International equities manager Magellan Financial Group Ltd (ASX: MFG) reported $109 million in net fund inflows for the month of April and a record total of $50.4 billion in funds under management (FUM).
The total FUM lifted 5.6% for the month largely thanks to the strength of equity markets with the benchmark US S&P 500 index of leading companies lifting for the month and European markets also performing well on the back of the French election race.
Also fuelling the FUM appreciation is the falling Australian dollar as most of the underlying securities that Magellan manages on behalf of its investors are priced in U.S. dollars. The Australian dollar equivalent in FUM naturally rises then in line with U.S. dollar strength.
Over April the Australian dollar weakened around 2.5% over its U.S. counterpart and if it were to fall further over the course of 2017 this is likely to buoy Magellan's revenues, profits and, ultimately, share price.
A more important question for investors than the direction of the Australian dollar is whether Magellan as an active manager that charges relatively high management fees can navigate the competitive threat from low-cost index-tracking passive investment funds.
Many retail investors are now opting for low-fee index tracking funds such as ETFs over the higher fees (commonly around 1.25%) charged by active managers aiming to beat the index-tracking funds' returns.
Magellan's retail FUM inflows have weakened over the last few months, but remain positive and whether this result is related to the rise of index funds is hard to know.
How exposed is Magellan to the passive investing threat?
Around 70% of Magellan's FUM is also managed on behalf of institutional investors who are generally charged lower fees than retail investors anyway and are far less likely to be attracted to passive investing.
It's the institutional business development market that remains the big growth opportunity for Magellan, although the progress of its retail business should be closely monitored by investors.
Today Magellan shares are changing hands for $23.59 which is a reasonable valuation given its founder-led nature and growth prospects in the institutional business development space in particular.
I would rate the stock a hold for now, although it remains one of the best asset managers on the ASX alongside Macquarie Group Ltd (ASX: MQG), BT Investment Group Ltd (ASX: BTT) and Henderson Group plc (ASX: HGG) in my opinion.
