The Magellan Financial Group Ltd (ASX: MFG) share price is up nearly 2 per cent to $25.36 in lunchtime trade after the international equities manager revealed it has raised $1.55 billion in funds under management (FUM) for its soon to be listed Magellan Global Trust (MGT).
The fund manager also revealed its monthly FUM update that showed total assets (excluding the MGT raising) increased around 1.8 per cent over October to hit $51.6 billion. When you add in the $1.55 billion raised via the MGT offer it appears Magellan had a bumper September.
However, it's not quite as rosy as it looks, as the group suffered $230 million in net retail outflows from its Global Equities strategies, which suggests gross outflows could have been around $300 million.
It's likely most of this money was pulled out by retail investors who required cash to take up Magellan's generous offer of 6.25% in free additional units to eligible subscribers in its MGT offer.
The result is that Magellan has probably cannabilised its own FUM and will now have to pick up the bill for giving eligible investors 6.25% in additional units in its MGT.
Whether Magellan's management team foresaw this retail investor quasi-carry-trade activity as a possibility is hard to know, but I doubt it was the desired outcome and with the benefit of hindsight it seems the MGT offer was probably too generous to existing Magellan security holders.
Total costs for the MGT raising and its generous freebies to existing investors were put at $84 million.
On the bright side the group won $340 million in net institutional inflows over September in a strong result and with the falling Aussie dollar it could post total FUM around $53.5 billion as at October 31. That compares to total FUM of $42.2 billion as at the same time last year and the difference suggests the group is going to post some double-digit profit growth (performance & MGT fee adjusted) for the six-month period ending December 31, 2017.
Analysts have the group as earning around $1.31 per share in FY 2018 which would place it on 19x estimated forward earnings that would need to be adjusted for the $84 million impact of the MGT raising that may be an expense subject to capitalisation.
Outlook
In the global funds management game $51 billion in FUM is still relatively small fry and the idea that its funds' performance have been adversely affected by their growing size is nonsense, although it's correct performance has tailed off over the last few years.
If Magellan is able to deliver some decent investment performance ahead this scalable marketing machine may still offer reasonable value for investors given it looks set to deliver some serious profit growth over FY18.
Magellan's cash generative business model means it also offers a fully franked trailing dividend yield of 3.4%. This is likely to be slightly higher if the group does deliver the expected profit growth.
Should you buy?
Although it has lifted 10 per cent over the past month, I would probably still prefer Macquarie Group Ltd (ASX: MQG) as an investment option over Magellan on current valuations.
While Janus Henderson Group (ASX: JHG) is another one of only a handful of investment grade and high-quality asset managers worth a look on the ASX.
