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Magellan Financial Group Ltd (ASX:MFG) share price rises despite $1.5 billion FUM hit

The Magellan Financial Group Ltd (ASX: MFG) share price is up 0.7% despite just revealing a $1.56 billion fall in funds under management (FUM) to $72.98 billion.

It sounds bad, but in October Magellan experienced net inflows of $322 million of which $73 million was net retail inflows and $249 million was net institutional inflows.

Therefore, the fall can be attributed to the recent fall in the share market that we’ve seen. Indeed, iShares S&P 500 ETF (ASX: IVV) is down 7% over the past month, so Magellan did a good job of FUM not falling further.

Magellan revealed that its retail FUM fell from $20.1 billion to $19.7 billion whilst institutional FUM fell from $54.4 billion to $53.25 billion.

Magellan’s FUM is a key statistic for its profitability because it earns management fees on those funds. The other important revenue generator is whether Magellan outperforms its benchmarks, generating performance fees.

I have been very impressed by Magellan’s ability to grow FUM year after year. Strong investment returns generated by Hamish Douglass and the rest of the Magellan team has both grown FUM and attracted additional FUM.

Funds management is a very scalable business, so a lot of the additional management fee earnings can flow through to the bottom line. Its new policy to pay out nearly all of its regular earnings out as a dividend is very attractive for investors who want to be rewarded each year.

Foolish takeaway

Magellan currently has grossed-up dividend yield of 7.2%. The bigger Magellan’s FUM grows the slower future growth will be as a percentage. However, I imagine that if Magellan can continue to outperform the market as it has been doing then FUM will continue to climb nicely.

Although Magellan isn’t on my own watchlist I think it is a good business to own for dividends and decent total returns.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 Scott Phillips.

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