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UBS analysts have downgraded Magellan Financial Group from ‘neutral’ to ‘sell’ over expectations it will have to reduce management fees for its under-performing Global Equities fund.
Magellan shares are down 1.2 per cent today to $39.01 and down 14 per cent since 23 August when it went ex-dividend by $1.14.
“Magellan’s retail funds under management (FUM) continues to experience outflows during August,″ UBS’ Shreyas Patel wrote in a note to clients, adding the Global Fund’s performance is 19 per cent below benchmarks for the past year and -1.1 per cent over five years.
Hamish Douglass is chairman and chief investment officer of Magellan. Credit:Luis Enrique Ascui
“Magellan’s higher than average fees, and below average performance, is likely to put pressure to lower base management fees in our view, resulting in an elevated fee pressure outlook - we downgrade our rating to ‘Sell’.”
Both Magellan and Platinum charge a 135 basis points management fee margin, according to the UBS note. But the median fee among its peers is 100 basis points.
And these expensive funds had the worst performance, with Platinum 7.1 per cent below the benchmark over five years.
“Notwithstanding a dramatic turnaround in performance to justify legacy fee levels, our view is that there will be pressure to sharpen pricing. Such a move would be defensive, and if not done, would see the risk of more persistent outflows.”
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Mr Patel and his team also lowered their earnings estimates by 3 per cent for the current fiscal year and by 12 per cent by 2025-56, on the assumption fees will have to come down.
“There now exists tension between its high fee levels and below benchmark investment performance. If retail fees are not addressed we believe the risk of outflows from competitive pressure for its flagship Global Fund could accelerate.”
They now expect to see total dividends of $2.29 in for 2021-22, and then peaking at $2.33 in 2022-23 before falling to $2.17 in 2023-24, then bouncing back to $2.31 two years later.
Magellan Financial Group’s share price peaked at $73.67 in February 2020 after jumping $20 in the preceding two months.
Last Monday it’s latest FUM update showed it was managing $118 billion, up from $117 billion in July, but the UBS team believes this net increase masks about $255 million of retail net outflows.