Why Magellan Financial Group Ltd shares could be cheap

Credit: Spyros Papaspyropoulos

Shares in international equities manager Magellan Financial Group Ltd (ASX: MFG) traded flat at $21.69 today despite the group posting a second consecutive month of strong inflows in funds under management (FUM).

In April Magellan posted $487 million in net inflows, which included net retail inflows of $151 million and net institutional inflows of $297 million. This is another strong result that follows on from bumper net inflows of $1.22 billion delivered in March.

As at April 29 the group had $39.96 billion in funds under management around $600 million up on the end of March as exchange rate differences and market movements also impacted the fund flows.

Magellan has built its business on a reputation for delivering market-beating returns by buying and holding global blue-chip businesses with competitive advantages over the long term.

Despite the strong operating performance over the past two months the stock has fallen around 4% as investors worry about the underlying performance of its funds and their potential to garner margin-boosting performance fees.

The group generally invests in global equities outside Australia, but made an exception for supermarkets business Woolworths Limited (ASX: WOW) over the middle of 2015 according to media reports. That position will have performed poorly so far, but the holding is only a tiny part of assets held by the group across its funds.

Far more important to Magellan investors is the outlook for a falling Australian dollar supported by the Reserve Bank’s recent interest rate cut and consensus that another cash rate cut is coming over the rest of 2016. This alongside the resilience of US equity markets is likely to see the group enjoy a strong finish to 2016, which makes the stock undervalued on current valuations at $21.60 in my opinion.

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Motley Fool contributor Tom Richardson owns shares of Magellan Financial Group.

You can find Tom on Twitter @tommyr345

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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