Down 70% in one year: Is the Magellan share price a turnaround buy?

After such a heavy fall, can the fund manager turn things around or is there more pain ahead?

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Key points

  • Magellan shares have been smashed in the past 12 months 
  • Its underperforming investment funds have seen some investors pull out their money 
  • The broker Morgan Stanley believes that there’s more pain to come 

The Magellan Financial Group Ltd (ASX: MFG) share price has been one of the worst performers in the S&P/ASX 200 Index (ASX: XJO) over the past year. It has dropped over 70%.

There have been a few different negative catalysts for the business.

But could the fund manager actually be a strong turnaround idea? We’ll have a look at what some leading experts believe.

What has caused the negative sentiment?

Poor investment returns of its global shares strategies led to the loss of a key institutional client. Billions of dollars of funds under management (FUM) have left through the doors of the business. The level of FUM is a key influence on revenue, profit and dividends for Magellan. FUM changes can also impact the Magellan share price.

At 31 May 2022, the Magellan Global Fund (Open Class) (Managed Fund) (ASX: MGOC) only registered an average annual return per annum of 4.9% over the prior three years, underperforming its index benchmark by an average of 6.5% per annum. It’s showing underperformance over the prior year, five years and ten years as well. This fund accounted for $10 billion of Magellan’s FUM.

On 30 November 2021, it had $116.4 billion of FUM. This had reduced to $65 billion at 31 May 2022.

Magellan co-founder Hamish Douglass, who was also one of the leaders of the investment team and a key decision-maker, stepped back from operations due to mental health reasons. His exit was seen as a negative for the business. However, he will resume work in a consultancy role on 1 October 2022.

As a fund manager, the decline in global share market valuations also pulls down on Magellan’s FUM because the underlying portfolios would drop in value as well. At 31 May 2022, the Magellan Global Fund open class units had seen a 5.5% decline in investment performance.

Is the Magellan share price an opportunity?

The broker Morgan Stanley thinks there’s more declines to come. It has a price target of $11, which is a reduction of around 15%. It thinks that $2 billion flowed out last month and that billions more may leave the business in June. The Morgan Stanley rating is underweight which is similar to a sell rating.

UBS also rates the Magellan share price as a sell, with a price target of $13.50. This broker is concerned that the infrastructure investment segment of Magellan’s fund management business could see outflows as well. 

One of the most positive price targets is from Credit Suisse, with the target being $14.40. That’s a possible rise of over 10%. However, it’s only neutral on the business. 

Valuation

UBS is expecting a large decline in profit in FY23 from Magellan. Using UBS’ earnings estimates, Magellan is valued at 9 times FY23’s estimated earnings. 

Motley Fool contributor Tristan Harrison has positions in 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 Scott Phillips.

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