This morning international equities manager Magellan Financial Group Ltd (ASX: MFG) lifted its funds under management (FUM) around 4% to $76 billion (plus $277 million raised for its Magellan Global Trust (ASX: MGG)) to take its total FUM to a new record high.
Fund managers including Magellan benefit from operating leverage where revenues rise faster than costs to produce profit growth as they can add fee-earning FUM without having to take on additional costs in the form of staff.
For example Magellan's flagship global fund runs around A$9.6 billion, but could easily add another $1 billion in FUM without having to hire an additional fund manager or research analysts.
It may incur some marginal incremental costs on other costs of doing business or the fees it pays its fund accountant and unit pricing provider, Mainstream BPO (ASX: MAI) as a fixed percentage of FUM, but these are minimal additional costs relative to the revenue growth.
Importantly, Magellan is now achieving the scale where its operating leverage is magnified as demonstrated by its financial results for the six months to December 31 2019 that saw profits and earnings per share grow 62% and 57% on average FUM growth of 35%.
The scale it now boasts also means that while net FUM flows and investment performance remain critical indicators on the operational performance of the business, equity market moves and currency swings (FUM benefits as the AUD falls) are now an increasingly meaningful impact.
For February net inflows equalled $284 million, which is a solid result, but the FUM flows are now becoming less meaningful compared to investment performance or market swings given it has $76,000 million under management.
The other meaningful determinant on profits and dividends is performance fees that are a known unknown although even conservatively allowing for zero performance fees over the second half of FY 2019 the stock does not look especially expensive on 21x estimates of forward earnings.
Of course if it delivers strong performance fees again the stock will be cheaper still at today's price of $35.70 and a better buy.
Another business in the asset management space to consider is Macquarie Group Ltd (ASX: MQG), while anyone looking to take on more risk in pursuit of greater returns could look to junior fund manager Australian Ethical Investments Limited (ASX: AEF).
