The Magellan (ASX:MFG) share price has lost 40% in 6 months. What now?

Magellan shares continue to underperform. What’s next?

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The Magellan Financial Group Ltd (ASX: MFG) share price has declined by around 40% over the last six months. What’s going to happen next?

There have been various factors that have turned some analysts sour on the funds management business including investment fund underperformance and fund outflows.

But the latest event that investors have to wrap their heads around was the surprise exit of the Magellan CEO, Brett Cairns.

CEO departure

Earlier this week, Magellan announced that Mr Cairns had resigned as CEO for “personal reasons” and will be leaving the company.

Mr Cairns has been involved with the business since 2007 when he started as a non-executive director and eventually became CEO in 2019. He was “instrumental” in developing Magellan’s exchanged-traded products as well as developing the retirement product called Futurepay.

Taking the role of interim CEO is Ms Kirsten Morton, who has been the chief financial officer for over eight years. Magellan stated she has a detailed understanding of Magellan and its operations, having joined the senior management team in 2013.

The Australian reported on speculation that there had been a rift between Mr Cairns and chair and co-founder Hamish Douglass, though Magellan denied that was the case.

Whilst the Magellan share price is currently up 2.5%, it’s still down around 8% this week.

Latest funds under management (FUM) update

On the morning of the CEO’s resignation announcement, the fund manager revealed that its FUM had increased $1.6 billion over the month of November 2021.

Analysts at UBS calculated that whilst Magellan seemed to benefit from net inflows during the month, it was lower margin institutional inflows that offset higher margin retail outflows.

Continuing with UBS’ thoughts on the business, the broker still believes that Magellan’s revenue growth could be challenged from potential outflows and lower management fees. That’s one of the main reasons why UBS currently rates the Magellan share price as a sell, though the price target is $29.50.

Valuation

Based on UBS’ numbers, the Magellan share price could be valued at 12x FY22’s estimated earnings with a partially franked dividend yield of 7.5% in FY22.

However, whilst investors are questioning the funds management side of Magellan, the business has been diversifying its business recently.

Magellan Capital Partners

Magellan Capital Partners has been created to make investments that could bring strategic benefits to the company and enhance Magellan’s intellectual capital.

The three major investments it has made are FinClear, Barrenjoey and Guzman y Gomez (GYG).

FinClear provides trading infrastructure, services and technology solutions that support businesses in wealth management and stockbroking. It owns iBroker, a post-trade system that underpins more than 15% of all transaction value traded on the ASX and Chi-X exchanges, including all that is executed through CommSec. Magellan owns 15% of FinClear which cost $23 million.

GYG is a fast service Mexican food restaurant which has operations in Australia, Singapore, Japan and the US. Global sales last year were $445 million. It’s planning to open another 30 stores next year and Magellan says that it has a long pathway ahead, with large global growth potential and good drive-through economics. Magellan invested $103 million for a 12% stake of GYG.

Barrenjoey is a new full-service financial services business that operates across corporate finance, equities, fixed income and research. Magellan said that it believes it’s “highly likely that Barrenjoey will become very valuable to Magellan over time”. It spent $156 million for a 40% economic stake in Barrenjoey.

However, at the moment analysts aren’t attributing much value to these investments within the Magellan share price.

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Motley Fool contributor Tristan Harrison owns shares of Magellan Financial Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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