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In its latest discloses Magellan says funds under management had fallen to A$50.9 billion, with A$3.2 billion leaving the manager in September.
The firm had FUM of A$95 billion at its peak in December 21.
Added to that one of its senior managers has been dumping shares. The Australian reports that John Sevior, the founder of
Airlie Funds Management, has sold two million shares in the past year.
Airlie was acquired by Magellan in 2018.
Meanwhile, research house Morningstar has downgraded the company as an investment in light of unforeseen management disruptions and underperformance.
“Our prior thesis has not played out,” Morningstar analyst Shaun Ler says.
Ler had expected Magellan to perform and clients to remain with the fund manager even during periods of underperformance.
“We underestimated the market disruption to Magellan’s investment style, and performance has not materially improved since it began in late 2020,” Ler said.
“We also understated the downside from the dilution of Magellan’s brand, evidenced by mandate losses and outflows.”
Morningstar has not only cut its fair value for the business but also removed its narrow moat rating.
The new no-moat rating reflects the loss of trust in Magellan, which was a key detractor that wasn’t captured in his prior investment case, said Ler.
Magellan has struggled to restore investor sentiment after co-founder Hamish Douglass left the business.
“Since the first net outflows (June quarter of 2021) to fiscal 2022’s end, net outflows were close to AUD 50 billion, roughly 50% of Magellan’s starting FUM. This was different to the whole of 2016 and 2017, when there were only two months of net outflows despite Magellan’s performance lagging considerably in 2016.”
“The building blocks that helped fortify Magellan’s moat—like its distribution reach and positive fund ratings—are redundant if its reputation is dented or if it does not deliver satisfactory investment returns,” Ler says.
Ler believes that it will take time for its new portfolio managers to build credibility and for new management to restore its growth.
He now expects funds under management (FUM) to grow at a slower pace to A$69 billion, lower than Morningstar’s forecast of A$78 billion and a fiscal 2022 base of A$61 billion.
While he also believes that the new management, led by chief executive David George, wants to adapt Magellan to an increasingly competitive landscape, he believes the outlook will remain challenging.
If Magellan is to grow its book with new investor money, it needs to outperform; tackle key person risk, add different products; reclaim its position in model portfolios; and recover its strong fund ratings and reputation.
“These milestones will be challenging and at minimum will take years to achieve.”
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A sad outcome that could not be predicted.