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Here’s why I think the Magellan (ASX:MFG) share price is a buy

I believe that the Magellan Financial Group Ltd (ASX:MFG) share price looks like a buy to me after its latest FUM update.

I believe that the Magellan Financial Group Ltd (ASX: MFG) share price looks like a buy to me after its latest FUM update.

Magellan’s April 2021 update

Magellan has just released its April 2021 to the investor community. It said that over the month of April, its funds under management (FUM) increased by $4.4 billion to $110.4 billion.

Retail saw an increase in FUM of $1.2 billion to $30.2 billion, whilst institutional FUM rose by around $4 billion to $80 billion.

What to make of this?

It has been a strong couple of months for Magellan, as its FUM has grown by around $10 billion. This amounts to an increase of around 10%.

FUM can be quite volatile month to month as share markets move up and down. But good investment performance and fund inflows can combine to create good profit growth for a fund manager like Magellan.

Funds management businesses are actually very scalable, making them highly profitable when they get to Magellan’s size. You can manage an extra $1 billion with the same investment team and infrastructure.

That means that new FUM mostly turns into new profit. And Magellan’s generous dividend policy means that new profit turns into dividends for investors.

Why I like Magellan at this share price

Compared to many other ASX fund managers, Magellan is priced expensively. But it’s generating good profit growth and FUM growth.

Compared to other ASX businesses generating profit growth, Magellan looks pretty cheap to me. Particularly when you add in the cash returns of the dividend.

What particularly attracts me to Magellan is its long-term potential away from the core funds management business.

It has been busy making investments under the parent company, which it calls its principal investments.

New investment bank Barrenjoey has been busy winning over many talented people in investment banking space so that it can hit the ground running.

Guzman y Gomez is a Mexican fast food business that is already operating in a few other countries. It has a long growth runway.

Summary thoughts on the Magellan share price

Looking at the estimates on CommSec, Magellan shares are priced at 17 times the estimated earnings for the 2022 financial year. The projection for the dividend has the FY21 partially franked yield at 5.2%.

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