Top fund manager names favourite tech shares to own

The Australian Financial Review is reporting that one of Australia’s most successful fund managers and stock pickers has revealed some of its top tech holdings.

International equities manager Magellan Financial Group Ltd (ASX: MFG) has risen 1,266% in value over the last five years as the group continues to enjoy a sweet spot of strong investment returns alongside strong retail distribution and institutional business development capabilities.

As a founder-led business Magellan has made a habit of market-thumping returns by taking a long-term approach in buying high-quality businesses, with competitive advantages on reasonable valuations.

Today the AFR reported that Magellan has several large positions in US tech stocks within its $7.7 billion Magellan Global Fund. Large holdings include Apple Inc, Microsoft Corp, Visa Inc and PayPal Inc, while the fund has consistently beaten its benchmark over the past one, three and five-year periods.

While past performance is no indicator of future returns it is compelling in persuading retail investors and their distribution advisers or partners in making a decision as to where to invest their funds.

It’s no coincidence Magellan has enjoyed some bumper retail FUM growth over the past year as it strikes new distribution agreements and enjoys the blustery tailwind of Australia’s ever-growing superannuation sector.

Retail business is also higher margin and more predictable in its growth for ably performing investment managers.

However, institutional business development remains the big opportunity for mid-sized fund managers like Magellan and winning new business depends on impressing the consultants and their clients.

Magellan has an impressive investment track record on this front and no doubt delivers strong pitches for new business, with institutional inflows of $1.02 billion arriving just in March. It is also operating in a huge addressable global market for institutional business, with the only limit really being the rate at which Magellan can grow its operational capabilities if it continues to win more business.

Given Magellan’s persuasive track record and well regarded business development team I would not be surprised to see the business continue to outperform in terms of FUM growth during 2016.

A depreciating Australian dollar would be another tailwind going forward and its level versus the US dollar over the second half of FY16 will have a big impact on whether the business beats its first half profit of $109.3 million.

Whatever the direction of the Aussie dollar over 2016, Magellan’s key advantages remain that it is a founder-led business, with no passengers and an extremely low cost-to-income ratio.

This means it’s scalable and in my opinion the valuation is not outlandish at $22.95 per share given it delivered diluted earnings per share of 63.7 cents in the first half. If you assume it can marginally better that in the second half the stock only trades on around 17x estimated diluted earnings per share of $1.30 for the full year.

The founder-led nature of Magellan and high levels of insider ownership means it remains my strongly preferred pick in the international financials space and it looks a buy at current valuations under $23.

Elsewhere, Platinum Asset Management Limited (ASX: PTM) has suffered from some mixed investment performance recently, while it also outsources a lot of its business development, which in my opinion makes it less attractive as an investment prospect.

Others like BT Investment Management Ltd (ASX: BTT) or Henderson Group Plc (ASX: HGG) have none of the founder-led benefits of businesses like Magellan and are also leveraged to the Brexit risk leading into June 23. Expect these two stocks to be volatile and do not underestimate the likelihood of a vote for Britain to leave the EU. This could have big consequences in terms of redemptions and FUM levels for businesses like these with exposure to the British Pound and economy.

Smart investors should see that Magellan is the best bet for superior long-term returns.

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Motley Fool contributor Tom Richardson owns shares of Magellan Financial Group.

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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