The Magellan Financial Group Ltd (ASX: MFG) share price is hurting today. It's down 5.87% after the business reported its FY22 result to investors. But, it's still up 22% over the past month.
Magellan is one of Australia's largest fund managers. But, it's now quite a lot smaller after the business suffered a major loss of funds under management (FUM) during the financial year.
Investors turned negative on the business as its investment funds underperformed compared to the global share market index. People and institutions pulled out billions of dollars of FUM during the year.
Adjusted net profit before tax dropped 12% to $515.2 million. The total dividend of $1.79 per share was a reduction of 15%.
Over the financial year, FUM plunged from $113.9 billion to $61.3 billion. Negative investment performance was the cause of $2.3 billion of negative movement. The $49.5 billion of negative net flows was the key reason for the decline.
Should investors get out?
According to The Australian reporting, one "veteran trader" says the business is "a basket case" and thinks "investors should get out while they can". However, any interests in Magellan shares were not disclosed within the article.
The latest monthly update for FUM, being July, showed a drop in FUM to $60.2 billion, down from $61.3 billion at the end of June.
Committed to rebuild
The Australian reported that Magellan is "committed to rebuilding trust among clients and shareholders." It quoted Magellan chair Hamish McLennan who said:
Our number one priority is to deliver on our clients' objectives, which in turn will provide the foundation for revenue growth and returns for shareholders over the long-term.
We recognise that the global equities strategy has underperformed relative to the market over the past 18 months and that we must do better.
The new CEO and managing director, David George, said he will share his thoughts with shareholders in October.
But, George did indicate that the current investment landscape is a volatile and difficult one, which should "reward outstanding fundamental company research and active management of portfolios". He went on to say:
Magellan remains an asset manager of scale, with considerable underlying financial strength and great potential. The strength of Magellan's balance sheet provides us with significant headroom to invest in our business to deliver our clients and position ourselves for future growth.
During the year, Magellan's total of cash, financial assets and investments in associates increased 7% to $963.3 million. It has no debt either.
Magellan said its focus is on its core funds management business, strengthening processes and driving consistent and improved investment performance. It's "determined to rebuild value for clients and shareholders".
The fund manager revealed that based on the FUM of $60.2 billion at 29 July 2022, retail fees make up 68% of the base fees, even though retail money only represents 38% of the FUM. If retail FUM proves to be more 'sticky' than institutional money, then this could be a positive mix.
Foolish takeaway
I did recently sell my own Magellan shares.
After the loss of FUM, FY23 profit is likely to fall again because of the loss of revenue. I recently wrote the following in my previous Magellan article:
The key thing for Magellan is to start generating some good performance in its key investment funds over longer time periods again. With relatively high fees, what will attract/retain funds if the investment fund is underperforming against its benchmark consistently?
Will the dividend and FUM keep falling? It's really hard to say. But going for a declining business is not the type of investment I normally like to make.
