Shares in international equities manager Magellan Financial Group Ltd (ASX: MFG) are down 2.3% to $27.47 today after U.S. tech shares fell sharply overnight on the back of profit taking and global trade tensions.
Over August Magellan's funds under management (FUM) lifted from $69.97 billion to $74.61 billion, which represents a rise of around 6% in an impressive result over a single month.
Unfortunately for investors most of the rise is due to the falling Australian dollar and rising equity markets, with net inflows of $292 million contributing only a small part.
While investors should focus on operational (e.g. net flows) and investment performance it's a mistake not to also consider how further weakness in the Australian dollar over the financial year to June 30 2019, may help boost Magellan's top and bottom line.
Most of the underlying assets it owns are priced in U.S. dollars with fees (as a percentage of assets under management) effectively earned in U.S. dollars, but costs (staff mainly) in Australian dollars for the Sydney-based fundie.
As such a falling Aussie dollar would provide investors a nice free kick over FY 2019, but I wouldn't base investment decisions on expectations around currency movements.
More important to the investment case for Magellan is your outlook for global markets (investment performance) and its valuation.
At $27.44 it's selling for 17.7x trailing earnings per share of $1.55 when you back out Magellan Global Trust (ASX: MGG) capital raising costs.
It also offers a trailing yield of 4.9% plus the tax effective benefits of franking credits.
Given it has made a strong start to FY 2019 I think the valuation and yield more than compensate for risks around a global equity correction that always exist and as such would be happy to pick up shares today.
It's also notable that $54.6 billion of Magellan's $74.6 billion in FUM is institutional money and as such it's not as vulnerable to the rise of low-fee ETFs favoured by retail investors as some think, although this is still a risk to keep in mind.
The rise of ETFs and fee pressures are also reasons why Magellan and other fund managers suffered an earnings multiple de-rating over FY 2018 that sent Magellan stock lower despite the strong operational performance.
In effect then after an earnings multiple de-rating the stock is now as good value as it has been in a long time.
Sell side research
Also notable is last July's decision of sell-side broker Morgan Stanley to downgrade buy side Magellan to an "underweight" rating.
As The Australian reported on July 9: "Morgan Stanley last week downgraded Magellan to underweight and slashed its price target to $20 on the risks posed by the slowdown in retail flows. Its shares took a beating as a result, plunging more than 8 per cent."
This is another example of how sell-side research or "trading tips" can lead retail investors into selling lemming style at the bottom, while generating huge fees for the brokerage arms of investment banks.
Don't be a lemming if you want to beat the market.
Remember that sell side research can be right or wrong, and it's called "sell side" as it's about selling in return for fees.
The reason it's widely publicised to journalists is because brokers want you to trade on it, while buy side research tends to remain closely guarded.
On July 4 Magellan's daily trading volume was 3x the average as sellers sent the stock to a low of $21.80 and gave up the rights to a 90 cents per share fully franked dividend paid just last week.
I expect shares will head above $30 before the end of 2018.
