Magellan lifts FUM 4% to record $76 billion: Are shares a buy?

Is the Magellan Financial Group Ltd (ASX:MFG) share price a buy?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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).

Tom Richardson owns shares of Macquarie Group Limited and Magellan Financial Group. You can find Tom on Twitter @tommyr345 The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Australian Ethical Investment Ltd. 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.

More on Share Gainers

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Share Gainers

These were the best-performing ASX 200 shares in March

These shares made their shareholders smile in March thanks to some very big gains.

Read more »

Stock market chart in green with a rising arrow symbolising a rising share price.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a massive day for the ASX 200, with a new all-time high recorded.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Technology Shares

This ASX tech stock rocketed 60% in March! Can it keep on delivering?

After soaring in March, the ASX tech stock is now up 169% since this time last year.

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Mesoblast, Newmont, Pilbara Minerals, and Platinum shares are jumping

These ASX shares are ending the week strongly. But why?

Read more »

A young male ASX investor raises his clenched fists in excitement because of rising ASX share prices today
Share Gainers

3 ASX All Ords shares up 50%+ in March

These ASX shares have been on fire this month. But why?

Read more »

Woman looks amazed and shocked as she looks at her laptop.
Share Gainers

Why Mesoblast, Patriot Battery Metals, Sigma, and Zip shares are pushing higher

These shares are having a good session on hump day. But why?

Read more »

Woman looks amazed and shocked as she looks at her laptop.
Consumer Staples & Discretionary Shares

If you'd put $20,000 in this ASX retail stock at the start of 2023, you'd have $134,000 now

This online retailer has executed a remarkable turnaround for its investors.

Read more »

Fancy font saying top ten surrounded by gold leaf set against a dark background of glittering stars.
Share Gainers

Here are the top 10 ASX 200 shares today

It was back to earth for ASX shares this Tuesday.

Read more »