Company 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 
Funds under management:Magellan Financial Group Ltd (ASX: MFG) reported for total Funds under Management (FUM) of $46,515 million as at December 2016 against $44,865 million as at November 2016. However, the group reported for net inflows of $115 million in the month of December 2016 as compared to net inflows of $1,083 million in November 2016. The group witnessed a moderate net retail inflows into Infrastructure Equities of $34 million and net institutional outflows of $11 million during the month as compared to net retail inflows into Infrastructure Equities of $41 million and net institutional inflows of $947 million in November 2016. The net retail inflows into Global Equities strategies reached $92 million in the month of December 2016, as compared to net retail inflows into Global Equities strategies of $95 million in November 2016. For October 2016, the group reported net inflows of $550 million driven by solid net institutional inflows of $445 million. Net retail inflows into Global Equities strategies and net retail inflows into Infrastructure Equities reached $59 million and $46 million, respectively.
 
Outperforming benchmark: Despite the recent volatility in the returns, Magellan Financial Group has built a track record better than the benchmark indices. The group is very cautious over a possible permanent capital loss and accordingly adjusts their risk profile, while aiming returns over a medium to long term.  On the other hand, 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 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.

 

Magellan Financial Group milestones in the last ten years (Source: Company Report)
 
FY16 performance highlights: Magellan Financial Group reported a decent fiscal year of 2016 performance, delivering a 13.5% rise in fully diluted earnings per share to $1.155 and a surge in 19% in fully franked dividends per share to $0.893. The group intends to maintain a payout in the range of 75%-80% of the net profit after tax of their funds management business. Magellan Financial Group principal investments reached $208 million as of June 2016 post enabling tax on unrealized gains, leading to $1.21 per fully diluted share.  MFG has a solid balance sheet, with no debt while their net assets have grown to $355 million as of 30 June 2016 as compared to $303 million in the prior corresponding period. The group has cash and liquid assets of over $328 million. In December 2016, the group was entitled to performance fees of over $3.5 million for the six months ended 31 December 2016.
 

Management and Performance Fees (Source: Company Reports)
 
Strengthening retail business: Magellan Financial Group is expanding their retail strength with partnerships with over 500 firms and has built solid relationships with four out of the top six major firms, having over 6,800 aligned advisers. Distinct versions of the Magellan Global Fund are available at Commonwealth Bank, BT/Westpac and AMP. The group even launched a similar version of the Magellan Infrastructure Fund on the Colonial First State platform in May 2016. With greater than $700 million of FUM across three Exchange Traded Managed Funds, the group has more than 13,500 unitholders, and >60% SMSFs.  Magellan Financial Group’s Inflows have been largely incremental to their business despite certain volatilities subject to the market conditions. Over 40 stockbroking companies are using these funds in Australia. MFG enhanced their overall Retail FUM to $12.0 billion as of 30 June 2016 as compared to $9.8 billion in the prior corresponding period. Overall Net Retail Inflows reached $2.3 billion during the year from $1.4 billion in same period of last year.
 
Favorable target industry dynamics: Investing in various financial instruments is increasing as the savings concept is found to be a compelling one. As per the NATSEM, the cost of raising a child enhanced 50% during 2007 and 2012 but incomes increased only 25%. In fact, a child born in 2014 need $63,000 to educate in a public school but private education cost comes to about $500,000 per kid. Therefore, investing in bonds and other funds has continued to be a lucrative market, and MFG is well positioned to leverage this opportunity. On the other hand, Australian long bonds fell to 1.81 per cent last year after rallying for the last thirty-five years impacted by the slowdown in the economy leading to a negative quarterly growth rate in the third quarter of 2016. But, situations could improve this year, as record-low interest rates, recovering residential construction and solid resources-sector earnings are expected to drive the Australian market. Moreover, given the current scenario, the Reserve Bank of Australia might enhance inflation by controlling the borrowing rates and enhancing the availability of money. In case of another rate cut, the high-quality Australian stocks would improve which would drive the returns for MFG.
 
Expanding investment team: To maintain the group’s solid performance, MFG is focusing on their investment team. The group’s portfolio managers/analysts’ team rose to 33 in June 2016 as compared to 22 as of June 2014. Overall employees rose to 101 in fiscal year of 2016 from 69 in June 2014. This team is expected to drive the next generation of products to develop and grow. Moreover, MFG is seeking to further strengthen the team with hires in other business areas in 2016/17. As a result, they forecast to enhance their staff expense to over 15-18% for 2016/17 fiscal year.
 
Focusing on the institutional business for the coming years: Magellan Financial Group’s overall institutional FUM reached $28.4 billion for fiscal year of 2016 as compared to $26.6 billion in the prior corresponding period. MFG built greater than 110 institutional clients as of June 2016 and has a diversified base. Magellan Financial Group intends to develop their potential pipeline of new business and is targeting institutions for global equities and global listed infrastructure capabilities over time. As a result, the group is planning to launch three new global equities related strategies in the coming 12-18 months.

 

Diversified institutional business (Source: Company Reports)
 
Stock performance: Magellan Financial Group’s stock has been volatile since the last one year given the tough conditions in the market with the stock falling over 1.3% (as of January 27, 2017). On the other hand, given the major consumer price inflation data outcome coming below the expectations against the Reserve Bank of Australia’s targeted 2%-3% range, experts are forecasting another rate cut. Further, most of the assets from Magellan Financial Group are priced in US dollars but the group incurs costs in Australian dollars. Accordingly, the economic scenario might boost MFG performance. MFG stock has otherwise rallied over 9.7% in the last three months as compared to S&P/ASX 200 returns (as of January 27, 2017). Although fund performance has been slightly below expectations during the past 12 months but attractive inflows owing to long-term investment performance track record, strong brand and focus on international equities are said to be performance drivers. Further, strong opening FUM (December 2016) is expected to have a positive impact on 2H17. We believe the momentum in the stock will continue in the coming months, while the stock has a decent dividend yield. We give a “Buy” recommendation on the stock at the current price of - $ 23.48, ahead of their interim results scheduled to be released in February 2017.

 
MFG Daily Chart (Source: Thomson Reuters)

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