'Worst is now behind them': 2 unloved ASX 200 shares paying FAT dividends

Are stock pickers themselves worth investing in? Here's a pair that are tempting buys, according to one expert.

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Ironically, ASX-listed investment companies have been out of favour with ASX investors in recent years.

The depressed sentiment in share markets over the past 18 months hasn't helped, with many customers pulling their money out to "safer" assets such as cash.

But now with many wealth manager stocks trading at a heavy discount, it could be the time to pick them up for cheap.

Here's a couple of suggestions from the S&P/ASX 200 Index (ASX: XJO):

Is the nightmare over now for Magellan?

The most infamous of the investment management stocks, Magellan Financial Group Ltd (ASX: MFG), has fallen a horrifying 83% since July 2021.

The drop in valuation has left its dividend yield at an enormous 13.44%.

Underperformance of its products and the very public exit of celebrity co-founder Hamish Douglass has devastated the company to an extent that even professionals are shocked.

Shaw and Partners portfolio manager James Gerrish certainly didn't see it coming.

"Like many investors, we underestimated the enormity of the implosion caused by their once dominant chief investment officer Hamish Douglass," he said in a Market Matters memo.

"A big fall from grace with Magellan now managing around one-third the amount of money they had at the peak of their powers, but are things finally on the improve?"

Created with Highcharts 11.4.3Magellan Financial Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

The answer is a "yes" from Gerrish's team.

"We are warming to Magellan, believing the worst is now behind them," said Gerrish.

"Over the last 3 months, performance has improved meaningfully in its flagship global fund, which has resulted in investment returns of +15.5% calendar year to date, outperforming the benchmark by around 3%."

This turnaround in product performance would have "positive ramifications" on stemming the outflow and alleviating pressure to cut fees.

"You'd have to think that those who were leaving would have already left by now, which implies that the FUM [funds under management] they now have (~$42.7 billion) is sticky."

Gerrish calculated that if you deduct the value of Magellan's non-fund assets such as Barrenjoey and Finclear, the funds management business is worth about $4 per share in the current market.

"Someone could easily come in, sell off the principal investments, take the FUM and address the performance & perception issues surrounding Magellan," he said.

"Or they can fix performance and flows internally, which seems to have already started, and the result will be a positive one from currently depressed levels."

Regal thought Perpetual was cheap, and it still is

Meanwhile, Perpetual Limited (ASX: PPT) has been busy on the corporate dance floor.

"In November last year, a consortium led by the Regal Partners Ltd (ASX: RPL) launched a takeover bid for Perpetual, who themselves were attempting a takeover of Pendal."

Although Regal failed in its acquisition attempt, its bid gave an insight into what the investment industry thinks the value of Perpetual is. 

Created with Highcharts 11.4.3Perpetual PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

"The consortium bid $1.7 billion for Perpetual which equated to $30 per share. Perpetual said it materially undervalued them despite being a 23% premium to their 30-day average."

During the to-ing and fro-ing, Perpetual prepared for a sale of its corporate trust business for $1.4 billion.

"Clearly, Regal thought Perpetual was cheap before they took out Pendal, and we think that's still the case now," said Gerrish.

"In Market Matters' view, Perpetual is worth well north of $30, or 15% to 20% higher."

Perpetual shares pay out an outstanding dividend yield of 7.4%. The stock price is 22.7% down over the past 12 months.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. 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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