Company Overview - Magellan Financial Group Limited (MFG) is an Australia-based 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. MFG operates in three segments: funds management, principal investments and corporate. The funds management activities of the Company, which are undertaken by the controlled entity, Magellan Asset Management Limited (MAM), comprise acting as trustee, responsible entity and investment manager for the managed investment schemes offered primarily to Australian and New Zealand investors. The principal investment portfolio comprises the Company's investments in Australian Stock Exchange (ASX) quoted and unlisted Magellan Funds, the frontier MFG funds, a select portfolio comprising Australian and international listed companies, cash and other investments.


MFG Details

Launched Magellan Infrastructure Fund: Magellan Financial Group Ltd (ASX: MFG) has launched an ASX-quoted version of its top-performing listed infrastructure fund. The Magellan Infrastructure Fund (Currency Hedged) started trading on the ASX with the code MICH on 22^nd July 2016. Moreover, the new exchange-quoted managed fund (EQMF) is the third of its kind listed by Magellan. The firm's EQMFs have already combined some $500 million in assets. In addition, the new breed of fund offers investors the ability to buy and sell units on the ASX as well as settle via CHESS. The group would now start the new ASX-quoted version with $10 million of its own capital. MFG expects that its infrastructure asset class would deliver investors total returns of over CPI + 5% per annum over the business cycle.
 


Historical performance of Magellan’s unlisted Magellan Infrastructure Fund (Source: Company Reports)
 
Funds under management performance highlights: Magellan has over $39 billion in funds (as of March 2016) across the world including Europe. The group comprises investments even in the UK markets through firms like Tesco and Lloyds Banking Group. Accordingly, the group’s institutional funds under management (FUM) in rest of the world segment (other than Australia/NZ & North America) fell to $14.89 billion in June 2016 as compared to $15.97 billion in the May 2016. This decline is mainly expected to be due to slowdown in the UK and Europe markets on the event of Brexit. Meanwhile, the groupdelivered net inflows of $151 million in June 2016, which comprised net retail inflows into Global Equities strategies of $136 million, net retail inflows into Infrastructure Equities of $59 million, and net institutional outflows of $44 million. Institutional funds under management for Australia also fell to $4.4 billion in June 2016 against $4.57 billion in May 2016. On the other hand, we believe this decline in FUM is a temporary impact given the solid track record the group has built all these years. Magellan FUM in May 2016 reached $42.63 billion as compared to $39.9 billion in April 2016. Retail FUM rose $12.47 billion in May 2016 against $11.5 billion in April 2016. Institutional Australia/NZ FUM rose over $4.57 billion as compared to $4.38 billion in April 2016. During first half of 2016, MFG delivered Average funds under management of $38.8 billion, which is a rise of 44% as compared to the corresponding period of last year. The Net profit after tax rose 41% year on year (yoy) to $109.3 million during the period. Consequently, the EPS (diluted) increased over 41% yoy to 63.7 cents per share. The group declared an interim fully franked dividend of 51.3 cents per share. On the other side, Magellan funds intended to pay distributions (net of reinvestment) of about $619 million in July. Additionally, MFG estimated a performance fees of about $5 million for the six months ended 30^th June 2016.
 

Key highlights (Source: Company Reports)
 
Built a diversified Portfolio and generated solid returns: MFG has actively managed portfolio of 20 to 40 high quality, low volatility global securities with overall beta cap of 0.8. Moreover, MFG’s portfolio turnover is 17.5% p.a. since inception and the manager’s designed the funds while keeping in mind the group’s capital preservation and absolute return. Magellan has launched its currency hedged infrastructure strategy in July 2007 and currently has over $1 billion in funds under management. The fund has delivered investors solid and reliable, low-risk investment returns over the long term with an average annual return over the five years to 30^th June 2016 of 15.4%. In the last five years, Magellan Infrastructure Fund have been delivering positive returns, indicating the group’s solid track record. Additionally, the global opportunity for the listed infrastructure sector is significant with investment opportunities available across the world in a range of different segments including regulated utilities (water and energy), toll roads, airports, ports, communications infrastructure and social infrastructure.  The group generated an outstanding performance of the Magellan Global Fund and delivered 15.3%, after fees, during twelve months ended in 31 December 2015 as compared to MSCI World NTR Index returns of 11.5%. Magellan Global Fund generated over 11.9% since inception (as of December 2015) as compared to MSCI World NTR Index returns of 4.4%.  Magellan Infrastructure Fund generated over 10.6%, after fees, during twelve months ended December 2015, even though the benchmark Global Listed Infrastructure index fell over 5.4% during the same period. Magellan High Conviction Strategy delivered 13.6% and 27.2% returns, respectively, during twelve months ended at December 2015 and since inception.
 

Global position of Magellan (Source: Company Reports)
 
Expansion in US: MFG has been expanding its operation in US since 2011 via US distribution relationship with Frontier Partners. There is a two-way exclusivity of marketing and distribution of Magellan’s global equities and global listed infrastructure strategies as well as MFG also acts as sub-adviser to three mutual funds in the US. Moreover, MFG has continued to build out internal US distribution team and hired team members in Newport Beach and Michigan. But, the volatility in June month led the North America Institutional funds under management decline to $9.14 billion as compared to $9.6 billion in prior month. Despite this volatility, the group’s FUM in the region have earlier been performing well.  Institutional North America funds under management surged over $9.618 billion in May 2016 from $9.065 billion in April 2016. Overall, a rebound in the US economy would benefit MFG as the value of the investments would grow. The group otherwise generated FUM of $8.3 billion as at 31 December 2015 as compared to $7.3 billion in June 2015.
 
Other highlights: MFG gets tax benefit wherein under the current legislation, the assessable offshore banking income is subject to a concessional tax rate of 10%. The effective tax rate for the 6 months to 31^st December 2015 is 23.5% as compared to 25.0% in the six months ended in December 2014. On the other side, Magellan believes that they are well positioned to benefit from compulsory superannuation trends as they have built relationships with over 500 firms. Moreover, separate versions of the Magellan Global Fund are available at Commonwealth Bank, BT/Westpac and AMP (wherein the FUM is $1.8 billion as at 31^st December 2015), while represented in over 120 model portfolios across Commonwealth Bank, BT/Westpac and AMP (as at 1^st February 2016).
 
Stock Performance: The shares of MFG fell over 17.7% during this year to date (as of July 29, 2016) as investors were concerned over the group’s UK FUM performance on the event of Brexit. On the other hand, the stock has been recovering over 6.2% in the last three months due to recovering global markets. FTSE 100 (INDEXFTSE: UKX) surged over 3.4% in the month of July while S&P 500 (INDEXSP: .INX) rallied over 3.6% in the same period. Accordingly, the group’s July FUM is expected deliver a better performance as compared to the June FUM performance. The heavy correction in the stock opened an attractive investment opportunity and we believe the stock would recover from the current levels. MFG also has a decent dividend yield. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of  $23.06, ahead of its full year 2016 result which is expected to be delivered on 11^th August, 2016.


MFG Daily Chart (Source: Thomson Reuters)

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