Why the Magellan (ASX:MFG) share price has lost its magic

Why has the Magellan Financial Group Ltd (ASX: MFG) share price been underperforming over the past year? Fund performance might be the answer

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The Magellan Financial Group Ltd (ASX: MFG) was once considered one of the best ASX 200 growth shares out there. Investors enjoyed an incredible run up between January 2019 and February 2020. Over that short period, Magellan shares went from just under $23 a share to well over $73 – a gain of 222% in just 13 months.

But Magellan has not recovered nearly as well from the coronavirus pandemic as the S&P/ASx 200 Index (ASX: XJO) has since. As it stands today (at the time of writing), Magellan shares are trading for $47.58. That’s a good 35% off of those February 2020 highs, and more than 27% below what the company was trading for back in August last year.

The Magellan share price seems to be going sideways.

So what happened to this ASX share? Magellan used to be loved for its leveraged exposure to the ASX and the US markets, considering its funds’ management nature.

Fund managers are actually a relatively simple business to understand. They make money in two ways – by increasing funds under management (FUM) and by delivering market performance, preferably outperformance.

Let’s look at Magellan’s FUM first then.

Fee fi fo FUM

Magellan’s FUM has remained remarkably consistent over the past 18 months. Back in February 2020, Magellan told the markets that, as of 31 January 2020, it had $104.31 billion in FUM. As we discussed last week, Magellan reported FUM of $106.05 billion as of 31 March 2021. That’s a pretty solid, if not overly inspiring, comparison there. It indicates that Magellan’s investors held their faith in the company’s funds over the significant market volatility and turmoil we saw last year.

So let’s now turn to the performance of Magellan’s funds themselves to see how they measure up. This company has long been able to attract investors with its focus on the US markets. And its ability to deliver market-beating returns, of course.

What about Magellan’s returns?

So, let’s first look at Magellan’s flagship Global Fund, of which there is a listed version in the Magellan Global Fund (ASX: MGF). According to Magellan, the Global Fund has returned 4.52% over the past 12 months (as of 31 March 2021) after fees. It has averaged 13% per annum over the past 3 years, 12.57% per annum over the past 5 and 15.88% over the past 10.

By comparison, the MSCI World Net Total Return Index (AUD), which is the benchmark Magellan follows, has delivered 23.78% over the 12 months, 13.08% per annum over the past 3 years, 13.58% over the past 5, and 12.85% over the past 10.

In other words, the Magellan Global Fund has mirrored or underperformed its index. The past year has been especially damaging to the company’s longer-term performance metrics, given that 13%+ underperformance.

Magellan’s High Conviction strategy, used in both a managed fund and its listed equivalent, the Magellan High Conviction Trust (ASX: MHH), has not fared much better. It has delivered 13.18% over the past year (again, as of 31 March). But 11.04% on average over 3 years, and 12.08% over the past 5.

By comparison, investing in a simple S&P 500 Index (INDEXSP: .INX) fund, like the iShares S&P 500 ETF (ASX: IVV), would have gotten an investor 25.4% over the past year, 16.7% per annum over the past 3 years, 16.3% over 5, and 17.3% over 10.

Plus, this exchange-traded fund (ETF) charges a management fee of just 0.04%. Compare that with Magellan Global Fund’s 1.35% fee, or the High Conviction fee of 1.5%.

Investors don’t usually like paying large management fees if the fund in question doesn’t justify said fee through index outperformance. This is likely to be what is weighing on the Magellan share price over the past few months.

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Motley Fool contributor Sebastian Bowen owns shares of Magellan High Conviction Trust. The Motley Fool Australia has recommended iShares Trust - iShares Core S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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