On this day 500 years ago (6 September 1522) Magellan’s ship Victoria returned to Spain after an epic three year voyage. Magellan’s ship was the first to circumnavigate the world, first to make the European Pacific crossing, and first to navigate from the Atlantic to the Pacific via the Strait of Magellan.

The fleet initially consisted of about 270 men and five ships. The expedition faced numerous hardships including Portuguese sabotage attempts, mutinies, starvation, scurvy, storms, and hostile encounters with indigenous people.

Only 30 men and one ship (the Victoria) completed the return trip to Spain. Magellan himself died in battle in the Philippines, and was succeeded as captain-general by a series of officers, with Elcano eventually leading the Victoria's return trip (Wikipedia).

Exactly five hundred years later and the fund manager Magellan returns it’s FUM report after a chillingly similar 3 year voyage. Magellan became a market darling in February 2020, it’s share price peaked at $73.67, and it’s FUM reached $110 billion late last year.

Then Magellan was plagued by numerous hardships; underperforming the benchmark, losing it’s largest client (St James Place), losing its captain, and continually haemorrhaging FUM. During August Magellan’s FUM fell a further 4.3% to $57 billion, about half of it’s record FUM late last year.

I’ve been aboard Magellan for too long. This week I jumped ship and boarded it’s rival Perpetual, who’s share price is also suffering, down 45% since it’s peak. The difference is analysts are forecasting Perpetual’s earnings to grow by nearly 12% per year over the next 3 years, and analysts are forecasting Magellans earnings to fall by 25% per year.

The other attraction is, Magellan has just paid it’s dividend (today) and Perpetual will go ex-dividend on Thursday (8 September) and pay a 97cps fully franked dividend on 30 September. The current dividend yield for Perpetual is 7.3% fully franked.

So, by jumping ship you can double your dividends for your investment, and get on board a what I believe is a more seaworthy vessel. If there are crew mates out there with similar thoughts, you will need to jump ship tomorrow if you want to double your dividends for the half year!

Perpetual has 46% upside says Bell Potter

James Mickleboro from the Motley Fool shared a note out of Bell Potter on 30 August (below):

“The team at Bell Potter are positive on the fund manager and believe its shares could bounce back very strongly.

According to a note, the broker has retained its buy rating and lifted its price target on the company’s shares to $39.80.

Based on the current Perpetual share price of $27.25, this implies potential upside of 46% for investors over the next 12 months.

The broker is also forecasting a dividend yield of approximately 7.5% in FY 2023, stretching the total potential return beyond 50%.”

Cheers

Rick

ASX Announcement

This morning Magellan (MFG) announced the launch of an on-market share buy-back of up to 10 million ordinary fully paid shares, representing up to 5.4% of shares on issue (“Buy-Back”). The Board previously announced its intention to consider an on- market buy-back at Magellan’s Interim Results Briefing on 18 February 2022.

Mr. Hamish McLennan, Magellan’s Chairman, said: “We believe the on-market buy-back announced today represents an effective way to enhance value for shareholders. The buy-back is consistent with our aim to deliver capital efficiency, solid dividends and attractive returns for shareholders with a focus on our core funds management business”.

The Buy-Back will be funded from Magellan’s existing cash and financial assets. Magellan will conduct the Buy-Back within the “10/12 limit” permitted under the Corporations Act 2001 (Cth), which provides that the Company may buy back up to 10% of issued capital in any 12-month period without shareholder approval.

Magellan has appointed Barrenjoey Markets Pty Limited and Ord Minnett Limited to act as its brokers in respect of the Buy-Back.

The timing and actual number of shares purchased will depend on the prevailing share price, market conditions and other relevant factors. All ordinary shares purchased pursuant to the Buy- Back will be cancelled. The Company reserves the right to vary, suspend or terminate the Buy- Back at any time. Full details of the Buy-Back are set out in the Appendix 3C lodged with the ASX today.

