Wipeout: Why did the Magellan share price sink 70% in FY22?

The last financial year was a horror show for Magellan.

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Key points

  • The 2022 financial year was a huge setback for Magellan
  • It lost tens of billions of dollars of FUM, while also losing its talisman Hamish Douglass
  • Magellan's profit is also expected to sink in FY23

The Magellan Financial Group Ltd (ASX: MFG) share price fell hard in FY22. In fact, it dropped more than 70% making it one of the worst performers in the S&P/ASX 200 Index (ASX: XJO).

Before FY22, Magellan was a high-flying fund manager achieving outperformance and attracting significant funds under management (FUM).

But, FY22 was a year where things went south for the Magellan share price.

As a fund manager, achieving investment returns is obviously a key objective. Performance is often compared to an index. But, if the fund manager doesn’t outperform the index, then why pay higher fees?

Underperformance

When the COVID-19 crash happened, Magellan’s portfolio was already positioned to deliver reliability with defensive investments.

At 31 March 2020, the Magellan Global Fund Open Class (ASX: MGOC) – one of Magellan’s largest investments over $10 billion in size – showed a net return of a 1.2% decline over the prior three months. That was an outperformance of 8.1% compared to the global share market index.

However, since then it has underperformed significantly as the global share market recovered strongly then shot even higher than during pre-COVID times.

Alas for Magellan, its Global Fund is a useful indicator of the overall performance of the Magellan global investment strategy.

By November 2021, the Magellan Global Fund had underperformed the global share market by 14.6% over the prior year.

FUM sinks

While some investors may be willing to put up with underperformance in the short-term, it seems that investors in Magellan funds started to lose patience at the end of 2021.

In December 2021, it announced the loss of the St James Place mandate. At the time, it represented 12% of the fund manager’s annual revenue.

At 30 November 2021, Magellan had $116.4 billion of FUM.

Since then, it has been losing billions of FUM, representing losses of more than just St James Place. At 23 February 2022, it had $77.2 billion of FUM. By 31 May 2022, Magellan’s FUM had dropped to $65 billion.

FUM is important for a fund manager because there are two main ways to generate revenue – management fees and performance fees. The performance fees are variable. But management fees can generate attractive and consistent revenue and net profit after tax (NPAT) for Magellan.

The loss of over 40% of its FUM is also expected to lead to a large drop in ongoing profit.

Profit estimates on CMC Markets show an earnings per share (EPS) projection of $2.26 in FY22 and then $1.45 in FY23. That would be a decline in profit of 36%.

Talisman steps back

In February 2022, it was announced that Magellan co-founder Hamish Douglass was going to take medical leave. At the time, he was Magellan’s chair and chief investment officer.

Co-founder Chris Mackay took over portfolio management of its global equity investment funds.

However, it was recently announced that Douglass would return to work later this year as a consultant.

Time will tell whether his return can help Magellan’s performance turn around.

Magellan share price snapshot

Over the past month, the Magellan Financial Group share price has dropped almost 20%.

The company has a current market capitalisation of $2.2 billion.

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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