Hi
@AceboyThanks for your post - the point in doing this is in part to challenge my beliefs about Magellan by posting them publicly in a domain where I will get feedback (constructive/unconstructive/positive/negative) and the other part is a broader analysis of Fund Managers in Australia to determine what the strengths/weaknesses of each fund manager is. The outcome of this will be to determine the best place to invest money and to determine whether to divest current holdings and then reinvest elsewhere - not unlike what active fund managers do to the investments that they make and hold today.
In terms of challenging beliefs, it isn't just about Magellan, but a broader Fund Management review. I have focused on Magellan here as this is a Magellan board for discussions on all things Magellan.
In terms of what you mentioned about Barren Joey and valuing other assets outside of the fund, I think it is safe to say that it will take at least a decade to determine the true business value of any new participant in the investment banking industry - UBS Australia has built up its business in Australia for over 30 years and will not give up market share easily. Macquarie Bank has spent the better part of the last 15 years to beat UBS and finally did so over the last couple of years. From the posts I have read, Barren Joey is going to take 2.5% market share (still 1.5% below UBS market share), with $55M in earnings contribution to Magellan. While I can't predict the piece of the pie and earnings contribution, I can predict it could take a decade or so to earn 4% market share and contribute to Magellan's earnings. If Macquarie Bank with super smart people took a decade to topple UBS as the key player, how long will it take Barren Joey to achieve a similar outcome? Blue Ocean versus Red Ocean approach - I foresee a lot of red. Is this talking 5h!t? Don't believe so. How realistic is the mini-Macquarie Bank story? Market research experts to confirm, nothing yet though.
To put value into a financial context, here is the breakdown of earnings contribution versus share of market based on UBS's market share and Magellan's 44% shareholding:
This is a choose your own adventure, a guide to determine what the earnings contribution of Barren Joey is going to be - unless they are innovating in some way to beat the competition and lower their operating costs. IBIS world released industry figures in September 2021 (Industry Report K6411A if you want to buy it). Barren Joey was not mentioned in here - are there any other comparative high quality industry analysis reports to IBIS world out there showing Barren Joey's market share? Would love to see one, I think one of the accounting firms publish one annually.
In terms of the actual market, 2020 was still a larger year for IPO's than 2021 as $5.3B was raised. 2021 is currently approximately $4.6B so far (
https://www2.asx.com.au/blog/on-the-board-newsletter/2021/strong-ipo-performance-in-first-half-of-2021). The point here is that with the total value of IPO's not growing by much year-on-year (IBIS world current forecast is 3.4% growth), the new participant is unlikely to outperform other industry participants. While profitable, it is highly probable Barren Joey will take a decade to reach similar earnings. The investment banking industry is not limited to IPO deals, but this is a guide to the low level of growth currently being experienced in the industry overall.
Going back to Magellan's core business of Fund Management, Magellan's historical strength of "deep and long-standing" relationships with more than 11,500 Financial Planners, all the major stockbroking firms and 120,000 direct investors in Australia is an historical strength of the retail distribution capability (not that anyone has mentioned it here - Douglass mentions in Tony Boyd's AFR article 21/10/2021). Historically and over the last year this strength contributed to retail FUM inflow in the first part of the financial year, but seems to have faltered from the end of the June 2021 quarter. Retail FUM flow from Magellan ASX announcements is as follows:
1> September 2021 Quarter
outflow was $617M
2> June 2021 Quarter
outflow was $260M
3> March 2021 Quarter
inflow was $15M
Based on current trends, is it going to be $1B of retail outflow in the December quarter for Magellan or level off at current outflow of $600M? What will additional competition do? Does Magellan need to reduce fees to keep retail investors and stem the clear bleeding that is occurring? Does Magellan have a plan to turn around performance and is it working?
While Retail FUM inflow has been an historical strength of Magellan, looking at AEF being able to raise $340M in Retail FUM in the last quarter and Pinnacle able to raise $2B in Retail FUM in the last quarter, has Magellan's market dominance worn off? Is its current Retail FUM under threat? Is it better to invest in AEF or Pinnacle?
Note: I do not have a large direct holding in GQG (only 3,000 shares) and part indirect, analysis is to determine where it to invest. Before investing, I would need to see retail FUM flow being reported in the Australian market and it would need to be beating Magellan. The investment candidates would be:
1> AEF (performance)
2> GQG (disrupted US active managers to raise a large pool of FUM by charging ETF level fees and quality active investment, can it do it here in Australia?)
3> Pinnacle (performance)
On the flip side, has Magellan outlined a plan to restore Retail FUM inflow (keen for anyone to point this out). This will be in the form of reduced fees or other incentives in market. Will this risk any future investment made in AEF, GQG or Pinnacle? Here again, is there a Red Ocean approach required here?
One final point regarding Magellan, I also consider management qualitative questions like (not that I have posted these on the Magellan board before), does Douglass follow his ten investment tips outlined here:
https://www.livewiremarkets.com/wires/money-makes-money-10-investing-tips-from-hamish-douglassAre there comparisons where he does follow beliefs versus where he doesn't? I have picked out too many where he contradicts his rules, like why hold onto BABA for so long after an obvious regulatory issue with the Chinese Government (contradicts rules #3, #4 and #7 not paying attention in class at Harvard)?
In terms of Barren Joey and the Mexican Takeaway, how does this follow rule #2's circle of competence? These side businesses are a long term miss-step to Magellan's core circle of competence of Funds Management.
Why does Douglass put these investing tips out there when he doesn't follow the majority of them? Is it more about making current retail investors comfortable, talk the investing game, but unfortunately not following them (happy to be proven wrong).
I think in not following rules and what you say publicly is a warning sign of bad things to come - nothing scientific here more qualitative than quantitative. It is like the performance of the FUM, it isn't underperforming, it is a deliberate strategy to secure your investment, so don't worry about what everyone is saying, trust us (Joe Aston is an extreme example of a nay-sayer).
In simple
@Aceboy, I aim to determine where and when to invest, what the potential impact is to future investment and whether Magellan is likely to turn its Fund Management business around. Keen to extend my understanding of the underlying business more, what its strengths and weaknesses are and then determine measures before investing. I love investing in the Fund Management industry as there is so much opportunity for a business to scale, like what Magellan has experienced since 2004 to now, if you can get in early enough, a lot of money can be made (getting out recently at above $60 would have been great).
Best of Luck
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