Yesterday international equities manager Magellan Financial Group Ltd (ASX: MFG) revealed its funds under management (FUM) grew around 3.6% for the month of May to hit a new record total of $52.2 billion.
For May the group posted net fund inflows of $142 million, with net institutional inflows of $77 million and net retail inflows of $65 million.
This is another solid month of inflows, however, the lion's share of the FUM growth again came from asset appreciation as U.S. equity markets continue to run hard since the election of President Trump and a positive Q1 2017 earnings season.
In fact since the election of President Trump in November 2016 Magellan's FUM has lifted around 16%, despite the group posting modest operating FUM inflows, as its real growth driver remains rising global equity markets.
This morning the share price hit a record high of $26.28 and its positive outlook thanks to a weaker Aussie dollar and strengthening equity markets in Europe and the U.S. is something I have covered multiple times over the past year.
The group's investment performance of late has been the only thing to underwhelm, with its flagship Global Equity Fund that has around $9.2 billion in FUM just 1% ahead of the market over the past three years and 0.5% behind it over the past year.
Part of the explanation for the mediocre performance was the resurgence of commodity prices and large-cap energy stocks in 2016, with Magellan avoiding the commodity space to focus heavily on financials and consumer-facing stocks, alongside the U.S. tech giants like Apple, Facebook and Microsoft.
The recent outperformance of the tech leaders may help Magellan generate outperformance fees in the future that could serve to support some strong profit and dividend growth as well.
Magellan has several strengths including its investing approach that favours the blue-chip future of tech businesses and an in-house institutional sales and retail distribution team cranking FUM growth.
Magellan's rival Platinum Asset Management Limited (ASX: PTM) largely outsource its sales functions which is unusual for a mid-sized fund manager and something I first pointed out as a structural weakness around three years ago. Outsourcing key business functions for example may save costs and help boost core profitability or metrics such as return on equity over the short term, but this may be deceptive as the business could be exercising a false economy over the long term.
Over the past year short sellers like Morphic Asset Management have also started betting against Platinum and its growth prospects partly due to the same concerns over its operational reach.
Platinum also recently slashed its management fees in an attempt to reverse FUM outflows in an increasingly competitive environment, where the game changer remains the rise of super-low-fee ETFs that threaten the entire active asset management industry.
Outlook
As an investor in financial stocks I would suggest looking to those that offer exposure away from the soft local economy, with global growth apparently rebounding as supported by yesterday's upgrade to forecasts from the World Bank.
I still rate Magellan, Macquarie Group Ltd (ASX: MQG) and potentially the newly-minted Janus Henderson Group CDIs (ASX: HGG) as the only three investment grade large financial services businesses on the local market.
