Magellan Financial Group Ltd (ASX: MFG) share price is having a crackin’ day today, up 8% at the time of writing.
Magellan is a funds management business that largely invests in international shares. It was set up in 2006 by Hamish Douglass and Chris Mackay. Since inception, Magellan claims it has been one of the most consistent market outperformers after fees.
Magellan’s Key Results:
- Funds under management (FUM) rose 35% to $72.1 billion
- Adjusted net profit up 62% to $176 million
- Interim dividend of 73.8 cents per share, up 66%
According to consensus estimates, analysts had been expecting a profit result of $169 million, so Magellan appears to have modestly exceeded forecasts.
Since Magellan, as a funds management business, makes its money by charging a base management fee based on FUM, plus a performance fee for doing well, the larger its FUM number grows the more fees it should collect – regardless of financial market performance. However, performance fees can suffer as funds management companies grow.
Magellan CEO, Brett Cairns, said Magellan performed well as FUM was increasing.
“Magellan has had a successful first half that has been underpinned by strong investment performance in volatile market conditions,” Cairns said.
“Average funds under management grew 35% to $72.1 billion, leading to a 28% increase in management and services fee revenue to $228.1 million and adjusted net profit increased 62% to $176.3 million.”
What Now?
I wouldn’t be surprised to see Magellan report a promising full-year result because I think Magellan is one of Australia’s most successful funds management businesses, alongside Platinum Asset Management Ltd (ASX: PTM).
Looking forward, Magellan shareholders can expect the company to receive a consistent stream of management fees. However, I would be cautious about relying on performance fees growing over time (around 15% of revenue). For the most part, Magellan is now at a growth point where it is so large than earning hefty outperformance is more unlikely.
I’d buy Magellan shares at the right price, but I know these businesses are highly cyclical. So for me, for now, it’ll stay on my watchlist.
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