Shares in Magellan Financial Group Ltd (ASX: MFG) edged 1% higher to $24 this morning after the international equities manager revealed its funds under management (FUM) have now grown 75% to nearly $70 billion over the last two years.
Magellan reported net inflows of $98 million over July 2018, with net retail inflows of $106 million and net institutional outflows of $8 million. The return to substantially positive retail inflows is a win for the group after it posted two consecutive months of retail outflows earlier in 2018.
Whether there was anything specific driving the outflows is unclear, although I suspect the wash through from the group's circa $1.55 billion Magellan Global Trust (ASX: MGG) capital raising that was unusually incentivised in offering existing retail investors ample opportunity to "game" the system.
I'd wager my right arm that we'll never see Magellan offer such incentives to retail investors again, especially when it has shown it can successfully grow FUM organically, by inflows, or by acquisition.
Back on July 31 2016 the group had just $41.4 billion in FUM and its strong growth since has not been mirrored by the share price that is up less than 5% since then.
This shows that the Magellan share price was probably overvalued two years ago, but on the flip side it suggests it could be undervalued today, especially if the group continues its strong operational performance.
However, it is worth noting Magellan issued 3.86 million shares recently at $27.55 a share as consideration for its acquisition of more than $6 billion of FUM run by Airlie Funds Management, while it also issued around 700,000 shares to fund the acquisition of Frontier Partners its U.S. distribution business.
The dilution will impact reported earnings and dividends per share, but Magellan's investment and operational performance is what really counts over the future.
As a founder-led business the group continues to possess strong cost control as for example it boasts a relatively low cost-to-income ratio, despite investing heavily in its own institutional business development and retail distribution functions.
This is in contrast to Platinum Asset Management Limited (ASX: PTM) for example where investment returns are more volatile thanks to the higher beta of its funds. Moreover, both Platinum and the likes of Perpetual Limited (ASX: PPT) have seen their FUM go nowhere over the past five years as they don't have the business development know how or resources of Magellan.
Clearly the asset management industry is under pressure generally as fees for retail investors continue to fall, although on the upside Magellan's core business (around 71% of FUM) remains institutional funds management where fees are already comparatively lower and easier to justify.
Magellan's general investing strategy of investing in the digital blue chips like MasterCard, Facebook and Apple has also paid off in the past and is likely to do so in the future.
The group will report its full year results on August 9 and given its track record it looks among the better investment options within the financial services space. While it's a good business, I wouldn't pay more than $24 for shares today given the structural pressures.
