Morningstar points to Magellan stabilisation “in due course”

Mike Taylor

Managing Editor/Publisher, Financial Newswire

20 February 2023

Research and ratings house, Morningstar has delivered fund manager Magellan the optimistic assessment that “stabilisation is likely in due course”.

The assessment issued in the wake of Magellan’s half-year results announcement to the Australian Securities Exchange (ASX) said that the firm’s 60% drop in underlying net profit after tax from the prior period was largely expected.

It said Morningstar did not like Magellan’s higher staff cost but noted that those costs were offset by lower non-staff expenses and higher dividend/distribution income.

“Collectively, these movements do not detract from our fair value estimate of $11,50 the Morningstar assessment said.

“We believe Magellan’s downside risks are more than priced in. The firm made good progress on numerous fronts, which should assuage investor concerns, both on performance and team stability. It also may help moderate the pace of redemptions,” it said.

“Magellan made several investment process refinements, which might explain the slight improvement in its global strategy’s near-term track record. Staff retention measures, which involved bringing forward cash payments, are necessary to steady the ranks—a critical point for clients and research consultants. We also liked its product extension efforts, notably relaunching the Core Series active ETFs and rolling out a new Energy Transition strategy.”

“These efforts are unlikely to cause a resurgence of net inflows at the group level, but they help rebuild credibility and prevent further damage to its brand. If Magellan executes well on these fronts, we’d expect it to maintain a fairly flat FUM base of roughly $37 billion over our five-year forecast period (versus $61 billion in fiscal 2022), with moderating net outflows being supported by equity market appreciation.”

“We do expect Magellan’s earnings to decline over our forecast period due to its weakening operating leverage. Cost/income roughly doubled to 34% since the prior period. This demonstrates its susceptibility to further earnings downside if FUM does not grow, fee compression persists, and costs keep creeping up.”

“This is our base case, and we expect funds management profit before tax to contract, averaging $140 million per year over the five years to fiscal 2027, considerably below its five-year average of $478 million. Over this time frame, we project funds-management profit tax margins averaging 50% per year, below its five-year average of 81%.”