Magellan has lost its competitive edge says Morningstar

Magellan Financial Group may have turned a corner but it has lost its edge when weighed against other active managers, according to research and ratings house, Morningstar.

In an analysis of Magellan in the wake of the fund manager’s full-year results announcement, Morningstar suggested that the company’s management disruptions and other troubles in 2022-21 had damaged its brand and undermined its economic moat.

“We believe the distinction between Magellan and other active managers is now less evident,” the analysis said. “While Magellan is likely past the worst of its operational headaches, it will be difficult to restore its competitive strengths.”

However, while suggesting that Magellan had lost some of its edge, Morningstar acknowledged being pleasantly surprised by the fund manager’s stronger-than-expected investment returns from principal investment.

Morningstar said it also likes Magellan’s new equity-accounted investment in Vinva, which it expected to be value-accretive, stating “Vinva has a solid track record of outperforming benchmarks, in contrast to Magellan.

The ratings house also said that while Magellan’s efforts to diversify earnings sources were commendable, it believed they were insufficient to offset the decline in its core funds management business.

“We still expect group NPAT to decline over the next five years – albeit at a slower rate of 3% per year, compared with our prior 8% forecast it said.

“The funds management business is seeing early signs of flow recovery, albeit concentrated in the smaller boutique Airlie Funds Management. However, part of this improvement could be due to pent-up demand, following depressed markets in 2022-23, which may not be recurring.”

“We do not expect net outflows to reverse into inflows throughout our five-year forecast period, given Magellan’s relatively subpar performance compared with peers,” the Morningstar analysis said.