The Magellan share price has fallen over 10% in a month: Is it time to buy the dip?

I'm going to share my view on the fund manager.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Magellan's FY22 result did not come with much good news
  • Profit fell in the last financial year and lower funds under management (FUM) is expected to hurt FY23
  • I wouldn't buy shares in the current situation

The Magellan Financial Group Ltd (ASX: MFG) share price has been dropping recently. It's down 12% in the last month.

Sadly for shareholders, this means it has given up most of the gains the company made since mid-July.

But, could this decline mean that Magellan shares are an opportunity? Is another rebound on the cards?

Magellan share price falls after FY22 result

Investors may have been buying shares of the fund manager leading up to the release of the 2022 financial year report. But, it has largely been negative since then.

There weren't many positives in the result.

Adjusted net profit after tax (NPAT) fell 3% to $399.7 million, while profit before tax and performance fees of the funds management business fell 11% to $470.6 million.

While average funds under management (FUM) dropped 9% to $94.3 billion, the FY22 FUM finished at $61.3 billion.

As the company pointed out, the funds management business made a profit before tax and performance fees of $29.5 million in the first half and $177.1 million in the second half, a drop of 40% half over half.

The fund manager warned that material outflows of FUM meaningfully impacted profitability in the second half "and will affect FY23".

Any positives?

While the Magellan Global Fund (ASX: MGF) showed underperformance of its global benchmark of 5.6% per annum over the three years to 30 June 2022, the Airlie Australian Share Fund generated outperformance of the S&P/ASX 200 Accumulation Index (ASX: XJOA) of an average of 4.7% per annum over the three years to June 2022.

The Australian investment performance and FUM is going well. In the August FUM update, the Australian shares FUM increased over the month from $8.3 billion to $8.4 billion. That came as total FUM dropped from $60.2 billion to $57.6 billion at 31 August 2022. August saw net outflows of $1.3 billion.

Another positive is that Magellan's share buyback is improving the situation for existing shareholders. The company is buying back up to 10 million shares. At 30 June 2022, it had bought back 626,960 shares at an average price of $12.43. That's slightly lower than where it is today.

Is the Magellan share price a buy?

I'm not sure that it is. The fund manager has taken a large hit of confidence and I think it's unlikely that FUM will come flooding back even if Magellan starts achieving a bit of fund outperformance, though that is an important step to regain some momentum.

Active fund managers are facing a lot of competition from cheaper exchange-traded fund (ETF) investment products. Magellan itself has launched cheaper ETFs. The trend could mean that Magellan's margin drifts lower in the coming years.

CMC Markets puts the current Magellan share price at 11x FY23's estimated earnings. If Magellan can stop the monthly outflows of over $1 billion, then that could be a boost for Magellan shares. But, I wouldn't want to buy shares right now. As a 'value play' I'd want to see the forward price-to-earnings (p/e) ratio under 10 before thinking about it.

I'm not sure if the fund manager will be able to generate the same sort of returns as it did for investors in the 2010s.

Motley Fool contributor Tristan Harrison has positions in Magellan Global Fund. 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.

More on Opinions

Happy couple doing grocery shopping together.
Opinions

Is the Woolworths share price a buy today?

Things could be looking up for this supermarket giant

Read more »

A businesswoman stares in shock at her computer screen.
Opinions

If I were just starting to invest in ASX shares, I'd buy this investment first

This could be an excellent place to start investing with.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Opinions

If the market keeps falling, I'll buy these 2 ASX 200 stocks

Make sure you use market pullbacks to your advantage.

Read more »

A man lays a brick on a wall he is building with a look of joy on his face.
Opinions

Why this could be a great time to invest in this ASX 200 stock

This business is building a good future, in my view.

Read more »

A woman sits on sofa pondering a question.
Opinions

2 high-flying ASX shares I wish I had bought (and may still buy)

I’ve long admired these two stocks, but haven’t invested (yet).

Read more »

A happy elderly woman smiles and cheers as she looks at good investment news on her laptop.
Opinions

Could this be a millionaire-maker ASX retirement stock at 55 cents?

I’m optimistic about this ASX stock. Here’s why.

Read more »

A husband and wife dance with their young daughter in their lounge room.
Opinions

Is the Harvey Norman share price in the buy zone?

After the recent price increase, I still see a lot of value

Read more »

Woman and man calculating a dividend yield.
Opinions

Is this the right time to invest in AFIC shares?

AFIC Is the biggest LIC – but is it a good time to invest?

Read more »