Magellan Financial Group Ltd (ASX: MFG) shares are up 3 per cent to $50.58 today after the international equities manager revealed its funds under management have grown to $97.7 billion as at November 29 2019. This compares to $93.5 billion as at October 31 2019.
The FUM appreciation of around $4.2 billion is largely attributable to a strong month for international equity markets in November 2019.
The U.S.'s benchmark S&P 500 Index rose around 3.4% over the month which is roughly in line with Magellan's FUM growth once you back out net inflows of $410 million over the month.
The highlight in November for Magellan is the $305 million in net retail inflows that are higher margin than institutional money and show how popular the Magellan brand is with financial advisers and their retail clients.
Magellan's FUM also appreciates as the Australian dollar declines versus the U.S. dollar. For example the underlying funds are priced in U.S. dollars, so the Australian dollar equivalent FUM rises in sync with the greenback.
The bonus for investors is that the vast majority of Magellan's costs are in Australian dollars and mainly accrued as a result of its staff wages bill.
FUM Growth and operating leverage
At the same time in November 2017 it had $58.5 billion in FUM.
At the same time in November 2018 Magellan had $72.1 billion in FUM.
We can see that its growth in nominal terms is around the same at around $22 billion per year, but in percentage terms it's slowing due to the law of large numbers.
However, due to the operating leverage in well run fund managers revenues can rise much faster than costs.
This is principally because you only really need one fund manager (stock picker) and maybe an 'assistant' or 'junior' to run a $1 billion fund, a $3 billion fund, or a $6 billion fund.
As you grow you'll probably need to hire more research analysts, client service executives, performance reporting, compliance, business development, and RFP staff, but there's no doubt that FUM and the directly associated fees can grow quicker than costs.
Basically fund mangers are scalable businesses that in theory could offer excellent returns to investors.
As a footnote it's often only the founder led ones that capitalise on the scalability as they're run with shareholder returns in mind. In other words cost control and growth remain a big focus.
Other more mature fund managers that exist as part of banks or in wider financial services groups tend to have little focus on costs or growth in my view. They're largely run for the staff's benefit and enrichment with shareholder returns a secondary focus.
On the local market some others to watch include VGI Partners Limited (ASX: VG1) and Australian Ethical Investment Limited (ASX: AEF). The latter is not founder led, but appears to be harnessing the shift towards ethical investing successfully.
