MFG in the BUY zone, page-677

Hi All

Considering some of the posts and the information in them, I just wanted to explore a couple of points deeper on Magellan, particularly Magellan’s addressable market and elaborating a bit more from my perspective from prior posts (some will care and some won’t even read – I think it is important to put this out there and for it to be discussed in detail). Anyway, thanks in advance if you take the time to read – interested in thoughts.

Magellan’s Funds Management Addressable Market – stat’sfrom IBISWorld K6419a

A lot of my comparisons to other market participants or other large fund managers (GQG, Blackstone, T Rower & Price, etc) will be against Funds Under Management growth and investment performance due to addressable market size – my thinking is that Magellan has the ability to focus on Funds Management and expand overseas. As @Dangero pointed out, Magellan are only focused on the Australian Investor Market and are not interested in expanding overseas. Considering this, I have put together some detailed information on the market Magellan participates in from the IBISWorld K6419a report.

The above diagrams show the revenue and the percentages of the addressable market that Magellan participates in. Following is market share and the revenue available:

- 26.9% for overseas market investments, $2.7707B of revenue in the Australian Addressable Market (Global Equity Fund)

- 21.4% for Australian market investments, $2.2042B of revenue in the Australian Addressable Market (Airlie Fund)

- 10.5% for Other Asset investments, $1.0185B of revenue. Assume this includes some aspects of infrastructure (Global Infrastructure Funds)

So the total revenue that is able to be generated is $6.0564B or 58.8% of total addressable market for Funds Management in Australia. Magellan generates $650M of this revenue or approximately 10.7%. Other participants that compete here are Macquarie, Pendal, Vanguard, Colonial First State, Platinum, Perpetual, Pinnacle and others. They have varying investment styles and suit different investor demands, but are competing against Magellan in one form or another.

Magellan’s investment style is effectively buy & hold unless something dramatic happens – like China’s competition crackdown. Magellan Fund Investors believe this is a stable investment approach and will hold investments in Magellan funds on this basis (tried to summarise).

Now that FUM growth has slowed (exclude low fund performance for a minute and focus on in/outflows), is it fair to assume that Magellan has reached saturation in its addressable market of investors wanting to invest money in a stable fund manager? – let’s call them a conservative investor demographic wanting some market upside and downside loss minimisation compared to peers. There may be some funds invested with Magellan that are looking for the higher returns ($200M of retail outflow per month on average for the September quarter, based on MFG ASX announcement), but in the majority most Fund investors want Value at Risk to be low, with some correlation to growth on the upside.

The other 89.3% of investors looking to invest in the Funds Management industry are looking for higher growth and are willing to take on higher risk for a higher return? These investors still want someone else to invest their money for them.

Magellan’s Fund Performance

We all know Magellan is currently underperforming and will lose some FUM due to this. The bet by investing in Magellan is that they will not lose FUM in the order of 5% to 10% per annum, FUM may slowly bleed out at $200M per month or 2% to 3% per annum.

This is largely due to the demographic that invest in Magellan Funds being conservative and are likely to be near or in retirement. Withdrawals from investors are either withdrawing due to retirement or are more aggressive investors wanting to re-allocate to a higher risk investment strategy.

The other aspect to consider in terms of FUM is that the performance of the stocks will increase on par with withdrawn FUM, so overall may stay the same.

A risk here to a Magellan Investor is if Magellan find its investors are leaving at a higher rate than expected, Magellan have the opportunity to lower fees. This will occur if FUM outflows increase to the 5% to 10% per annum mark or $600M to $1B per month and EPS may go backward as a result of this.

Magellan’s Capital Partner Investments

The other bet is that these investments will pay off over the longer term. Earnings contribution is low to start with and based on other posts, earnings from investments may contribute 10% to Magellan’s overall revenue at best over a 5 to 10 year period (that is up to $60M).

This excludes any potential capital gains as I don’t believe Magellan will be in the business of selling these assets within ten years (but happy to be corrected).

Magellan’s approach to increase Addressable Market

If Magellan want to increase its domestic demographic, higher returns need to be generated (note: early fund investors enjoyed a good growth story, but have recently suffered). The other way is to reduce fees or build out other product sets, but the addressable market that Magellan serves already encompasses just under 60% of addressable market. Unless Magellan start a property fund or debt fund the addressable market will not increase.

Magellan’s investors

The bet as an investor is primarily the Funds Management business continues as it is. The EPS and Dividends per share will endure at the current rate. The Dividend Payout Ratio is currently at 94% and prior year was just under 80%. If you use a normalised EPS (without the Investment Bank loss), you are looking at an 88% Dividend Payout Ratio this year.

Assuming EPS will stay the same unless Addressable Market is changed, it will currently take over 14 years to earn back the current $35.19 share price ($35.19/$2.50) or in 2036 you will see every dollar back in the form of a dividend payment.

If you assume a 5% compounded growth rate inMagellan FUM year on year (fund gains of 9% less 4% withdrawals), this iscorrelated to EPS and dividend payout ratio stays at 88%:

At 5% compounded growth, as a Magellan investor you will get the money you invested back in 2034.

If as an investor in Magellan you are comfortable with this, then stay invested. There is a point to work out if there is anything better out there, but you can read my other posts on different boards for that. Consider picking some of Magellan's investments that it holds in its funds.

Note: $2.50 EPS is just under a $460M NPAT in 2022 and includes earnings from Capital Partner Investments.

I will let you all draw your own conclusions.

Best of Luck
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