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Magellan down but not out, says Morningstar

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Morningstar has cut its fair value estimate for narrow-moat Magellan Financial Group by 25 per cent to 38 per share, following the termination of its mandate with its largest client, St James’s Place (SJP).

Morningstar has reacted to news that SJP has terminated its mandate with the fund management giant, noting that the termination came as a surprise.

“As Magellan’s recent underperformance has only begun since November 2020, we thought institutional clients would negotiate for lower fees rather than terminate Magellan. Regretfully, this has not transpired in SJP’s case,” Morningstar’s equity analyst Shaun Ler said.

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Mr Ler predicted this event would trigger outflows from Magellan’s other institutional mandates and retail products, putting a hefty dent in the firm’s financials beyond the $19 billion SJP mandate loss.

“We’re bracing for more redemptions from consultants and investors who are discontented with Magellan’s pricing, but stuck with the firm due to its historically strong track record.

“These parties will likely perceive the mandate loss as a sign of instability and diminishing investment prowess with Magellan; and withdraw support for the firm,” Mr Ler said.

He noted, however, that Morningstar “firmly” believes shares of Magellan are oversold.

“These near-term headwinds are bumps in the road, not nails in the coffin,” Mr Ler said.

“Its investing calibre and upside from growing distribution remain intact. Over the medium term, we see greater prospects for Magellan to outperform, and see fresh streams of net inflows.”

Earlier this month, Magellan was rocked by the abrupt resignation of its chief executive Brett Cairns for personal reasons, an event that topped off an earlier triggered downward spiral of its share price.

Morningstar noted that while Mr Cairns’ departure has “undoubtedly amplified investors’ pessimism”, it had “no bearing on Magellan’s investing calibre and earning outlook”.

On Monday, in an ASX statement, Magellan confirmed SJP’s mandate represented approximately 12 per cent of the group’s current annual revenues and was anticipated to have approximately a 6 per cent impact on the revenues for the year ended 30 June 2022.

“The impact will be immaterial on the group’s interim results to 31 December 2021,” Magellan said.

Its shares were placed into a trading halt on Friday, prior to the ASX announcement.

However, its share price was down 28 per cent within minutes of trading opening on Monday. 

Magellan down but not out, says Morningstar

Morningstar has cut its fair value estimate for narrow-moat Magellan Financial Group by 25 per cent to 38 per share, following the termination of its mandate with its largest client, St James’s Place (SJP).

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Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.

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