The Magellan Financial Group Ltd (ASX: MFG) share price is being berated in 2024, and it's only the second week.
After capping off its first week of trading in the new year at a gain of 4.2%, the positive vibes towards the Australian fund manager evaporated yesterday. At their low, Magellan shares clipped a fall of 8.6% before finishing Monday on a 7.4% retreat to $8.94.
Today, the Magellan share price is edging ahead, outpacing the S&P/ASX 200 Index (ASX: XJO). Let's take a closer look into what could be leaving a sour taste in the mouths of Magellan shareholders.
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Fleeting fees and flows
On 5 January 2024, Magellan disclosed its latest funds under management (FUM) update for December. The two-page document was received positively by the market amid a 1.7% month-on-month increase in FUM to $35.8 billion.
As detected by fellow Fool James Mickleboro, investors seemed unfazed by the market underperformance and $200 million in net outflows during December. Neither did the 'immaterial' contribution from performance fees half year. Both appeared to be forgiven — until yesterday, that is.
Investors quickly changed their tune on Monday after Citi analysts shared their hot take on the update. Setting the Magellan share price on course for its biggest descent in 13 weeks, the broker downgraded the fundie to a sell.
To justify its revised rating, Citi spotlighted the immaterial performance fees for the six months ending December 2023. Furthermore, analysts at Citi described a negative outlook on fees from outperformance on the three and five-year horizons.
Despite labelling the Magellan share price as a sell, Citi surprisingly dialled its price target up from $7 to $8.10 per share.
Is consolidation what the Magellan share price needs?
Several industry experts have recently detailed the competitive landscape facing fund managers. The increasing popularity of exchange-traded funds (ETFs) and rivalry from super funds has made the money management industry a tough place to be.
As mentioned in The Australian, Jarden investment banker Mitchell Schauer believes changes may be afoot in 2024.
Magellan and other ASX-listed fund managers may need to consider, "Should these businesses be listed? Can they consolidate through scrip-based combinations to drive scale, relevance, operational efficiencies and synergies?" according to Schauer.
The issue for active fund managers is the cost involved in the approach. While ETFs can offer low-cost passive investment offerings, largely running on autopilot, active managers require a more hands-on technique.
As wage inflation bites and funds flow away, margins in the active fund management industry tighten. The only way out for some may be to bite the bullet and seek a merger with a larger company.
Magellan's rival, GQG Partners Inc (ASX: GQG), is one ASX fund manager reportedly open to doing deals. The US-based company released a stronger set of numbers for its December update, posting net inflows of US$1.8 billion.
