This is an interesting article in the AFR and the arguments used in it can be applied both ways. From the article, two statistics that explain why leading active equity fund managers are experiencing tough times: 1. Active funds have had net outflows of $9.1B over the last five years - while this has been an issue for Active Fund Managers recently, it doesn't explain how Active Fund Managers have been able to grow to $AUD100B+ FUM business in Australia. Perpetual, Pendal and Platinum had $AUD20B+ (Perpetual and Pendal grew FUM through US acquisitions to $100B+). 2. Inability of active managers to maintain market-beating levels of performance over time - Active Fund Mangers in all asset classes grow FUM quickly as they outperform, how much depends on the level of marketing the Fund Manger performs. Magellan's growth was based more on advertising and aligning FUM to overweight tech index, than outperformance based on investment capability. Growth levels slow when fund managers are under constant pressure to continue to perform and marketing no longer increases FUM.
There are some solutions Active Fund Managers can apply. They are: 1. Stop charging high fees - Magellan has a concentrated portfolio and low cost to serve. To compete with ETF's, charges must decrease. Perpetual, Pendal, Janus have less ability to compete as their Funds Management Models require higher cost to serve. 2. Increase Total Addressable Market (TAM) go global - Perpetual, Pendal and Janus have large off shore businesses now and have increased the ability to grow. Question mark will always be whether they can compete or will FUM drop over time and can they decrease fees to accumulate more FUM to the benefit of existing customers. By increasing TAM through acquisition, Magellan could look to grow globally - $AUD51B is a small fund manager globally. If they are to grow or are able to turn around current business performance then there is upside, however Australian Fund Managers don't seem to understand the concept that fees should lower with the more FUM you are managing. This is a serious competitive threat to their existence. On this point, if Magellan management want to expand and retain FUM, it has to be on the basis that they will be able to lower fees charged to customers. 3. Change/Adapt to changing market conditions to improve performance - Higher performance comes from the ability to change or adapt to changing markets, a point that is lost on Fund Managers based in Australia. This is the big leap Magellan needs to change to improve performance. The other large fund managers are too diversified (much like an index hugging ETF) to be able to beat them, they are more likely to match indexes over the longer term. Magellan can't continue just being overweight the tech index. Note: this is easier said than done.
There is not all good news in this article, the final two paragraphs as follows: Magellan management need to put their skates on. The small and slow steps they are taking is likely to destroy the business. Very symptomatic of how its funds management business performs.
There was another article by Jonathan Schapiro in the AFR interviewing Hamish McLennan. Magellan have appointed Macquarie as an Investment Banker, potentially looking at takeovers but they could also be the target of a takeover.
While the performance of the business is floundering, the balance sheet as reported in Annual Report for 30 June 22 has the following amount of cash and assets able to be liquidated: 1. $419.922M in cash at bank 2. $374M in holdings in Funds able to be cashed in (although this will be at a reduced price if sold, look to Magellan closing some funds and liquidate at Net Asset Value which will increase this number by 20% or so) - Note 7 3. $162.295M in investments - Note 8
Total $956.217M, however it would not surprise me if this figure is closer to $1B now or roughly $5.40 per share.
A takeover price based on recent offer for Perpetual would be roughly $7.62 ($400M for a Fund Management business in need of a turnaround specialist).
From the words David George has used in previous articles, the next takeover could possibly be in the Private Equity/Real Assets space. This is something Regal Partners has a lot of experience in.
Interesting times ahead for the consolidation of businesses in the Funds Management industry. Magellan has a lot of money to impart to make acquisitions, however also has a lot of assets on the balance sheet for another Fund Manager to come in and restructure if Magellan Management fail at turning around.
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