I believe that there is a bull case to be made about the Magellan Financial Group Ltd (ASX: MFG) share price.
If you haven’t heard of Magellan before, it is a business that predominately operates as a fund manager.
It actually manages more than $110 billion of funds under management (FUM).
The core part of the business is managing money to look at global investment opportunities. At the latest update, for October 2021, it was managing $114.8 billion of global equity money.
Bullish point 1: Growth of FUM
Despite a difficult start to FY22 in the first three months, October 2021 actually saw a rise of FUM across the board, with total FUM increasing from $113.3 billion to $114.8 billion over the month.
Not only did the global shares strategy FUM rise in spite of a worsening of the exchange rate, but the underlying performance of FUM with returns/inflows was seemingly good too with growth, compared to the declines that Magellan had been showing before.
There was also growth with its other main strategies of infrastructure and Australian shares, which saw FUM growth of $312 million and $78 million respectively.
The Australian shares FUM has the potential to grow quite a bit more in size if Magellan can continue to grow its FUM at the rate it has in the last couple of years.
I think there are several areas of growth for Magellan outside of its global equities strategy: ESG/ethical investing, Australian shares, infrastructure, FuturePay (a retirement product) and MFG Core Series – that’s the cheaper exchange-traded fund (ETF) products.
Bullish point 2: External investments are going well
This next point is a key reason why I’m optimistic about the long-term future of the Magellan share price.
Magellan is currently invested in three external operating businesses: Barrenjoey, Guzman y Gomez and FinClear.
Each of those businesses have made progress in recent months.
Barrenjoey has spent a lot to quickly get to sufficient scale. But the new investment bank made a profit in the first three months of FY22. Magellan thinks this business can expand into more services and also win more market share in its existing lines of service. It is now seemingly adding to Magellan’s profit, not taking away from it.
Magellan said that the financial business FinClear is growing strongly through both organic and acquisition growth. There are further areas that the business can target for growth.
Finally, the Mexican food chain Guzman y Gomez is growing quickly, with plans for many more outlets in Australia and around the world. The drive-thru has “excellent” unit economics for the business.
It is possible that more compelling investments may be made in time. I’m hope Magellan does do that.
Bullish point 3: The dividend
Dividends aren’t exactly going to generate huge returns for investors, but they can be a very useful addition to total returns. Magellan aims to pay at least 90% of its profit out each year.
Fund managers don’t need much capital to keep growing. The same investment team can manage another $1 billion without needing more assets or much else. That’s why the underlying funds management business is very profitable.
Based on the CommSec estimate that Magellan will pay a FY22 annual dividend of $2.37 per share, that suggests a partially franked future dividend yield of 6.7% at the current Magellan share price.
