Updated thoughts on Magellan (MFG) please
Hi James , enjoying your daily analysis & commentary. Would like to have your thoughts on MFG after the current FUM disaster.
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Answer
Hi Christof,
MFG endured a simply awful session on Friday, with the stock closing down -18.5% following the resumption of big outflows exacerbated by weakness across financial markets in September. Total FUM dropped from $39bn to $35bn, over 10%, made up of $2bn in net outflows and $2bn due to market weakness. Unfortunately, details under the hood are light but we’ve made the following assumptions/observations as owners of the stock:
- Our bullish thesis was predicated on improving performance stemming outflows, and in the time leading to inflows – this looks wrong today.
- Principle investments account for around ~$5 worth of value, meaning the FUM business is priced very cheaply with Fridays close at $7.18.
- Stemming outflows, however, was critical, and they’ve clearly lost another institutional mandate in September.
- Performance remains key, -$2bn of market related declines = about a 5% market related loss in total.
- Their $15.7bn in infrastructure equities were down $600m, about inline with the benchmark return (-3.8%), so that looks okay.
- Aussie equities were down ~$100m, which if we take the index return (-2.8%) for the month, it would imply some outperformance or small positive flows.
- That leaves about $1.3bn of market related declines on $18.6bn as at end of August, which implies a best case drop of ~7% on the month from their global strategy depending on when the mandate was lost – the MSCI world index (AUD) was down around 4%, implying decent underperformance.
- Performance impacts flows + it impacts performance fees. Without stating the obvious, it’s the lifeblood of an active manager.
- MFG had turned the performance corner at their last update, today’s number suggests otherwise.
The points above imply the thesis is broken on MFG, and that might be so, the shares are screaming that we’re wrong, however, a ~$300m reduction in market cap does seem excessive. We will be considering our holding very seriously over the coming days. If we didn’t hold it, we would not step up to the plate and buy it before we know more re performance.
