EUR 850.00 For Business Accounts Only

Morningstar | Magellan Financial Group's Latest Monthly FUM Drop a Potential Warning Sign; FVE Maintained

Narrow-moat-rated Magellan Financial Group's funds under management for November were slightly lower month on month but continued their upward trajectory after a period of sustained outperformance. Net inflows of AUD 522 million weren’t enough to prevent an AUD 870 million reduction in total FUM to AUD 72.1 billion as negative performance for the period had an impact. We remain confident in the asset manager’s ability to navigate increasingly challenging times and maintain our AUD 28 fair value estimate and 3-star rating.

As with all pure-play asset managers, we expect a slowdown in FUM growth owing to investment performance in the near term as higher volatility grips global markets against a backdrop of growing financial market risks. It is this investment performance that has driven Magellan’s FUM from about AUD 58 billion at Dec. 31, 2017, to AUD 72.1 billion at Nov. 30, 2018, excluding the Airlie Funds Management acquisition in early 2018, which added approximately AUD 6.2 billion to FUM. Magellan’s performance since the firm’s 2006 inception is an impressive 11.6% per annum as at June 30, approximately 250 basis points in excess of the stated performance objective of 9.0%. However, if we continue to see current levels of volatility into 2019, even management’s stated objective of 9.0% will be difficult to meet.

Asset managers are facing a challenging near-term future on several fronts. Having benefitted from the global liquidity tailwind of quantitative easing across Europe and the United States in recent years, the coming years will not be so kind as the U.S. and Europe move to quantitative tightening. If easing had the impact of lifting asset valuations to long-term, if not all-time, highs, tightening is likely to reverse much of this. Falling asset prices threaten to damage performance numbers, which could lead to lower FUM and net outflows. While Magellan’s record of strong brand and performance should act to mitigate some of this, the firm will still be affected.

Furthermore, the asset-management industry continues to face structural risks of falling management fees as passive vehicles proliferate and competition intensifies. Australia’s managed funds industry remains the envy of many markets with its strong growth rates supported by the mandated superannuation guarantee scheme. As the pool of funds continues to grow, as it will, new entrants will continue to be attracted to this market, putting pressure on incumbents to evolve and prosper.