Are GQG or Magellan shares a better buy?

Both of these fund managers offer a compelling outlook.

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The outlook for both GQG Partners Inc (ASX: GQG) shares and Magellan Financial Group Ltd (ASX: MFG) shares is positive, in my eyes.

These two fund managers have seen their share prices rise strongly in the last few months, and there's a good chance there could be more pleasing shareholder returns for a few different reasons.

However, I'll also point out that fund manager share prices can be very volatile because when share markets drop, it hurts their funds under management (FUM). So, if there's widespread market volatility, their share prices can be sold down heavily. But I view those moments as excellent opportunities to 'buy the dip' because the share prices usually recover strongly, too.

Both fund managers recently reported, so we have a good sense of what's going on for both businesses.

Positives about GQG shares

As shown on the chart below, the GQG share price is up by 59% in 2024 to date.

Created with Highcharts 11.4.3Gqg Partners PriceZoom1M3M6MYTD1Y5Y10YALL31 Dec 202318 Aug 2024Zoom ▾Jan '24Feb '24Mar '24Apr '24May '24Jun '24Jul '24Aug '24Jan '24Jan '24Mar '24Mar '24May '24May '24Jul '24Jul '24www.fool.com.au

The company's main funds continue to deliver strong long-term outperformance of their benchmarks, which is helping attract new client FUM and grow its existing FUM.

The FY24 half-year result saw average FUM increase by 46.5% to US$139.5 billion, helping revenue increase by 53.1% to US$363.1 million. This helped net profit after tax (NPAT) grow by 56.4% to US$201.2 million, and the total dividend per share increased by 46.3% to US 5.66 cents.

That's a lot of strong growth numbers.

GQG also recently entered 'private markets', which is a growing part of the asset management industry. It recently bought some minority interests in boutique asset managers, which are the foundational investments for its GQG Private Capital Solutions (PCS) business. This segment will focus on providing a "broad range of financing and strategic solutions to mid-market private capital asset management" outfits.

I like this move because it diversifies earnings further and opens another avenue for growth.

In terms of passive income, Commsec forecasts the GQG dividend yield could be 7.4% for FY24 and 8.4% in FY25.

Positives about Magellan shares

While the Magellan share price is down 78% from July 2021, it is up 34% from 30 May 2024, as shown on the chart below.

Created with Highcharts 11.4.3Magellan Financial Group PriceZoom1M3M6MYTD1Y5Y10YALL1 Jul 202418 Aug 2024Zoom ▾1 Jul8 Jul15 Jul22 Jul29 Jul5 Aug12 Aug1 Jul1 Jul15 Jul15 Jul29 Jul29 Jul12 Aug12 Augwww.fool.com.au

The fund manager seems to finally be stemming the outflows of FUM. While FY24 saw average FUM decline 25%, June 2024 saw flat net flows. Thanks to investment performance, July 2024 saw FUM increase $1.8 billion.

Pleasingly, Magellan's adjusted NPAT rose 2%, thanks to the profit generated by investment bank Barrenjoey – Magellan owns a stake in that business. Barrenjoey is expecting to start paying dividends, which will be beneficial for Magellan.

While profit before tax and performance fees dropped 25% to $158.3 million, the business saw its performance fees jump 67% year over year to $19.2 million thanks to its improved funds' investment performance.

Magellan revealed it was partnering with and investing in Vinva Investment Management. It's taking a 29.5% stake for $138.5 million. Magellan will distribute Vinva's systematic equity (quantitative) products globally.

Magellan has an FY24 partially franked dividend yield of 6%. The forecast on Commsec suggests Magellan could have a dividend yield of 5.1% in FY25.

My choice

While I'm pleased with the recovery that Magellan is starting to show, I think GQG is by far the better investment pick. Its FUM inflows are strong, the dividend yield is higher, it's diversifying with PCS, and it's growing geographically in places like Australia.

Over five years, I think GQG shares will have delivered a stronger total shareholder return (TSR).

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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