Magellan Financial (ASX: MFG) shares are down 17% today on their September fund management numbers. The problem for MFG shares is that the company has suffered a 10% or so decline in funds managed and about a 5% net outflow. That the two numbers are different is possibly rather part of the problem. But the result is the same either way. A fund manager’s profits are clearly geared to the amount of funds under management - that falls, the value of the fund manager does, and probably by more than the decline in funds.
As to what’s done at Magellan: “Magellan Financial Group Limited is a publicly owned investment manager. It invests in global equities and global listed infrastructure markets across the globe. Magellan Financial Group Limited founded in 2004 and is based in Sydney, Australia.” Not a complicated concept for us to have to deal with. But the thing we need to know is that fund managers get paid by a percentage of fund under management. That’s what pays for all the analysts and offices and salesmen and so on - 1 or 2% sorts of levels of funds being managed.
Magellan Financial stock price from Google Finance
Which is where the problem is at Magellan. That fund number is falling: “In September, Magellan experienced net outflows of $2.0 billion, which included net retail outflows of $0.3 billion and net institutional outflows of $1.7 billion.” It’s actually worse than that. Funds are down from $39 billion to $35 billion. But only $2 billion of that is funds leaving - which means the other $2 billion must be falls in the market value of the funds being managed. Which isn’t a good result either.
As we say, the financial performance of a fund manager is highly geared to that funds managed number because of the fee structure. Their costs of managing - their number of analysts and so on - doesn’t fall when the funds do, but the fees do fall. Therefore the change feeds directly through to the bottom line. The only way they can combat this is by reducing head count - which isn’t likely to increase the performance of the funds. It’s therefore easy enough to enter a downward spiral - which is why the share price reaction here is so vehement.
The two effects therefore feed upon each other at Magellan. Bad fund performance - 5% loss in a month - leads to funds leaving - 5% in a month - which then both feeds into that bottom line and also requires slimming the company. Which might well lead to further underperformance in the funds and operating cashflow.
