Magellan: Result 2018

‘The lady doth protest too much, methinks', says the Queen in Shakespeare's Hamlet, and it's easy to reach a similar conclusion about Magellan's 2018 results announcement.

The fund manager gave up 10 pages of its 35-page presentation to justifying its performance, but these things should really speak for themselves.

The simple facts are that Magellan has had one spectacular five (or six) year period (in which it outperformed by about 10% a year) followed by an average one. We like Magellan's approach and we think it's likely to outperform by a little over the long term – but the track record so far does not make this an inevitability.

When we last updated on the stock it appeared that investors might have been reaching the same conclusion, with net retail outflows in the three previous months (March to May). Things have since stabilised somewhat, with retail inflows in June and July, although the latter may have been supported by the reinvestment of distributions and the institutional channel saw an outflow in July (its first since April).

Slowdown

It all adds up to a net retail inflow of $50m so far this calendar year and a net institutional inflow of $928m. Many fund managers would kill for that – but it represents a sharp slowdown for a company that has grown from nothing to $70bn of fund under management (FUM) in just twelve years. In the six months to last December, there was a net inflow of $3.5bn.

Perhaps the bigger problem for Magellan, though, is that it may be nearing capacity limits – and it devoted another eight pages of its presentation to dispelling that theory. It suggests, for example, that the recently purchased Airlie Funds Management has a potential capacity of $65bn (being the total for Australian large-cap equities managed funds), while sustainable ‘low carbon' strategies have a ‘theoretical capacity' of $15bn–20bn.

Those are more like theoretical market sizes, though, and they barely rate even as ‘aspirational targets'.

Putting all these issues together and Magellan looks like a case of ‘tails you lose and heads you don't win very much'.

Dividend jump

There was plenty of winning for the company and its shareholders, though, in 2018 – as there has been for most of its short history. A 29% rise in average funds under management to $59bn meant that management fees rose 26%. Bolstered by a near-doubling of performance fees and a tripling in returns from investments in its own funds, overall revenue rose 34% to $453m. Excluding the costs of launching the Magellan Global Trust, expenses increased 23% to $101m, giving a 37% rise in underlying profit before tax to $352m and a 36% rise in underlying earnings per share to $1.55.

After reviewing its capital needs – determining unsurprisingly that it doesn't need very much – the company has set a new dividend policy of paying out 90–95% of net profit from its funds management business. As a result, the total dividend for the 2018 financial year jumped by 57% to $1.345 cents per share, including final dividends totalling 90 cents.

Given that FUM is already 19% ahead of its average for 2018, we'd expect another decent jump for earnings in 2019, to maybe $1.65–1.70, although as ever the exact amount will depend on the performance fees and investment income. From thereon, though, we'd say growth is likely to slow.

The stock's current multiple of about 16–17 times 2019 earnings doesn't actually need much growth, but the risks discussed above mean we'd need a big margin of safety before buying it. HOLD.