MFG
Fat Prophets take some profits
Magellan Financial (ASX:MFG) has been a stellar performer over the years, but has plateaued over the past 12 months, despite a strong increase in funds under management over that time and a bumper set of fiscal 2018 numbers. The stock has also succumbed to the recent broad correction in equities globally, and given conditions have been close to optimal for the likes of Magellan for some time now, further selling may be on the horizon.
What’s new?
Ahead of its AGM meeting in October Magellan announced that Hamish Douglass was stepping aside from his role as CEO of the local fund management giant and assumed the Chairman position, and essentially switched roles with Chairman Dr Brett Cairns who is now CEO. Mr Douglass has continued to be Chief Investment Officer (CIO) and the lead portfolio manager of Magellan’s global equities strategies. As chair Mr Douglass will continue to work jointly with now CEO Brett Cairns on the strategic direction for the company. Mr Douglass stepped down from the Board of Magellan Asset Management Limited, Magellan’s main operating subsidiary. There were no changes to either Dr Cairns’ or Mr Douglass’ remuneration.
We view the move favourably. With the growing size and complexity of the Magellan business, which has expanded into retail and acquired Airlie Funds Management and US Frontier Partners earlier in the year, we believe the separation of the chief executive role and chief investment role is appropriate and will allow more focus from both executives. And although normally we would prefer to see the chairman be a non-executive, Mr Douglass is the co-founder and a major shareholder with interests well aligned to other shareholders, and he knows the business inside out.
Both executives are well known and regarded so there were no real ‘surprises,’ and over the past five years or so Magellan has progressed its business strongly, while its shares have delivered an impressive combination of dividends and share price appreciation. The market viewed the announcement favourably as well, with the shares advancing roughly 8% on the news.
September 2018 FUM (funds under management) update
In September 2018, Magellan saw positive flows, with net inflows of $86 million, comprised of $60 million in net retail inflows and net institutional inflows of $26 million. Total FUM (funds under management) as of 28 September 2018 hit $74.545 billion, down marginally from the $74.612 billion at the end of August 2018, but an impressive 44.5% increase from the $51.576 billion at 29 September 2017. This was driven through a combination of inflows, the acquisition of Airlie and performance.
At the end of September 2018 retail FUM was $20.114 billion, representing a 33% increase from a year earlier. Retail FUM represented approximately 27% of total FUM at the end of September 2018. Magellan’s Institutional mandates are diversely split between Australia/NZ, North America and Rest of the World as shown in the table below. The bulk of funds (~76%) are deployed into global equities and Magellan also lists infrastructure as a separate category.
Source: Magellan
As touched on earlier, Magellan had a strong fiscal 2018. Revenue was up 34% to $452.6 million, with increases across the board from bread-and-butter management and services fees, performance fees and other revenue. Profit after tax and before MGG (Magellan Global Trust) net offer costs and amortisation increased 37% year-on-year to $268.9 million. After the substantial costs that Magellan absorbed on the Global Trust, after tax profit was still up 8% year-on-year to $211.8 million.
Diluted earnings per share were up 7% to 122.0 cents and total dividends were increased 57% to 134.5 cents.
Source: Magellan
Turning to the charts and on the daily chart, the technical picture has deteriorated since our last review. Prices have dropped below the 50-day moving average (red line) at $26.77 and 200 day moving average (green line) at $25.24. Support at $24.40 is now in for a strong test by the looks.
Turning to the monthly chart, support continues to be largely respected around the 61.8% Fibonacci retracement (blue set of retracements) at $23.48. Prices are however flirting with this level and need to hold their ground to avert a move towards the next layer of support at $19.76.
Summary
Magellan Financialhas been a stellar performer over the years, but has plateaued over the past 12 months, despite a strong increase in funds under management over that time and a bumper set of fiscal 2018 numbers. The stock has also succumbed to the recent broad correction in equities globally, and given conditions have been close to optimal for the likes of Magellan for some time now, further selling may be on the horizon.
Earnings growth assumptions are also aggressive, setting a relatively high bar for outperformance. Currently, Magellan shares trade on around 19.1 times forecast FY19 earnings, falling to 14.5 times the following year. The projected yield over the same time frame expands from 5.8% to 6.3%.
We recommend Members sell Magellan Financial Group. It will be removed from the Fat Prophets portfolio.
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