Why I think Magellan (ASX:MFG) shares are a buy

After the release of the September 2020 update, I think Magellan Financial Group Ltd (ASX: MFG) shares are a buy.

September 2020 update

Today, Magellan told investors about its funds under management (FUM) movements over September 2020.

Magellan reported that its total FUM increased by $1.22 billion to $102.1 billion, up from $100.9 billion in August 2020.

Most of of this increase appears to have been net institutional flows into Magellan’s infrastructure investment option.

In September, Magellan experienced net inflows of $1.2 billion, which included net retail inflows of $239 million and net institutional inflows of $959 million.

The infrastructure equities strategy saw its FUM rise by $912 million and the global equities saw FUM increase by $537 million. However, the Australian equities strategy suffered a $232 million decline.

Why I think Magellan shares are a buy

Magellan has been a good performing fund manager since the GFC, so I think it can continue to grow FUM organically simply by continuing to produce good returns for investors with the existing FUM.

But it’s the other elements of Magellan that makes it a particularly attractive option to me.

This month shows that Magellan can continue to attract good flows of funds even after many years of growth. Net inflows are one of the main ways that fund managers grow.

I’m also really excited by the potential of the new investment bank, Barrenjoey, that is being launched. Magellan is one of the main backers of Barrenjoey and it could make a lot of good profit in the coming years after attracting a high quality team of leadership, advisers and analysts. Magellan owns a 40% economic stake of Barrenjoey, though just 5% of the voting rights so that more of the power is left with the employees of the business.

It has also been working on a retirement product option for a few years, which should soon be close to being launched after a ruling by the ATO.

Magellan can grow its business without needing much more capital. Fund management businesses are very capital-light. That means most of its earnings can be paid out as a dividend each year. At the current Magellan share price, it has a fully franked dividend yield of 3.6%. That’s an attractive way to get paid real returns whilst being a shareholder.

However, for reliable dividend income, I reckon there are other ASX dividend shares that could be an even better option. One idea is Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) which I wrote about here.

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At the time of publishing, Jaz owns shares of WHSP.

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