The Magellan Financial Group Ltd (ASX: MFG) share price dropped lower today after the group posted net fund outflows of $27 million for the month of March, although total funds under management (FUM) climbed around 2.1% to $47.7 billion as a result of market appreciation and the weaker Australian dollar.
Over the month of March the Australian dollar fell marginally against its U.S. counterpart, while the tech-heavy NASDAQ 100 Index of leading tech companies also climbed around 1.75% in a good month for managers focused on U.S. tech leaders like Apple, Amazon, Google and Facebook.
The appreciating total FUM is good news for Magellan, although the operating result of $115 million in net institutional outflows is not a result the group will want to become a pattern given managing institutional money is still the core of its business.
Over the long term though the group has been able to more than double its FUM from $22.4 billion at the end of March 2014 to $47.7 billion today thanks to fairly evenly split FUM growth from its retail, institutional and infrastructure businesses.
Fund managers earn management fees as a fixed percentage of funds under management and can earn lucrative performance fees in addition to the management fees when their investment funds outperform their equity index benchmarks.
Magellan's strong FUM growth over the past three years then is what has seen its share price climb 78.5% over the past three years as the FUM inflows and falling Australian dollar worked in its favour. Although the rate of FUM growth is slowing its distribution networks, scale, and investment reach is still growing and Magellan remains relatively small by global funds manager standards.
Outlook
I still like the group's medium-term outlooks thanks to its founder-led nature and tight control on costs that means its operating leverage could see future profits rise at faster rates than revenues.
However, the group's investment performance has been patchy of late due in part to the commodity price rebound lifting global equity indices and hurting Magellan's relative performance (and performance fees) due to its general avoidance of commodity-type investments.
I expect a falling Australian dollar and modest reversal of the commodity boom over the next 12-18 months will continue to help the fund manager perform moderately well. It also offers a trailing fully franked 3.3% dividend yield and remains my preferred pick in the funds management space due to the heavy insider ownership of shares and an "in-house" business model that focuses heavily on retail distribution and institutional business development.
Other fund managers worth a look include UK-focused Henderson Group plc (ASX: HGG), which trades on a decent valuation and is well regarded within the industry, while Australia-focused Wilson Asset Management (ASX: WAM) also pays a healthy dividend, is founder led, and has a strong track record.
