Many investors look to the small-cap or 'casino' end of the share market in the hope of finding rocketing shares to create potentially life-changing wealth for themselves and their families.
However, for mum and dad investors this is generally a risky strategy best left to highly-experienced or professional investors, as for every diamond there's plenty of roughies in small-cap land.
So why look for the needle when you can just buy the haystack?
Both Magellan Financial Group Ltd (ASX: MFG) and Macquarie Group Ltd (ASX: MQG) look like haystacks in that they offer investors exposure to a broad range of international equities and infrastructure products, while boasting potential for strong long-term returns.
Check out their returns in 2019 alone.
Magellan at $31.85 is up 37% and about to pay a 73.8 cents per share dividend. It offers a trailing yield of 5.1% plus close to full franking credits.
Macquarie at $126 is up close to 18% and offers a 4.2% trailing yield plus partial franking credits.
Over the past 5 years both these businesses have more than doubled in value, while paying strong dividends along the way.
In other words due to their high quality they're able to leverage rising capital markets to produce ever stronger profit growth, while giving investors some very broad exposure to global markets and a weaker Australian dollar.
One common strength both businesses possess is an ability to recruit and generally retain some of the best staff going due to the high rates of pay and remuneration policies that offer incrementally vesting equity in the businesses.
After all they're both client-facing and human services businesses where being able to attract the right staff counts for an awful lot.
Magellan in particular has a big advantage over fund manger peers such as Perpetual Limited (ASX: PPT) or Pendal Group Ltd (ASX: PDL) in that it's founder led and can retain a tight control on recruitment and staffing.
Its cost-to-income ratio for the six months to December 31 2019 came in at just 17.7% showing how a high-quality fund manager can be run.
Remember, Magellan does not attempt to save on institutional business development (sales) or retail distribution costs either, on the contrary it invests heavily in them.
While Macquarie does not carry any passengers in terms of staffing, which means everyone is pulling their weight via long hours and full workloads to make for a profit-generating machine, despite a much higher cost-to-income ratio that reflects the alignment of staff and shareholders' interests.
Of course staffing is an intangible asset or quality (like a brand) and it's hard to assign a valuation to it, but you only have to look to the track records of profit growth and big share price gains of Magellan and Macquarie to realise the importance of it in some sectors.
As such I'd continue to rate these stocks as decent buys given they can produce strong total returns without the high risk associated with investing at the small cap end of the market.
