Fund managers benefit from the billions of dollars that flow into superannuation each year thanks to Australia’s mandated retirement system. They earn management fees even if their investment selections are poor and because of their high fixed costs, they benefit from economies of scale.
Here are three fund manager stocks that could make good investments:
- Janus Henderson Group plc (ASX: JHG) which was formed following the merger between Janus Capital Group and Henderson Group has over US$345 billion in assets under management and is set to benefit from the economies of scale created by the merger. It has no long term debt, a decent return on equity of 15% and a good spread of asset classes & geographies that it focuses on.
Challenger Ltd (ASX: CGF) manages $70 billion in assets for investors and converts this wealth into annuity income streams as part of its retirement investments business. Challenger leads the Australian retail annuity market with strong brand recognition and broad distribution. Australia’s ageing population is a well known mega trend that Challenger will likely benefit from going forward.
- Magellan Financial Group Ltd (ASX: MFG) is a global equities and infrastructure fund manager with a good track record of growth in funds under management and out-performance. Its founder Hamish Douglass is well known in investment circles and has a good track record in the offshore markets. Its return on equity is over 40% which justifies the price to earnings ratio of 22. Magellan currently trades at a dividend yield of 3.4%
Whilst the fund management industry faces some potential headwinds with the rise of passive investment, this could ironically benefit the best performing fund managers as it could create more opportunities for mispricing in the market. As Australia’s $2 trillion superannuation pool continues to rise, this will likely flow into funds managed by the likes of Janus, Challenger and Magellan.
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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.
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The Motley Fool Australia owns shares of Challenger Limited. 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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