Magellan Financial Group Ltd (ASX: MFG) has long been considered one of Australia's leading investment managers. In fact, an investment in Magellan on 4 January, 2010 would have multiplied by 67 times the original investment. Specifically, this represents an average annual growth rate of 52.7%. To illustrate further, if this continues into the future, an investor would double their initial investment every two years.
Magellan is the parent company that owns a range of unlisted and listed funds in global equities and infrastructure. As funds, most of these pay distributions not dividends, and are sold in units, not shares. Nonetheless, the most important point is that all of the funds are doing very well. If you are looking for an investment in which you can leave your funds for 10 to 20 years, then I think Magellan is a good option for the following reasons.
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1. Future growth
Magellan recently announced it had taken a 40% stake in Barrenjoey Capital Partners, an unlisted, full service, investment bank planned for Australia. Magellan will have no involvement in the day-to-day operation of the company, but has retained a board seat. So while it is largely a passive investment, Magellan will have some oversight of the investment bank.
The goal is clearly to generate an annual return in excess of 10% via this unlisted asset. If the model is anything like Macquarie Group Ltd (ASX: MQG), then there will be opportunities to increase exposure to other unlisted assets as in-house investments.
2. Past performance
The company's historical financial metrics demand respect and subsequently, the Magellan share price growth has been incredible. Since 2010, Magellan has seen a compound annual growth rate (CAGR) of 50.5% in its earnings per share. Moreover, the company has also increased its per share dividend payment by a CAGR of 59.6% over the past ten years.
There is a raft of metrics to review on this company. However, the one that really stands out to me is the return on equity (ROE). This is the return on assets minus liabilities. So for every $100 of assets the company has, unencumbered by debt, Magellan has earned an average of $38 over the past ten years. This company is truly impressive at allocating capital for the best return.
3. Magellan is cheap
By every valuation method I know, the Magellan share price is currently selling at a discount. Nonetheless, it has a current price-to-earnings (P/E) ratio of 26.59, which at first glance seems high. Moreover, if this was, say, Fortescue Metals Group Limited (ASX: FMG), or Commonwealth Bank of Australia (ASX: CBA) I would agree it was too high. However, with Magellan there is every reason to have high hopes for future performance.
The company also has a trailing 12-month dividend yield of 3.7%. While this isn't a high yield, it is still pretty solid in the current environment and is secondary to the capital growth I expect to see.
