HOLD Magellan Financial (MFG) Current price $20.40

The Intelligent Investor Gaurav Sodhi

If Magellan were in another industry, we might be gushing about the achievement of establishing a colossus from scratch. Being a fund manager, one that has underperformed its benchmark no less, Magellan has instead attracted disdain, mockery and no small dose of schadenfreude.

The share price crashed almost 30% as Magellan announced the loss of its largest client, UK-based St James’s Place, which will pull about $18 billion from the fund manager, representing around 12% of revenues.

The risk from here is that other clients now have a precedent to follow and further funds flow out the door. With a fixed cost base, lower funds under management will translate to lower profits and an even lower share price. All that is entirely possible.

Yet today’s price anticipates a lot more outflows. We’ve long argued that funds management is about more than just performance. Distribution, marketing and good storytelling still matter, and Magellan boasts a better trifecta than anyone. The non-funds part of the business is important and valuable, too.

Magellan remains hugely profitable, and its strengths are intact. The risks of lower FUM and lower profits have grown but the valuation now anticipates a lot more bad news. A decision from here isn’t easy. Nor is it necessary.

We’ve removed our price guides on this stock and will wait to see how Magellan responds, how other clients will react and how the funds perform. The business looks awfully cheap but rushing to buy when risk is high isn’t prudent.