The Magellan Financial Group Ltd (ASX: MFG) share price has fallen by more than 30% in the past month. I get excited about businesses that have fallen heavily but still have the potential to deliver growth, so I'll consider if it's a buy.
The lower a share price goes, the fewer expectations the market has for that company's future. If a business can start impressing investors again, it has the potential to deliver rapid returns.
It could be unwise to expect any ASX stock to deliver strong short-term gains, but a very undervalued business could provide both solid capital growth and decent dividends over the long term.
Having said that, beaten-up ASX shares don't always recover just because they've fallen. They could keep falling over time.
Let's take a look at what went wrong for Magellan shares and whether they could be an underrated opportunity.
FY25 half-year result recap and investment team changes
Magellan recently reported its results for the six months to 31 December 2024.
The company reported that its average assets under management (AUM) grew 3% to $38.1 billion
However, profit before tax and performance fees for the funds management business saw a 10% decline to $72.1 million, adjusted net profit after tax (NPAT) fell 10% to $84.1 million, and statutory NPAT sank 10% to $94 million.
The profit decline led to the interim dividend per share being cut by 10% to 26.4 cents.
Magellan also reported that it generated $6.1 million in performance fees, up from $0.1 million in the first half of FY24.
Another positive the business reported was "disciplined cost management", with funds management operating expenses flat at $51.6 million. That's pleasing in the current inflationary environment.
The start of the recent significant decline in the Magellan share price occurred when the fund revealed a number of investment team changes. It fell 23.5% between 29 January 2025 to 3 February 2025.
Gerald Stack will step down from his role as head of investments at Magellan after 18 years with the business. He has led the listed infrastructure team since 2007.
Is this the right time to invest in Magellan shares?
With the loss of a key member of the investment team, there is a danger of losing funds under management (FUM) if clients pull out money. The business is also fighting against the growing trend of investors allocating more of their money to low-fee exchange-traded funds (ETFs).
Magellan has lost a lot of FUM over the past few years, but its recent monthly FUM updates have been promising. The January 2025 monthly update showed flat net flows and a $500 million FUM rise overall to $39.1 billion thanks to market movements.
Investment performance has also picked up, which was demonstrated by the company's increase in performance fees.
I also think it was a good move to diversify Magellan's business with investments in other fund managers, such as Vinva.
After such big losses over the past five years, it's hard to see the company regaining its former glory.
In my view, it all comes down to whether the Magellan funds can deliver solid (out)performance compared to the benchmark from here. The new investment team may well be able to do that.
The recent sell-off may have been overdone, but investing in Magellan shares would certainly be a higher-risk option right now. I'm not personally looking to invest, but it wouldn't surprise me if the stock outperformed the S&P/ASX 200 Index (ASX: XJO) in the shorter term.
