The Magellan Financial Group Ltd (ASX: MFG) share price has dropped close to 10% after the fund manager released its latest worrying monthly update.
Magellan used to be one of the biggest fund managers in Australia. But it has rapidly lost its place.
FUM loss
The fund manager reported that at 30 December 2022, its total funds under management (FUM) had dropped to $45.3 billion. This was a decline of around $5 billion from $50.2 billion at the end of November 2022.
Magellan explained that in December, it experienced net outflows of $2.6 billion, which included net retail outflows of $0.6 billion and net institutional outflows of $2 billion. This puts further pressure on the Magellan share price.
Retail FUM – from regular investors like you and me – saw FUM drop from $20.6 billion to $18.9 billion.
Institutional FUM dropped from $29.6 billion to $26.4 billion.
While there were declines for both its infrastructure shares FUM and Australian shares FUM, it was the global shares FUM that suffered the biggest drop, declining from $24.6 billion to $20.6 billion.
The fund manager revealed that its funds will pay distributions (net of reinvestment) of approximately $0.3 billion in January, which will be reflected in the FUM figures in next month’s announcement.
Disappointing performance
A fund manager can earn outperformance fees if it outperforms its benchmark that it’s trying to beat.
But, Magellan’s investment performance has been very disappointing over the past two and a half years. For the six months to 31 December 2021, Magellan said that performance fees “are not meaningful”.
The fund manager noted that performance fees can fluctuate significantly from period to period. But, the company seems to be consistently not generating much in performance fees at the moment.
Some fund managers can’t earn outperformance fees unless the fund’s value rises beyond its previous high watermark.
HY23 profit likely to sink
Magellan revealed that the average FUM for the six months ending 31 December 2022 was $53.8 billion, down from $112.7 billion in the prior corresponding period. That’s a drop of over 50%.
While revenue may not have dropped as much – because institutional FUM typically generates less revenue than retail FUM – it does suggest that the reported profit is going to utterly plummet in the FY23 half-year result. This could put more pressure on the Magellan share price.
Magellan shareholders will be hoping that the FUM exodus stops soon. But, I’m not sure when that will be. Investors won’t want to stick around with ongoing underperformance.
I think there are many other ASX growth shares with more compelling outlooks, that have also fallen heavily. I’d rather look at those.
