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Magellan saga makes Morgans nervous about more mandate losses

Business

Local stockbroking firm Morgans has told investors to avoid Magellan Financial Group until there was more certainty about its funds under management.

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It follows a 40 per cent fall in Magellan shares after British wealth manager St James’s Place ended its mandate with Magellan, estimated at $22 billion, and representing about six per cent of revenue in the second half 2022 and 12 per cent in 2023.

That combined with news that co-founder Hamish Douglass was in the middle of a divorce which would potentially split his shareholding in Magellan. Magellan’s chief executive Brett Cairns also resigned citing personal reasons.

Morgans analyst Scott Murdoch said medium-term earnings risks at Magellan were still present and this included further institutional mandate losses based on relative investment under performance; potential for accelerated retail outflows; and the possibility of retail fee reductions 

“In our view, risks need to alleviate before we can take a more considered view on MFG with respect to valuation. We would avoid the stock until there is more certainty in the FUM (funds under management) base and earnings outlook,’’ Murdoch said.

“Near-term downside earnings risk outweigh any upside for now. MFG’s relative investment performance in the Global Fund continues to pose risk to net flows.

“Retail outflows commenced more recently (June-21 quarter) and there is risk of outflows accelerating if the Global Fund is removed from any dealer group model portfolios.

“Whilst we see MFG as more likely to introduce retail products with more competitive pricing versus a cut to existing fee levels, scrutiny over the retail management fee level has increased which could exacerbate retail outflows.

“We expect retail outflows to continue, with a very mature presence in the retail market coupled with current under performance/fee position issues.’’

However, he said MFG’s balance sheet was solid, with about $408 million in net fund investments; about $212 million in cash; and about $237m investments in associates.

 

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