Investment Performance as of 31 December 2016 (Source: Company Reports)
 
Principal Investments: The company allocates any excess cash generated by the group to Principal Investments, after allowing for working capital requirements and dividends of 75%-80% of the net profit after tax from the Funds Management business. Principal Investments include investments in Magellan Unlisted Funds, the ASX quoted Magellan Global Equities Fund and Magellan Global Equities Fund (Currency Hedged), listed shares, a number of small unlisted investments. Ultimately, it targets to earn satisfactory returns for shareholders through the sensible deployment of the Group’s capital, while maintaining capital strength to reinforce the business. Notably, for the Principal Investments, company has established a pre-tax return hurdle of 10% per annum over the business cycle. Further, it intends to maintain a strong balance sheet and high level of liquidity to endure any market conditions or unforeseen events.
 
H1FY17 Performance: During H1FY17, the company reported a revenue decline of 16% year on year at $153.5 million and posted a 20% drop in profit after tax at $87.0 million, largely impacted by lower than expected performance fees. While Management and services fees grew by 10% to $146.1 million, performance fees declined by 92% to $3.6 million during the same period. This led to a decline in performance fees to a corresponding decrease in earnings and dividend by 21% yoy, 25% yoy respectively. However, excluding performance fees, underlying profitability grew by 9% and cost to income ratio improved from 27.4% to 27.1%.
 
Canons of the Group’s approach: Given the medium to long term focus, it is convincing to expect some periods when the funds might not outperform or lag their benchmarks. Further, given the focus on high quality/low volatility investments in Global Equity and infrastructure strategies, returns may underperform broader benchmarks in strongly rising markets due to the cap on volatility and classification of infrastructure. However, over the cycle the strategies will produce an appropriate risk adjusted performance while maintaining focus on capital preservation, particularly in adverse market conditions. Moreover, MFG is able to maintain robust relationships as these key principles of the group’s approach are well understood by the adviser community and clients. Bringing out different products to timely cater to global requirements is another strength of the group. For instance, earlier this year, the group announced for the launch of three Low Carbon strategies and updated that seeding has been complete for two of the three institutional strategies (namely, Global Low Carbon (seeded) US Mutual Fund, US Low Carbon (seeded) US Mutual Fund, and International (non-US) Low Carbon US Mutual Fund). MFG believes that the group is the only active manager with such a product.
 
Stock Performance:MFG stock has moved up 10.8% in the last six months (as at May 05, 2017), however, its almost trading flat for past three months. Although fund inflows have been growing, earnings have been impacting by revenue from performance fee due to constant fluctuations in global equities. We believe that catalysts such as attractive inflows coupled with historical investment performance track record and continuous focus to outperform global benchmark indices can drive momentum going forward from a long-term perspective. We give a “Buy” recommendation on the stock at the current price of  $ 24.14

 
MFG Daily Chart (Source: Thomson Reuters)

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