The Magellan Financial Group Ltd (ASX: MFG) share price… well, it hasn't been pretty, to say the least.
Magellan is now up almost 15% since Tuesday morning's trading. However, that doesn't hide the fact this fund manager is still down 27% in 2022 thus far, and down a nasty 66% over the past year alone.
With the $15.44 share price at the time of writing, it's hard to imagine it was only a bit over two years ago that this company was fetching more than $70 a share.
So what on earth has gone so wrong for Magellan?
Well, there has been a seeming cavalcade of bad news stemming from the company in recent times. We had the reportedly temporary departure of its former star stock picker, Hamish Douglass, in February for health reasons. This followed public revelations of Douglass' divorce. But we also had some high-profile institutional funds pulling their capital out of Magellan's management.
But perhaps the root cause here is the disappointing performance of Magellan's underlying investments. Most of the company's woes seem to start there.
Magellan isn't shy when it comes to charging management fees. Its flagship Magellan Global Fund, which has an ASX-listed version in Magellan Global Fund (ASX: MGF), bills investors 1.35% per annum. Its Magellan High Conviction Fund (ASX: MHHT) charges 1.5% per annum. That's many multiples higher than what a typical index fund charges. So it's fair to say that with management fees like that, investors expect significant market outperformance.
But unfortunately, that is something the company has struggled with in recent years.
Magellan funds battle chronic underperformance
The Magellan Global Fund has returned 9.9% over the past 12 months, according to the company's latest data. That doesn't exactly look great against its MSCI World Net Total Return Index benchmark, which has given investors an 18.15% return over the same period. Over the past 5 years, the unlisted fund has returned an average of 11.65% per annum against the benchmark's 13.36% per annum. These metrics are after fees have been taken into account, by the way. It's only over the past 10 years that Magellan Global Fund beats its benchmark. But even then, it's by 0.01% per annum (15.23% versus 15.22%).
Magellan likes to say that its Global Fund has "downside protection built in". But over the past six months, the fund has lost 8.06% against the benchmark's 3.96%.
Although the company's High Conviction Fund doesn't use a benchmark, it has given investors a return of 10.27% per annum over the past five years, again below the MSCI's 13.36%.
So you get the picture.
What's gone wrong?
Most of these woes stem from what seem to be poorly-timed investments. The company bet big on Chinese companies like Alibaba and Tencent, just before a series of Chinese regulatory crackdowns and geopolitical tensions saw investors lose faith en-masse in Chinese companies.
Netflix Inc (NASDAQ: NFLX) was a major holding when the company dropped more than 20% upon an earnings report earlier this year. Netflix is now down more than 40% year to date. It was a similar story with Facebook, now Meta Platforms (NASDAQ: FB).
Now Magellan's co-founders have famously described themselves as disciples of Warren Buffett and his trademark buy-and-hold investing style.
Buffett has routinely been pilloried over his career for periods of underperformance, only to prove the doubters wrong again and again. Perhaps the same will happen with Magellan and its funds. But for investors who have been buying-and-holding Magellan funds or, indeed, Magellan shares, for years, patience would certainly be being tested.
At the current Magellan share price, this ASX 200 funds manager has a market capitalisation of $2.86 billion.
