The Magellan Financial Group Ltd (ASX: MFG) share price is down around 1% in early reaction to its latest monthly update. However, there could be some positives building.
As a fund manager, movements in the funds under management (FUM) are key, as it impacts how much revenue and net profit after tax (NPAT) the business can generate.
The company has seen tens of billions of dollars of funds flow out of the business over the last couple of years.
The latest updates could suggest the worst may be over for the Magellan share price.
May FUM update
In May, the company said that its total FUM had dropped to $41.4 billion, down from $42.7 billion as of 28 April 2023.
This update said that total net outflows for the month were $0.5 billion, which represented net retail outflows of $0.5 billion and flat net institutional flows. The rest of the FUM difference was due to investment performance and currency changes.
Looking at the three strategies, global equities FUM declined $500 million to $20.4 billion, infrastructure equities FUM dropped $700 million to $16.6 billion and Australian equities FUM declined $100 million to $4.4 billion.
I'm now going to look at a couple of reasons why the Magellan share price could do better from now on.
FUM flows looking better
Sometimes there will be months of negative performance for a fund manager, but hopefully there will be more positives over time.
Fund flows are key – is it working to help boost the FUM or hurt it?
In April 2023, Magellan experienced net outflows of $2.4 billion, while the March net outflows were $3.9 billion. An outflow of $500 million is much better and may suggest that the fund manager is getting closer to stopping the flow declines.
I'm not suggesting that the outflows decline is random. Recent investment performance has been much better, which may encourage investors to leave their money with Magellan, which could then be supportive of the Magellan share price.
Better performance
While May could show a tough month for some of Magellan's funds, the April fund updates showed good performance over 2023 so far.
I believe it's key that fund managers deliver regular outperformance of their benchmark, or else why pay much higher fees to a fund manager to underperform?
In the latest published update, for April 2023, the $2.8 billion Magellan Global Fund (ASX: MGF) had beaten its global benchmark by 1.6% over the prior year, and it had done 3.6% better in the prior six months.
The $7.5 billion Magellan Global Fund Open Class (ASX: MGOC) had beaten its global benchmark by 0.8% over the prior 12 months to April 2023, while the first four months showed outperformance of 3%.
The Magellan Infrastructure Fund options also demonstrated outperformance in 2023 to April 2023.
Past performance is not a guarantee of future performance, as the disclaimer goes, so I'm not expecting Magellan to outperform over the rest of 2023. But, the investment decisions seem to be paying off.
Foolish takeaway
I think that the Magellan share price could start to perform better if it's able to keep slowing the outflows and eventually turn them into inflows. This outcome will be heavily impacted by Magellan's ability to regularly outperform the market with its key funds, which is not a certain thing.
I don't think Magellan's FUM is going to get back to $75 billion in the next few years, but just seeing positivity for the business could be a boost.
