The Magellan Financial Group Ltd (ASX: MFG) has hit a new all-time high, breaching the $60 per share level for the first time ever this morning and cementing founders Hamish Douglass and Chris Mackay’s membership in the ASX billionaire’s club.
Sentiment around the wealth manager has reached feverish excitement levels, after Magellan wowed investors with significant funds under management (FUM) growth and benchmark-beating returns with its managed and listed-funds over the year so far.
Magellan shares started off 2019 trading for $23.37 but today’s new record high translates into a YTD gain of 160% (incidentally vastly outperforming all of Magellan’s funds).
What’s behind Magellan’s success?
As a fund manager, Magellan collects management fees from its stable of listed and unlisted investment vehicles. These fees range from 1.05% for the Magellan Infrastructure Fund (ASX: MICH) to 1.35% for the Magellan Global Trust (ASX: MGG) and most other Magellan offerings all the way up to 1.50% for Magellan’s High Conviction Fund (unlisted). As more investors pile into these funds, the larger Magellan’s funds become and the more revenue comes in the door.
In addition to this, most of Magellan’s offerings also charge performance fees, which levy an additional fee of 20% on any excess returns above a fund’s benchmark (usually an index). Since Magellan’s funds have had a fantastic year of outperformance (MGG has returned 15.9% over the past year), this has added to the surge in revenue. This also provides a ‘snowball’ effect – as Magellan delivers outperformance, more investors are drawn into Magellan funds, raising FUM levels.
What are Magellan’s numbers like?
Looking at its interim results for the six months ending 31 December 2018, we can see why investors are so bullish on Magellan. FUM growth came in at 35% (to $72.1 billion), adjusted net profits after tax were up 62% to $176.3 million and Magellan raised its dividend by 66% (yielding 2.22% on current prices). These numbers are (obviously) very strong, but the question for investors today is whether now is the right time to be buying into this stock.
Magellan is clearly a quality company with an enviable portfolio of investment offerings. Not many funds managers have consistently put out the kind of performance numbers that Magellan is rolling out every month. However, the company is now valued at $10.75 billion on profits of $176 million. This translates to a price-to-earnings ratio of 49.74. If there is a stock market crash or other cyclical event, it’s possible that Magellan’s FUM will fall and performance fees will dry up. Investors should keep this in mind when considering a $60 Magellan share price.
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Motley Fool contributor Sebastian Bowen 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.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019