Magellan – worst may be over says Morningstar

Under pressure fund manager, Magellan may have weathered the worst of the fund outflows generated by the controversy around the changed status of Hamish Douglass, according to the latest analysis from research and ratings house, Morningstar.

The Morningstar assessment, issued following the release of the fund manager’s full-year results, is pointing to the outflows from Magellan slowing over coming months and even goes so far as to suggest that Magellan itself has been too pessimistic.

The ratings house paid tribute to Magellan’s new chief executive, David George and his references to potential strategy enhancements and the creation of new product structures, stating the fund manager had not previously adequately highlighted the changes.

“George wasn’t keen to lower Magellan’ s fees,” the assessment said. “We expect fee margins to compress anyway, either through mix shift toward lower-cost ETFs or cheaper product structures (like products for managed accounts),” it said.

“We lower our fair value estimate to $28.50 per share from $31.30,” it said. “This mainly reflects fiscal 2022’s FUM being 4% lower than our prior forecast and large institutional redemptions following Magellan’s latest FUM disclosure.”

It said a lower starting FUM for fiscal 2023 and larger than expected redemptions limited the degree to which portfolio returns and revenue could compound before adding that Morningstar did not expect future redemptions be as drastic as fiscal 2022 due to improvements in Magellan’s near-term performance, stabilisation in the management team, higher future expected portfolio returns and the expectation that Magellan will step up its distribution/client engagement efforts.

The current share price broadly assumes redemptions totalling 80% of fiscal 2022’s FUM and below-index portfolio returns of 7.5% per year over our forecast period,” the analysis said. “We view this as overly bearish and believe Magellan’s downside risks are more than priced in.”

“George’s statements that Magellan has seen “some client wins” recently suggests outflows may stabilise if Magellan continues to execute well. We forecast FUM settling at $78 billion by fiscal 2027, with portfolio returns averaging 16% per year (in line with its fiscal 2017-21 average) helping offset redemptions averaging 11% per year.”