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The best stock you’ve never heard of

Magellan Financial Group (ASX: MFG) saw its share price grow from $2.06 to $9.64 in the past financial year, a return of 367.5%. This made Magellan by far the top performing stock in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

Magellan is a fund manager that was started by Chris Mackay and Hamish Douglas in 2006 with a clear goal of filling a void in the global investment options for Australian investors. The company has been phenomenally successful having grown its funds under management (FUM) to nearly $13 billion by May this year and now sports a market capitalisation of nearly $1.5 billion. In comparison, in May 2012 FUM was $3.7 billion.

There is a lot to like about Magellan’s operations, including its investment philosophy, which states: “We aim to find outstanding companies at attractive prices whilst integrating an in depth macroeconomic understanding in order to manage risk.”

Magellan’s search for outstanding companies has the investment team focusing on companies with sustainable competitive advantages (or ‘moats’), with reinvestment potential, low business and low agency risk. It’s a no-nonsense approach which leads the funds to own some of the world’s greatest businesses.

As the chart below shows, Magellan FUM growth over the past 12 months has put a rocket under its share price. The share price growth has sent the trailing price-to-earnings (P/E) ratio to 61, which obviously is high compared with listed peers, Platinum Asset Management (ASX: PTM) on a P/E of 25 and Perpetual (ASX: PPT), which trades on a P/E of 42. However, the high P/E is also a sign that the market is accounting for a big boost to earnings coming through, thanks to the much larger base of FUM.

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Source: Google Finance

Foolish takeaway

One of the most interesting aspects about Magellan’s growth story is the time investors have had to study and analyse the company. It has been listed for over six years, and with the company’s funds’ performance and funds under management growth readily available on a monthly basis, it shows that time can often be on the side of an enterprising investor.

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Motley Fool contributor Tim McArthur owns shares in Perpetual.

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