Should you buy shares in AMP or Magellan Financial Group Ltd?

While the share price of AMP Limited (ASX: AMP) has fallen around 21% in the past 12 months, the share price of Magellan Financial Group Ltd (ASX: MFG) has increased about 10% over the same period.

These significant disparities in share price performance have occurred while the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has slumped approximately 18%, which would suggest that AMP’s fortunes are much more tightly linked to the general economic environment than Magellan’s appear to be.

Here’s why

AMP is a massive player when it comes to wealth management services in Australia. At December 31 2015 the group could boast of AMP Capital’s average assets under management (AUM) standing at $159 billion and its Australian wealth management division’s AUM standing at $115 billion. Meanwhile, group underlying profit increased by 7% for the half.

While AMP has successfully expanded its AUM beyond domestic clients with nearly $17 billion being managed for international clients, the 7% increase in profit does highlight that its large domestic base (which includes significant insurance operations) will remain a drag on future growth rates.

Indeed, AMP’s large market share position translates into low-growth expectations. According to one analyst consensus forecast, AMP is only expected to increase earnings per share (EPS) by 3% and 4% over the next two years (Source: Thomson Consensus Estimates).

In contrast, Magellan is on a very fast growth projectile. Average AUM leapt 44% in the six months to December 31 2015 and net profit jumped 41% on the prior corresponding period, which would suggest strong earnings momentum into the full year.

What it all means

AMP is a giant of the financial services industry and despite encouraging signs regarding its international investment management initiatives, the complexity of the business and the difficulty it will have to grow at above market average rates arguably makes AMP’s investment proposition relatively unappealing.

In comparison, Magellan has snared a market-leading position in the provision of international equities management in what remains an underserviced section of the domestic market. The solid returns achieved on funds managed by Magellan, coupled with the group’s leverage to higher AUM suggest a promising future outlook for the group.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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