Magellan Financial Group: Insto outflows continue
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 15 March 2022, 10:30 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- Magellan Financial Group (ASX:MFG) announced the continuation of outflows, with a further A$5bn redeemed in 2.5-weeks. Current FUM of A$69.1bn is down 10.5% in that period.
- Insto outflows from mid-Feb have been A$7.3bn. We estimate there is ~A$18.5bn remaining in Global Insto mandates and we expect further material outflows.
- Stabilisation of the Retail FUM base will be key for the business (A$1.4bn of outflows in CY22 to-date). We expect ongoing outflows, however note there is risk of acceleration given persistent relative underperformance in the Global fund.
- Further meaningful outflows look inevitable, and until the more severe downside risks ease and there is increased certainty in the FUM base, we continue to see the risk/reward as unfavourable.
Event: FUM update
MFG has announced current FUM (as at 11-Mar) of A$69.1bn, down -10.5% from the last update as at 23-Feb (A$77.2bn), and down -20.7% from 9-Feb (A$87.1bn).
FUM composition is Global A$39.2bn; Infrastructure A$20.4bn; Australia A$9.5bn.
Net outflows (12 days from 23 Feb) have been ~A$5bn, led by Institutional outflows of -A$4.7bn and Retail -A$0.3m. Outflows since 11th Feb have totaled A$8.2bn (Insto A$7.3bn; Retail A$0.9bn). YTD net outflows now stand at ~A$13.7bn (Insto A$12.3bn; Retail ~A$1.4bn).
Investment performance: relative performance remains under pressure for Global. Versus benchmark: Global 1-mth -1.8%, 1yr -9.1%, 5yr -1.7%; Infrastructure 1-mth -3.1%, 1yr -1.0%, 5yr +1%; Airlie 1-mth -2.1%, 1yr +9.2%; 3yr +6.1%.
Outflows to continue; Retail FUM base stability the medium-term swing factor
We estimate Global Insto FUM stands at ~A$18.5bn, post ~A$12.3bn in outflows in CY22 to-date. Our forecasts factor in a further A$8bn in outflows in 2H22, however it is possible the majority of remaining Global Insto FUM is redeemed. Removing the remainder of Global Insto FUM (above our outflow estimate), would result in FY24 EPS ~12% lower (all else equal).
Retail outflows are run-rating at ~A$6-7bn pa. MGOC (active ETF) Feb-22 outflows were 5.6% of units on issue (~A$726m), which was double the previous highest outflow. Risk around acceleration of retail outflows remains. We factor in a further A$1.8bn of outflows in 2H22, and A$3.6bn in FY23.
Capital position solid
MFG holds net fund investments (post MTM est) of ~A$385m (A$2.07ps) and MCP investments book value of A$243m (A$1.31ps; as at Dec-21). Capital management is possible, however we expect it would require
investment realisation (~11% FY24 accretive using Fund investment proceeds).
Forecast variability remains high
We downgrade FY22 by 5.8% and FY23/24 by >25%. Our forecasts assume additional outflows in Institutional of A$8bn in 2H22. Retail outflows include: 2H22 remainder A$1.8bn; FY23 A$3.6bn; FY24 A$1.8bn.
As we have noted, forecast outcomes for FY23/24 continue to be wide based on: the extent of outflows; market moves (noting current volatility); any divestments and subsequent capital management; and associate profitability or divestment gains. Given the forecast variability and until reasonable FUM stability is achieved, assessing MFG based on valuation metrics remains difficult at this point.
MFG’s capital base is solid, however we still see earnings risk to the downside. Until a clearer investment case can be made (FUM stability), we view the risk/reward as unfavourable.
Price catalysts and risks
- accelerated outflows resulting from further investment underperformance
- retail rating agency downgrades
- investment consultant downgrades
- removal of funds from dealer group model portfolios.
- capital management
- better/faster than expected stabilisation in the FUM base
- a major improvement in fund performance
- significant value realisation or contributions from MCP investments.
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