Magellan Financial Group Limited (ASX: MFG) is a listed funds management business based in Sydney, NSW. Established in 2006, Magellan offers retail, high net worth and institutional investors exposure to global equities and infrastructure assets through a number of ASX-listed and unlisted funds.
Since its founding, Magellan has been nothing short of a roaring success. High revenue and earnings growth has been generated by an impressive ability to continually grow funds under management (FUM), which is all underpinned by the company's investment track-record, excellent marketing and reputation for good client service.
Additionally, a scalable-business model allows Magellan to keep employee costs relatively stable even as FUM continues to grow. Magellan's success has not gone unnoticed by the market; its share price is up an incredible 1,482% over the last five years.
Can this amazing growth story continue?
I believe it can. Growth in FUM is the key to Magellan's success as management fees are the company's main source of earnings. Through the month of December 2016, Magellan grew total FUM to AUD$46.5 billion, still well short of the theoretical capacity of US$50 billion the company set in its 2014 full year results.
Since then, Magellan has created three ASX-listed funds: Magellan Global Equities Fund (ASX: MGE), Magellan Global Equities Fund (Hedged) (ASX: MHG) and Magellan Infrastructure Fund (Hedged) (ASX: MICH).
Furthermore, through the full year results released on 11 August 2016, Magellan co-founder, CEO and major shareholder Hamish Douglass stated the company intends to launch another "3 new global equities related strategies over the next 12-18 months."
So not only will the theoretical cap from 2014 have already increased, but it will continue to rise as newly created funds mature and Magellan is able to establish a longer-term performance record in drawing additional institutional investor interest that should result in increased FUM.
In spite of all this, Magellan has come under some recent criticism as its funds have underperformed over the last 12 months. Whilst I believe this to be a short-term set-back for the company, continued poor returns could produce net FUM outflows and consequently reduce earnings. Investors should also expect that any bear market would similarly see a downturn in total FUM.
As Magellan is founder-led, I suggest it is also prone to the so-called "key-man risk". Whilst I don't expect Mr. Douglass will retire from the company anytime soon, the market didn't see the recent resignation of Peter Hall as CEO and CIO of investment firm Hunter Hall International (ASX: HHL), coming either.
Magellan is a quality business providing Australian retail investors some much needed exposure to overseas markets and a proven record of growth over the last 10 years. Despite some recent underperformance, further prospects for growth appear positive and therefore I believe it will continue to perform well over the long-term.
