Magellan Financial – MFG:ASX
From their website:
Magellan was formed in 2006 to generate attractive returns for clients by investing in global equities and global listed infrastructure while protecting their capital.
Founded by Hamish Douglass and Chris Mackay. Hamish is still an executive in the company, filling the role of Chairman and CIO.
They are a funds-under-management-style business, managing a series of funds and portfolios, and derive a fee from the money they manage. In today’s ETF run world their fees seem quite expensive.
They take 1-1.5% as a base, then 10-20% of excess returns depending on how the funds perform and what sort of holding you buy. They try to payout 4% of their earnings as yield, have 0-20% cash and the rest gets skimmed/reinvested.
Looking at a bunch of their funds, they seem to be similar to market based ETFS, with their long term averages ranging from 5.5-11.5%. The premise of these funds are relatively simple:
- Global – ~11% long term return (since 2007)
- High Conviction ~14% long term return (since 2013).
- Sustainable – Just taking interest I think, doesn’t have results.
- Infrastructure – 7.5% (since 2007)
I think their funds seem to be quite reasonable. You get a few percentage points over a Vanguard ETF, a payout of 4% every year to cover cash flow. For busy people, with no interest in management, this is probably a good completely hands free fire and forget solution.
In the last ten years they have done an AMAZING job of growing their FUM. Rising from $1Bn in 2011 to $97Bn in 2020, a growth rate of 60% p.a. The 2020 financial year has been one of their worst on record (second only to 2016) at 12% FUM growth.
| Year | FUM (m$) | Growth (%) |
| 2011 | 2756 | |
| 2012 | 4006 | 45% |
| 2013 | 14695 | 267% |
| 2014 | 23513 | 60% |
| 2015 | 36381 | 55% |
| 2016 | 40495 | 11% |
| 2017 | 50597 | 25% |
| 2018 | 69509 | 37% |
| 2019 | 86718 | 25% |
| 2020 | 97184 | 12% |
Other options
FID is also a FUM style business that is exceptionally run (Full disclosure: I have held these guys for years). They haven’t managed to achieve anything near MFG’s level of growth (averaging 14% p.a. Since 2014)
| Year | FID FUM(m$) | FID Growth (%) |
| 2014 | 3576 | |
| 2015 | 4084 | 14% |
| 2016 | 4736 | 16% |
| 2017 | 5680 | 20% |
| 2018 | 6720 | 18% |
| 2019 | 7400 | 10% |
| 2020 | 8000 | 8% |
Weighing machine
RoE (Return on Equity) of between 40-57% for the last five years, but was near the low end of the spectrum in 2020. They’ve managed to grow earnings steadily and consistently by over 25% over the past 5 years, with last year being one of their slowest years for growth. Extremely high margins (40-60%), that increased in the last few years. Zero debt… ever. High growth of around 35% with a good dividend yield at roughly 3-4%. High insider ownership (25.5%, $2.3Bn in shares), note that the insiders also own the company’s funds, definitely enough to have skin in the game. I’d classify this as an “extremely high quality company”.
Voting machine
They have recently fallen a bit from favour, though I wouldn’t call them unpopular, currently trading at about 20xPE. Historical range fluctuates between 15-29x, so they’re at the middle-lower end of the range. They are currently in line with the PE for the AU market.
Company History
2015 – They started listing their funds on the ASX allowing for liquidity into and out of them. Think this was probably some of the reason for the significant growth into their FUM. They did significant hiring – 7 new analysts etc etc. This seems kinda nuts to me given how few funds they actually run.
2016 – Really nothing to add in the shareholder letter. “It’s been ten years, we put our clients and partners up front, earnings up FUM up, etc. etc.”
2017 – Some fiddly tax things WRT dividend payments to the funds, and performance fees. FUM up again. Solid repeated messages about trust, simplifying the bureaucracies. Commented that the listed funds mentioned above are now known as Active ETFs. They flag that they are going to increase the marketing expense to try and target self directed investors looking into ETFs. And also pay for new investment vehicles – e.g. MGT, to make them more interesting to investors not looking to pay for establishment costs.
2018 – Balance sheet was reviewed as being solid. They have increased the dividend payout to 90-95% of NPAT. Acquired Airlie and Frontier. Criticism of “ball tampering in CA”, I think they sponsored cricket or something…
2019 – Rejig of exec positions, nothing really to note. Listing their High conviction trust, New Active ETF. Airlie and Frontier acquisitions are being amortised over years.
2020 – They mention “reducing friction and improving access to investment strategies for clients”. They have listed another Active ETF – Airlie Australian Share Fund – which brings together unlisted funds, and Active ETFs into a single unit. Announced “MFG Core” – low cost funds for retail investors looking to access Magellan’s research process. Management fee of 0.5%. It’s been available to institutional investors for a long time, but is now being opened up to retail. Also announce the launch of another aETF (Magellan Global Sustainable Strategy).
Dec 2020 – FUM was up about 4% to $100.9Bn in the six months to Dec. This is much lower, and will likely be their worst growth for the last decade. They’ve become an investor in GYG, with a 10% holding. It is unsure whether GYG is going to list on the ASX, but CEO pedigree is good (McDonalds and Kmart). In October and November some insiders sold a significant number of shares in MFG ($15M between them) at ~$60.
Valuation
SWSt has them valued at $57
My 7YrCF has them at $49, Bull Model: $108, Bear Model: $8.
My WeVo Valuation has them at $69 with 16% return from dividends and 28% from Capital Gain. Bull Model: $163 Bear Model: $5
Investment thesis
They’ve had an amazing run, in the last ten years they’ve gone from 87c a share, to $48. And their PE is still at a very respectable ~20x. They are a fantastically managed company, with good cost controls, they have their clients and shareholders front and centre, and have accurately placed themselves front and centre into the current trends for liquidity and easy access funds with their Active ETF products.
The downside risk is that we are late in the financial cycle, and bull market. Their big growth is potentially finished, and when the markets contract, and money floods out of them, they will deflate like a huge balloon.
The upside reward is that the AU share market is nowhere near as artificially inflated as the US. It’s TMC/GDP is sitting at close to the long term average, so even if there is deflation it may not be in this sector. The Fed’s are pumping money into the economy, and MFG are setting up products to take advantage of the “low cost ETF boom”. Effectively framing themselves as a Vanguard for Australia. Plus, they’ve got into GYG early, and I really like their food.
A bet on MFG is basically a bet on their management. They’ve done a stellar job, and the positioning they’re doing at the moment, to me, looks like they’re setting themselves up for more wins.
Final thoughts
Pros: Stellar management, positioning to capture the “Cheap ETF” market, Burritos!
Cons: End of 10 year bull market, FUM companies likely to get reamed in this.
Result: Buy. I fully entered this thinking that these guys would be a hold, but I like their plans, and positioning. They’ve captured a particular segment of the market, and the new offerings are aimed at a much bigger segment (I think). They may even manage to grow a little bit through any downturn… Buy at $47, Sell at $108.
