The Magellan Financial Group Ltd (ASX: MFG) share price has done well in recent weeks. Indeed, it's up 10% since I wrote this earlier article on 6 June. Now a fund manager has outlined why Magellan shares could still be very valuable.
Magellan has suffered a significant sell-off following large funds under management (FUM) outflows after its main investment funds underperformed their respective benchmarks.
However, even a struggling business can be oversold by the market if investors become too pessimistic.
Sandon Capital has made a number of points about why Magellan shares could perform from here. The fund manager has suggested the fallen business is "deeply undervalued and misunderstood by the market".
How much are Magellan shares worth?
Sandon has suggested the Magellan share price could be worth between $11.79 to $15.29, which would be an increase of between 34% to 74% from its current level.
The investment team at Sandon believes that Magellan can repair its business and reputation, with investment performance being the best way to do that. Sandon pointed to the fact that Magellan's main investment strategies have outperformed over the past year and since inception.
It was also pointed out that Magellan has a lot of value on its balance sheet, with a "significant amount of non-operating assets" including excess cash, fund investments, and investments in associates. These assets are worth more than $1.1 billion. Sadnon suggests the market isn't valuing these assets for much and that a lot of this capital could be returned to shareholders.
What the fund manager could do to improve its core management business to boost Magellan shares
Sandon notes Magellan should be careful with its $100 billion FUM goal because it could mean justifying an unsustainable cost base. New product launches and acquisitions can also be risky if used to boost FUM because they "often do not succeed", Sandon says.
It pointed out Magellan is much cheaper than its peers, including GQG Partners Inc (ASX: GQG) and Regal Partners Ltd (ASX: RPL). However, the fund manager thinks Magellan's cost base is too high for how much FUM it has. It suggests its costs should be around $100 million rather than the guided range of $125 million to $130 million.
A reduction of its expenses (and expense ratio) would "sustainably improve the earnings power of Magellan", according to Sandon.
The fund manager also suggested that Magellan should renew its board to get new opinions and perspectives not anchored to Magellan's past.
Foolish takeaway
There are a number of things that Magellan can do to improve returns for investors, but generating investment outperformance could be the most important factor. Currently, it is doing better than before so this could mean ongoing stronger performance for Magellan shareholders.