Why the Magellan share price is up 36% in 2 months

Here's why the Magellan Financial Group Ltd (ASX: MFG) share price is up 36% in 2 months.

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The Magellan Financial Group Ltd (ASX: MFG) share price is up 36.25% in the last two months.

Magellan shares have far outstripped the broader market during this time – and have clocked up 16% in gains since the start of the year alone. This company today trades on a market capitalisation of $12.2 billion, an earnings multiple of 31.39 and with a trailing dividend yield of 2.77%.

But how much further can Magellan run? After all, this is a stock that was trading for around $20 just over one year ago.

Why Magellan shares have hit the roof

As a fund manager, Magellan makes money in two ways. The first is extracting annual management fees from the pool of capital under its management. The second is collecting performance fees when Magellan's investment funds outperform their benchmark indices.

So, Magellan's profits build when more investors join its funds, and also when its funds perform well compared with the broader markets.

Both of those things have been happening recently. In the January just passed, Magellan received capital inflows of approximately $414 million, which took its total funds under management (FUM) to $104.31 billion (which incidentally put Magellan over the $100 billion FUM mark for the first time).

Magellan's flagship offering – the unlisted Magellan Global Fund with $12 billion in FUM – has returned an average of 15.84% per annum over the past ten years. That's 3.64% above its benchmark, delivering handsome rewards to the company over this time.

These two factors have snowballed Magellan's profitability over the past few years as more potential customers see outperformance and, in turn, lend their capital to Magellan's funds.

The huge gains that both the ASX and global markets experienced in January has no doubt turbocharged this process and the market is clearly expecting more FUM and performance fees from Magellan going forward.

That (in my opinion) explains why the Magellan share price has exploded in recent months.

Are Magellan shares a buy today?

Although I think Magellan is a great company, I would not be interested in buying a fund manager when markets are at record highs (as they are today). Just as a booming stock market can dramatically raise the profitability of Magellan, a market crash can have the opposite effects.

If this were to happen, I would expect Magellan to underperform the broader market for the duration of said crash. In my view, the time to buy cyclical stocks like Magellan (no matter how good they are) is during bad times, not good.

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.

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