Funds management is a rapidly growing area, especially with the ever increasing need for self-managed superannuation funds to find good places for investing.
Magellan Financial Group (ASX: MFG) is a specialist funds management business based in Sydney. Magellan offers international investment funds to high net worth and retail investors in Australia and New Zealand. The principals, Hamish Douglass and Chris Mackay, are two of Australia's leading investment professionals. Their long involvement in merger and acquisition activity together with corporate advisory work has resulted in invaluable experience and expertise in valuing companies, as well as assessing risk management.
Net profit after tax of $36.1 million for the half year ending 31 December 2013 is an increase of 137.5% compared with the corresponding half. The improvement was mainly due to increased management fees, as the funds under management had grown substantially. As at 31 January 2014, funds under management stood at $21.245 billion, comprising 33% Australian and New Zealand equities, 49% international equities and 18% infrastructure equities.
Magellan runs four funds under management. The Global Fund, composed of 20 to 40 global equities, is held for the long term. The Infrastructure Fund, a unit trust that specializes in investing in global listed infrastructure securities, comprises 10-50 investment securities. It aims to achieve attractive risk-adjusted returns over the medium to long-term. The High Conviction Fund is a long-only global equity strategy comprising of 8 to 12 stocks. The fourth fund is a listed entity, Magellan Flagship Fund (ASX: MFF), which invests in a concentrated portfolio of global equities. It has a minimum number of 20 listed international and Australian companies perceived to have attractive business fundamentals at a discount to their assessed intrinsic value.
Competitors include Macquarie Group (ASX: MQG), AMP (ASX: AMP) and Platinum Asset Management (ASX: PTM). Magellan's latest half year report indicates that, over the last five years, the Magellan Global Equity Fund was superior to other funds at 16.1% per annum, except for Platinum at 18.1%.
Magellan has a solid balance sheet with no debt and a very impressive return on equity of 43.5% as at 30 June 2013.
Foolish takeaway
Magellan is a high-performing growth stock. Attractive long-term industry dynamics are supported by increasing numbers of Australian investors seeking international equity exposure. Magellan does not focus on short-term performance, instead seeks high-quality stocks likely to produce strong long-term returns through the business cycle.
The price to earnings ratio is understandably high at 33 times, as its earnings growth is considerable. The current price of $13.75 offers good value. However, as there has been strong escalation in price during this month, a possible Fibonacci retracement of 61.8% could translate to a price pull back of $11.65. This would present an excellent entry point, considering it was selling for just under $11 at the start of this month.
