Why UBS just slapped a buy rating on Magellan Financial Group Ltd

Is Magellan Financial Group Ltd (ASX:MFG) still cheap at a $26.50 share price?

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News wires are reporting that the analysts at investment house UBS AG have run the ruler over Magellan Financial Group Ltd (ASX: MFG) and slapped a buy rating on the stock. The analysts have reportedly put a $30 share price target on Magellan on the back of its strong growth in funds under management.

Magellan will most likely reveal its total funds under management as at November 30 this week, with it posting total FUM of $56 billion as at October 31 2017.

That compares to $42.2 billion at the same time last year, with growth of around 33% compared to the prior year. The strong growth in FUM should correlate roughly to growth in the performance-fee-adjusted top line with Magellan enjoying operating leverage as staff costs should not rise as fast.

Despite the FUM growth the stock had been drifting lower recently as substantial shareholder Fidelity Investments sold down its holdings in Magellan over the course of November.

It's not known why Fidelity was selling, but Magellan has recently incurred some substantial one-off costs around its decision to offer substantial freebies to Magellan Global Trust (ASX: MGG) investors, alongside its decision to sponsor The Ashes cricket contest.

I'd have to agree with UBS AG that after the Fidelity Investments sell down Magellan stock looked cheap at $25.17, with it rising to a level I would consider closer to fair value at $26.60 today.

If Magellan is able to generate decent performance fees over the half year to December 31 2017 the stock may hit the $30 price target come February 2018, although I'm not betting on it. The stock should also offer a healthy yield more than 3.5% over the 12 months ahead.

Other good quality international asset managers to consider include Janus Henderson Group (ASX: JHG) or BT Investment Management Ltd (ASX: BTT).

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