The uncertain outlook for stock market returns in the next quarter due to the rapid spread of the new variant of the coronavirus is also weighing on the attractiveness of top fund managers.

“Sentiment around the stock markets has deteriorated due to omicron and inflation fears and because asset managers are facing the market they have been made redundant,” said Shaun Ler, analyst by Morningstar.

Purchase opportunity

However, Mr. Ler believes that some stocks have been punished too harshly and present good value at current levels.

“Profits for asset managers are likely to rise as funds under management rise from pandemic lows,” he said.

“Companies are looking to ease the cost reduction and make money by selling to non-institutional clients, promoting new strategies such as ESG and expanding overseas.”

In Morningstar’s quarterly outlook released on Friday, the company highlighted Magellan and Pendal as its top picks in the financial services industry.

Mr Ler said the holdings of Magellan’s portfolio were undervalued relative to the overall global equity asset class, and he sees an advantage for the fund manager’s earnings as his major investments in Barrenjoey, Guzman Y Gomez and FinClear become profitable.

“The current share price implies that Magellan will generate lower annual returns than passive exchange-traded funds and experience large cash outflows over the next five years,” said Mr. Ler.

“We believe these assumptions are too pessimistic and ignore Magellan’s investment track record, growing distribution initiatives and strong intangible brand.

Morningstar sees Magellan’s fair value at $ 50.50 from its current price of $ 29.08.

As for Pendal, Morningstar believes it is well positioned to resist margin squeeze due to its relatively lower fees and growing exposure to the US market, where fee pressure is more favorable than in the Australian market. .

“A confluence of factors is currently weighing on its actions, including the weakness of European and Westpac flows, and fears of COVID-19 mutations or a spike in inflation. We expect these short-term headwinds to be reversed, ”said Ler.

He added that Pendal could generate higher market returns and receive more consistent performance fees due to its growing exposure to stocks and its funds with “more appropriate benchmarks”.

Morningstar estimates Pendal’s fair value to be $ 9, more than 60% above its current price of $ 5.58.