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6 reasons why Magellan Financial Group Ltd shares are soaring

Credit: Nicki Manix

The share price of Magellan Financial Group Ltd (ASX: MFG) soared to a record high of $26.15 this morning as investors wake up to its potential to become a major story in the history of Australian financial services.

This is a business I have repeatedly recommended to investors over the past two years and not for nothing either, below I have six reasons it retains a bright future.

Retail distribution – Led by the well-connected Frank Casarotti, Magellan has been able to crank retail FUM flows like clockwork over many years. It benefits from a widening distribution reach and the gradual shift to international equities as Australia’s superannuation pool only keeps growing.

Institutional business development – Success in this area is dependent on a strong sales team, impressive management team and consistent long-term track record of beating the benchmark for relevant investment funds.

Most institutions and their consultants instinctively look to a five-year past performance record (among other time periods) versus a benchmark and on this basis Magellan beats most of its competitors. This alongside the fact it has created a growth sweet spot of strong leaders (Hamish Douglass) and sales teams means it is something of a sales machine.

Co-founder led – Magellan is led by its founders which brings all the benefits of a business focused on long-term underlying performance.

Fund managers and financial services business are often mired by staff focusing on their own short-term interests, rather than those of the business. Not at Magellan, which employs less staff than most, but likely rewards them more and therefore can retain and grow its best talent. Evidence of this is an astonishingly low cost to income ration of 20.6%.

Investment performance – This has been strong and is in part a product of the business’s approach on long-term returns focusing on a global blue-chip strategy that is so popular with institutions and consultants like Mercers and Tower Watson.

Startup – Magellan now manages around $40 billion in FUM, while this may be considered a large amount in Australia, in global terms it’s still very small as a global fund manager. The firm still only employs around 100 staff and Magellan is arguably still a startup (though likely not of the T-shirt wearing variety), which means it still has a huge growth horizon ahead.

US dollar exposure – The company’s global funds are denominated in US dollars, which means revenues as a percentage of FUM rise and fall roughly in alignment with US dollar strength. In addition its cost base is almost exclusively in Australian dollars largely via staff wages, so it’s a beneficiary of the Aussie dollar’s fall.

The only word of caution I would exercise over this business is that the valuation is now getting high and it remains more leveraged than most to falls in equity markets, although on the flipside it’s a likely big beneficiary of a strong 2016 for US equity markets. In other words it probably has a higher beta than most when measured against movements in the wider equity markets.

In my opinion however the overall outlook, management control, and startup nature of the business mean it remains an attractive buy.

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Motley Fool contributor Tom Richardson owns shares of Magellan Financial Group. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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