The Magellan share price has fallen over 10% in a month: Is it time to buy the dip?

The Magellan Financial Group Ltd (ASX: MFG) share price has been dropping recently. It’s down 12% in the last month.

Sadly for shareholders, this means it has given up most of the gains the company made since mid-July.

But, could this decline mean that Magellan shares are an opportunity? Is another rebound on the cards?

Magellan share price falls after FY22 result

Investors may have been buying shares of the fund manager leading up to the release of the 2022 financial year report. But, it has largely been negative since then.

There weren’t many positives in the result.

Adjusted net profit after tax (NPAT) fell 3% to $399.7 million, while profit before tax and performance fees of the funds management business fell 11% to $470.6 million.

While average funds under management (FUM) dropped 9% to $94.3 billion, the FY22 FUM finished at $61.3 billion.

As the company pointed out, the funds management business made a profit before tax and performance fees of $29.5 million in the first half and $177.1 million in the second half, a drop of 40% half over half.

The fund manager warned that material outflows of FUM meaningfully impacted profitability in the second half “and will affect FY23”.

Any positives?

While the Magellan Global Fund (ASX: MGF) showed underperformance of its global benchmark of 5.6% per annum over the three years to 30 June 2022, the Airlie Australian Share Fund generated outperformance of the S&P/ASX 200 Accumulation Index (ASX: XJOA) of an average of 4.7% per annum over the three years to June 2022.

The Australian investment performance and FUM is going well. In the August FUM update, the Australian shares FUM increased over the month from $8.3 billion to $8.4 billion. That came as total FUM dropped from $60.2 billion to $57.6 billion at 31 August 2022. August saw net outflows of $1.3 billion.

Another positive is that Magellan’s share buyback is improving the situation for existing shareholders. The company is buying back up to 10 million shares. At 30 June 2022, it had bought back 626,960 shares at an average price of $12.43. That’s slightly lower than where it is today.

Is the Magellan share price a buy?

I’m not sure that it is. The fund manager has taken a large hit of confidence and I think it’s unlikely that FUM will come flooding back even if Magellan starts achieving a bit of fund outperformance, though that is an important step to regain some momentum.

Active fund managers are facing a lot of competition from cheaper exchange-traded fund (ETF) investment products. Magellan itself has launched cheaper ETFs. The trend could mean that Magellan’s margin drifts lower in the coming years.

CMC Markets puts the current Magellan share price at 11x FY23’s estimated earnings. If Magellan can stop the monthly outflows of over $1 billion, then that could be a boost for Magellan shares. But, I wouldn’t want to buy shares right now. As a ‘value play‘ I’d want to see the forward price-to-earnings (p/e) ratio under 10 before thinking about it.

I’m not sure if the fund manager will be able to generate the same sort of returns as it did for investors in the 2010s.

The post The Magellan share price has fallen over 10% in a month: Is it time to buy the dip? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Magellan Global Fund. 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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