Shares in Magellan Financial Group Ltd (ASX: MFG) climbed 3 per cent to $25.37 in morning trade after the group revealed it has lifted its total funds under management (FUM) to more than $56 billion as at October 31 2017. This compares to FUM of $42.2 billion as at October 31 2016 and $51.5 billion as at the end of September 2017.
The effects of the $1.575 billion in inflows from the Magellan Global Trust (ASX: MGG) raising over October had been well telegraphed to the market, but the majority FUM lift that materialised as a result of the falling Australian dollar and strong U.S. equity markets over October has curiously caught investors by surprise judging by today's share price movements.
Given that Magellan's FUM is now around 33 per cent higher than this time last year it seems the group is well positioned to deliver some substantial underlying profit growth for the six-month period ending December 31, 2017.
The unknown remains the impact of performance fees that could take some of the shine off or add zest to what is shaping up to be a strong result.
The group does have to wear the $84 million one-off cost around the launch of its Magellan Global Trust and how this is expensed will impact reported profits in the years ahead. However, analysts have earnings of $1.27 per share pencilled in over FY 2018 which would place it on around 20x estimated adjusted forward earnings, with current EPS estimates perhaps too conservative given the strength of U.S. capital markets over the second half of 2017.
Either way, FY 2018's earnings will need to be adjusted to reflect the substantial cost of the MGG raising, although over the medium term Magellan is well positioned to deliver decent dividend and earnings growth. Moreover, it remains founder led and a relatively small operator in the global equities space with just A$56 billion in FUM.
In other words it has room to attempt to double it FUM again, before it even gets into the established mid-tier of global equity money managers.
This is no easy task, but given the operating leverage in the business the stock is almost certain to climb if the group can double FUM again within the next 4 years. This may sound optimistic and that's a big if, but if global equity markets remain strong and it can deliver consistent net inflows it's not impossible.
I would consider the stock a conservative hold at current levels around $25.40, although if it got 5 per cent cheaper under $24 I expect it offers good value to investors looking for exposure to the strength of U.S. equity markets in particular.
Other investment grade money managers on the ASX to consider include Macquarie Group Ltd (ASX: MQG) and Janus Henderson Group (ASX: JHG).