It’s really hard for investors to get excited about Magellan at the moment, but if your looking for a positive perspective it’s worth reading Morningstar analyst Shaun Ler’s views in the following extract published this morning in the AFR - Magelllan Hit by an Index Juggernaut

“The best possible spin you can put on Magellan’s loss of the St James’s Place contract is that it frees up capacity for Magellan’s global equity strategy, and it lessens the concentration of client risk exposure. The largest single client exposure is now about 3 per cent of assets under management

This positive perspective was highlighted by Morningstar analyst Shaun Ler on Friday in a note listing the “best stock ideas of 2022”.

Ler says the sheer scale of funds under management at Magellan ($101.37 billion at December 2021) “means it is capable of growing FUM and earnings from the compounding of investment returns despite periodic outflows”.

“By our estimations, the current share price implies Magellan will, over the next five years, generate annual returns less than passive equity exchange-traded funds and suffer outflows equivalent to more than half of its FUM as of November 2021,” he says.

Magellan and other active equity managers are facing a passive equity funds management juggernaut that includes organisations such as Vanguard managing money for virtually nothing on index funds.

But it is hard to see Magellan’s strong relationships with global institutional investors, built up over the past decade, deteriorating as rapidly as the market seems to think.

On Friday, Magellan told the market its profit was on track to be the same as last year notwithstanding the loss of the St James’s Place contract.

It said average base management fees were about 65 basis points (a year) based on closing funds under management of $95.5 billion at December 31.

“The run rate of base management fees based on closing funds under management at 31 December 2021 is broadly in line year-on-year.”

That suggests Magellan will earn about $500 million before interest and tax this financial year, which means it is trading on a forward price earnings multiple of 8.4 times.

That is a 20 to 30 per cent discount to the rating applied to its peers. Time will tell if the market has overreacted or is correctly forecasting significant outflows and loss of fee income.”

This morning Magellan reported FUM as at the 31 December. Including the termination of the St. James’s Place mandate, FUM has fallen from A$113,304 million on 30 September to A$95,491 on 31 December 2021, representing a 15.7% loss of FUM. Approx 12% of this is accounted for by the termination of the St. James’s Place mandate. For the December quarter, excluding the termination of the St. James’s Place mandate, Magellan experienced net outflows of $1,552 million or 1.4% of FUM at 30 September 2021.

In comparison to 31 December 2020 FUM is down 5.8%.

I don’t know how the market will react to the news given much of this is already factored into the share price. However, loss of FUM continues which is not good news for a fund manager.

Disc: shares held IRL

While most investors have been focused on recent underperformance of Magellan’s global growth fund, the CEOs sudden departure, and the separation of Hamish Douglas and his wife, some investors (including the InvestSmart team) see this as a unique buying opportunity.

Yesterday the share price fell to just over $28, the lowest price since January 2019, and down from an all time high of $73 in February last year.

I have felt very comfortable buying Magellan shares this week, so much so that it now makes up 10% of our portfolio IRL. Why?

I believe Hamish Douglas , the Executive Chairman and Chief Investment Officer for Magellan, is one of the best investors in Australia today. I think recent underperformance of the global fund is mostly due to Hamish’s cautious investing style and the cost of protecting shareholder capital against the downside in a very bullish global market. As the market becomes less bullish and downside risks return I think the fund will return to outperformance.

I feel comfortable owning Magellan because I believe the shares will pay for themselves in approximately 7 years with reinvested dividends, at which point the shares could be worth double their current value and continue to pay a 7% partially franked dividend based on the current share price. This is all based on the following assumptions:

• underperformance of the global fund is temporary
• FUM returns to positive inflows
• Future earnings growth of 12% per year over several years
• Cash margins continue above 55%
• Future ROE over 35%
• 7% partially franked dividends (74%) based on the current share price, grossed up to 10% when franking credits are included
• remains debt free
• Hamish remains at the helm as Chief Investment Officer

I am also very excited about the future of Magellan as I believe that Hamish Douglas will slowly transform Magellan from a fund manager to a diversified financial behemoth. This has already started with investments in Barrenjoey, Guzman Y Gomez and Finclear.

For me Magellan is a high conviction Buy at $30.

Disc: Shares held IRL