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
 
Surpassed the minimum capital raising size for Magellan Global Trust: Recently, Magellan Financial Group Ltd (ASX: MFG) announced about the launch of a new ASX-listed investment vehicle, the Magellan Global Trust (Trust). The Trust is expected to be listed on the ASX (ASX code: MGG) and will be managed by Magellan Asset Management Limited. This is expected to be the biggest ASX float this year with >$1 billion listing. The Offer opened on 29 August 2017 and the Broker Firm Offer and Public Offer closed on 22 September 2017 and the Priority Offer is expected to close on 29 September 2017. Within eight business days of the Offer opening, the IPO has received commitments from the Priority, Public and Broker Firm Offers more than the minimum capital raising target of $250 million. Following completion of the Offer, the Trust’s units will comprise fully paid ordinary units (Units) and Class A Units.  The investment objectives of the Trust are to achieve attractive risk-adjusted returns over the medium to long-term, whilst reducing the risk of permanent capital loss. The Trust offers investors the opportunity to invest in a portfolio of high quality global companies and intends to target a 4% cash distribution yield per annum while benefiting from capital growth over the medium to long term. Investment philosophy is to invest in a focussed portfolio (15 - 35 investments) of the world’s best companies, and to invest at a discount to its assessment of each company’s underlying intrinsic value. The group has highlighted about the one-off cost in FY18 associated with the trust while benefits are expected to boost retail inflows.
 
Earnings impacted by decline in revenue from performance fee: For FY17, the Group reported net profit after tax of $196.2 million for the 2017 financial year ($198.4 million for 2016). The net profit reflects lower performance fees of $21.7 million for the 12 months to 30 June 2017 compared with $48.0 million for the 12 months to 30 June 2016. Excluding performance fees, underlying profitability grew by around 10%. Total Funds Management profit before tax increased 1.8% to $248.3 million while the same increased 15.5% before performance fees, broadly in line with the increase in average funds under management (FUM). Further, growth in dividends before Performance Fees lagged somewhat at 8.1%, mainly due to one-off conversion of previous non-dividend paying Class B shares into dividend paying ordinary shares. On the other hand, MFG continued to receive solid support from clients and their advisors, which resulted in $4.0 billion of net inflows. This, coupled with satisfactory investment returns, led to average FUM increasing 15.8% over the year to 30 June 2017.
 

Group’s performance in FY17; (Source: Company reports)

The Group had investment assets (cash and cash equivalents, financial assets and investment in associate) of $411.1 million (30 June 2016: $328.3 million) and shareholders’ funds of $447.6 million (30 June 2016: $355.4 million); and the Group’s NTA per share was $2.60 (30 June 2016: $2.07 diluted for the conversion of the Class B Shares). As at 31 August 2017, Magellan has $50.6 billion funds under management. In August, Magellan experienced net inflows of $140 million, which included net retail inflows into Global Equities strategies of $83 million, net retail inflows into Infrastructure Equities of $47 million, and net institutional inflows of $10 million. Although fund inflows have been growing, earnings have been impacted by revenue from performance fee due to constant fluctuations in global equities.


Funds under management; (Source: Company reports)

Robust Retail business focused on global equities and global listed infrastructure: 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 August 2017, FUM in retail division grew by 21.8% yoy to $15.3 billion against $12.6 billion in August 2016.


Investment performance; (Source: Company Reports)

Further, it is undertaking a priority offering for its shareholders and investors in Magellan’s retail strategies to offer these investors an invitation to subscribe for units in the new ASX-listed investment trust, the Magellan Global Trust. It will reward these investors with a loyalty bonus in the form of additional units in the Trust equal to 6.25% of the value of their allotment under the priority offer. This priority offer will engage approximately 250,000 to 300,000 individuals who are invested in Magellan and its retail strategies either directly or indirectly, and represents an opportunity to build an attractive closed end vehicle of scale. Magellan is paying for all the costs of the capital raising and the cost of the loyalty bonus. Moreover, the company expects this initiative to strengthen its retail business and provide an attractive additional investment platform for retail investors.
 
Low Carbon strategy to leverage Magellan’s existing investment processes: At 31 August 2017, the Group had total institutional funds under management of $35.3 billion from more than 120 clients and experienced institutional net inflows of $5.4 billion for the 12 months to 31 August 2017. During the year, it has seeded and launched a new investment strategy that is initially being marketed to wholesale and institutional investors globally. The Low Carbon strategy leverages Magellan’s existing investment processes and philosophies and incorporates a proprietary low carbon overlay in portfolio construction which screens out companies based on their carbon emissions intensity and limits the overall carbon emissions of the portfolio through a portfolio carbon emissions intensity cap. It also excludes companies with fossil fuel exposures or interests, for example companies engaged in the extraction, storage and transportation of fossil fuels. It had initially launched a global equities version of this strategy and now launched a U.S. mutual fund and Irish UCITS sub-fund for this strategy and is also making it available to separately managed accounts. Although it will take time to develop a track record and generate meaningful client investment, it is seeing a good level of preliminary interest in this strategy. MFG had also seeded two complementary Low Carbon strategies and expects to launch U.S. mutual funds around these in FY18.


Institutional Client Diversity; (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 for returns over a medium to long term. As at 31 August 2017, the group reported 10.04% return on their Magellan Global Fund, which is in line with benchmark for the year. But, their Magellan Infrastructure Fund had lagged the bench mark returns by 1.35% for the year. However, MFG has been performing well in their Global Equity as well as Infrastructure funds by outperforming the bench mark returns in the last five-year period.


Investment Performance for the periods to 30 June 2017; (Source: Company Reports)

Principal Investments: The Group’s Principal Investments include investments in Magellan Unlisted Funds, the ASX quoted Magellan Global Equities Fund, Magellan Global Equities Fund (Currency Hedged), Magellan Infrastructure Fund (Currency Hedged), listed shares, and many small unlisted investments, and has surplus cash after allowing for the Group’s working capital requirements. The company intends to allocate any surplus cash generated by the Group, after allowing for the payment of dividends, to Principal Investments. At 30 June 2017, the Group had total net Principal Investments of $251.0 million (net of tax liabilities, settlement receivables/payables and accruals), compared with net Principal Investments of approximately $208.2 million at 30 June 2016. Principal Investments portfolio has returned pre-tax 16.0%, 14.8% and 19.7% per annum over the last 1, 3 and 5 years respectively. Excluding the effect of the Group’s investment in Magellan Flagship Fund, which was disposed of by way of in-specie distribution to shareholders in February 2013, the portfolio returned pre-tax 10.8% per annum since inception from 1 July 2007.


MFG Group’s Principal Investments; (Source: Company Reports)
 
Stock Performance: MFG stock has declined 17.2% in the last three months while it is up by 3.8% in the last one year (as at September 24, 2017). Although fund inflows have been growing, earnings have been impacted by revenue from performance fee due to constant fluctuations in global equities. However, 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. Further, the new listed trust is also expected to be the growth lever for retail segment. The stock moved up about 1.9% on September 25, 2017 with improving sentiments. We give a “Buy” recommendation on the stock at the current price of $23.72
 
 
MFG Daily Chart (Source: Thomson Reuters)
 

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