The $100b question: What’s ailing fund manager Magellan?

George, a former Future Fund executive, has sought to stabilise the investment team since his appointment last year and there are signs that Magellan’s flagship global fund is starting to perform better, though it’s early days. The outflow hit caused by star fund managers leaving is probably in the past, too.

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So, Magellan’s current challenge is less about large-scale redemptions in response to a crisis. Rather its problem is a steady stream of outflows. But that could still be a hard trend to turn around.

Fund managers like Magellan make money by investing on behalf of big institutions, like super funds, and individual retail investors. The recent trends among both these groups aren’t pretty.

J.P. Morgan analyst Siddharth Parameswaran says that in the company’s second half, net institutional outflows from Magellan were $7.6 billion, while retail net outflows were $2.6 billion.

The silver lining, if you can call it that, is that the amount of institutional money leaving Magellan is bound to slow soon because total institutional funds under management has come down so sharply. Macquarie, which is negative on the stock, estimates there’s about $5 billion in institutional FUM left in Magellan’s flagship global fund.

In the higher-margin retail investor market, there’s been roughly $400 million a month in retail outflows in recent months, and Macquarie estimates this general trend will continue for a while yet.

There are a few reasons to suggest it will indeed be hard to turn around Magella’s outflows.

One is simply that all global equity fund managers face a tough backdrop at the moment. Rising interest rates and volatility are prompting more investors to pull their cash out of overseas shares and put the money into term deposits. Competition from low-cost index funds, and super funds hiring their own stock pickers, rather than paying an external manager, present further challenges. Another headwind is that as fund managers like Magellan “mature”, their ageing retail clients start redeeming their money because they need it for retirement.

Magellan also faces its own specific challenges in winning back the retail market, thanks to the dramas of the past couple of years.

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A big one is that its reputation as financial advisers has taken a hit. Ratings on its funds have been downgraded, hurting inflows, while it also charges higher fees than some rivals. Turning around these ratings and adviser perceptions is a slow process that ultimately depends on the company delivering outperformance – no mean feat.

Some point to the outflows at fellow fund manager Platinum Asset Management – which has also had its share price fall sharply in recent years – as a case in point.

Others are more optimistic, and bet Magellan can gradually win back investor confidence, even if it doesn’t return to its glory days. There is hope the company can return some of its capital.

Activist investor Sandon Capital, for example, is pushing for George to abandon any acquisition plans and focus on returning capital and curbing costs.

Next week will mark one year since George formally began as CEO. The role was always going to be a tough job, but realising his ambition of returning Magellan to a $100 billion manager is only looking more challenging.

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