Why is the Magellan share price underperforming the ASX 200 this week?

Female investor in front of computer with hands at forehead.Female investor in front of computer with hands at forehead.

The Magellan Financial Group Ltd (ASX: MFG) share price is having a tough time. It’s down 3.1% today and down 7.4% for the week. That compares to the S&P/ASX 200 Index (ASX: XJO) which is down 1.6% today and 3.65% for the week.

Obviously, share prices change all the time, but things have been tough for Magellan in particular.

Since 11 August, the Magellan share price has declined by 24.4%.

What’s going on with the Magellan share price?

For starters, it’s worth noting that Magellan is a funds management business. Its revenue is largely dependent on funds under management (FUM). While FUM can change when investors put money into, or take money out of, the fund manager, it’s also what happens with its investment funds.

A falling share market can hurt Magellan’s FUM, revenue and subsequently the net profit after tax (NPAT). Investors often like to use the NPAT to value the Magellan share price.

The last FUM update we’ve heard from the business was another drop of FUM – August 2022 saw a decline from $60.2 billion to $57.6 billion, with net outflows of $1.3 billion.

Magellan is working on turning things around. It recently sent out a communication to investors talking about changes and efforts by the business.

Non-executive director Karen Phin has informed Magellan that she intends to retire from the board at the annual general meeting (AGM) in October 2022.

Also, in response to stakeholder feedback, the company gave more details about Hamish Douglass’ consultancy role where he will provide “valuable investment insights to the business”.

He will be paid at a rate of $400,000 per annum. Douglass will commence consulting services on 1 October 2022, but he will begin earning consulting fees from 7 February 2022. These fees are “commensurate” with the fees paid to other consultants engaged by the group.

Core funds management business

After a challenging FY22, Magellan has been focused on its core funds management business.

Magellan Chair Hamish McLennan said:

We recognise that our global equities strategy has underperformed relative to the market over the past 18 months and we are taking proactive steps to address this matter and deliver the strong investment performance for which we have been known over the past 16 years. Whilst markets may fluctuate in the short term, we remain committed to our investment philosophies and disciplined investment approach, which are designed to protect investor capital and generate wealth over the long term.

McLennan also pointed out that it has launched a number of staff retention initiatives, including a retention bonus plan. The chair said that the staff retention initiatives have allowed employees to remain focused on our clients and the business during a period of change and uncertainty.

Capital management

Magellan has also been trying to add value for shareholders in a few different ways.

One initiative was a share buyback of up to 10 million shares. And this continues to be in operation.

The second was a bonus issue of options to shareholders on a 1-for-8 basis, with an exercise price of $35 per option and a five-year term.

Finally, McLennan talked about how the company sold its holding of Guzman y Gomez for $140 million, which was 36.3% higher than its entry price in January 2021. He confirmed Magellan wouldn’t be making any further investments in private businesses through Magellan Capital Partners.

Magellan share price snapshot

Since the start of 2022 the Magellan share price has fallen almost 40%. Magellan shares are down 65% in the last 12 months.

The post Why is the Magellan share price underperforming the ASX 200 this week? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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