CIE Stock in Focus: Magellan

A key objective for the Contango Income Generator Fund is its investment focus on high yielding ASX listed securities that are outside of the largest 30 securities in the S&P ASX300 Index.

In this mid-monthly update, I would like to present a stock we hold that demonstrates this quality through a strong record of outperformance, Magellan.

Stock in focus: Magellan

Magellan (MFG) is a global equities and infrastructure fund manager that has grown since inception in 2006 with an IPO of their Global strategy at $380m to $70bn in July 2018. Their growth has been driven by their successful track record of consistent outperformance of their benchmark and their ability to bring in funds through various distribution channels.

Magellan Global Fund

Their most recent listing of their Global LIC (Listed Investment Company) attracted $1.5bn in FUM. LICs are normally closed ended vehicles that allow their managers to invest without having to fund redemptions by investors at inconvenient times. MFG now has over $19bn via the retail channel and $50bn via their institutional channel, this FUM (funds under management) is split across global ($50bn), Australian ($6bn) and infrastructure strategies ($10bn).

Airlie acquisition

One of their recent acquisitions has been for Airlie Funds Management, which has a number of institutional Australian mandates ($6bn FUM) for a cost of approximately $112m paid in MFG shares.

MFG’s FY18 results had several positive surprises which caused their share price to rise more than 13% on the day of the release. Profits were up 36% year on year on an underlying basis, driven by the growth in their FUM, strong performance fees and tight cost controls. On the back of the strong underlying result, MFG announced a change in their dividend payout ratio to 90-95% of their profit after tax from the funds management segment and 90-95% of net crystallised performance fees after tax. This is up from their previous payout ratio of 75-80% of their profit of funds management segment and 0-100% of net performance fees after tax. This change in policy has resulted in a dividend increase of 57% compared to the previous year.

Sizeable organic FUM opportunities

As MFG’s FUM has grown from $50bn at the start of the financial year to $70bn at the end of the financial year, they have accumulated fees on an average FUM of $59bn over the financial year. As the company goes through the next financial year, they should be accumulating fees on higher average FUM and in turn drive revenue, profit and dividend growth. On the back of this, MFG has identified various FUM growth avenues for the future and given MFG’s track record, we remain optimistic that they will continue to deliver FUM growth albeit at a more moderate rate.

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