Company Overview - Magellan Financial Group Limited is a fund management company. The Company's objective includes offering international investment funds to high net worth and retail investors in Australia and New Zealand, and institutional investors across the globe. Its segments include Funds Management, Principal Investments and Corporate. The funds management activities of the Company are undertaken by the controlled entities, Magellan Asset Management Limited (MAM) and MFG Services LLC (MFGS). MAM's funds management activities comprise acting as trustee, responsible entity and investment manager for the managed investment schemes offered primarily to Australian and New Zealand investors. MFGS acts as a service company providing MAM with services of investment analysts and distribution personnel based in the United States. The principal investment portfolio comprises its investments in the Australian Stock Exchange (ASX) Quoted Funds, the Unlisted Magellan Funds and the Frontier MFG Funds.
 

MFG Details
 
Reported a decent financial performance in FY 16:Magellan Financial Group Ltd (ASX: MFG) has reported a growth of 14% in the profit after tax to $198.4 million during fiscal year of 2016 while fully diluted earnings per share (EPS) grew 13% to 115.5 cents compared to the corresponding period FY 15. The revenue has increased 17% on a year over year basis to $333.8 million during the period. This is due to the 27% increase in the Management fees to $258.4 million, coupled with 11% increase in the Performance fees to $48 million and 5% increase in the Service fees to $8.2 million. Additionally, MFG has reported a 27% growth in the average funds under management to $39.4 billion in FY 16. However, the employee expense increased by 35% which is in line with guidance, the foreign and withholding tax includes $1.3 million provision for prior years and there is an expected occupancy expense of about $3.2 million for FY 17.


 Financial Performance highlights for fiscal year of 2016 (Source: Company Reports)
 
Funds under Management volatility:MFG has deepened the penetration of Global Equities and Global Listed Infrastructure strategies with the retail investors, advisers and brokers in FY 16. MFG has received $2.3 billion in net retail inflows during fiscal year of 2016 and $12.0 billion in retail FUM. In Global Equities there was $2.0 billion of net retail inflows and total retail FUM of $10.9 billion, and in the Infrastructure there was $365 million of net retail inflows and a total retail FUM of $1.15 billion. Moreover, there was an ongoing solid support from institutional clients in FY 16 as the net institutional inflows were $1.8 billion. For September 2016, the group witnessed net inflows of $407 million, which comprised net retail inflows into Global Equities of $144 million, while net retail inflows into Infrastructure Equities reached $77 million, while net institutional inflows of $186 million were achieved. The group witnessed net inflows of $416 million during August 2016 which comprised net retail inflows into Global Equities strategies of $212 million, net retail inflows into Infrastructure Equities of $102 million, and net institutional inflows of $102 million.
 

Funds under Management for FY16 (Source: Company Reports)
 
Growth in the Retail Business: MFG is building its retail business by leveraging its extensive relationships with over 500 independent advice firms, while making new arrangements with BT/Westpac and AMP. In addition, MFG has long standing relationship with Commonwealth Bank, and the support from the ASX quoted versions of the Global Equities strategy. Global Listed Infrastructure strategy has also contributed to the group’s growth which received the net retail inflows of $365 million into the infrastructure strategy during FY 16 and now manages about $1.15 billion in global listed infrastructure on behalf of the Australian and New Zealand retail investors.
 

Average Monthly Retail Net Inflows (Source: Company Reports)
 
Maintaining Institutional Business growth as well: MFG has more than 110 institutional clients as on 30^th June 2016. MFG has the quality and depth of the pipeline of potential new business and are confident to see solid institutional interest in the global equities and global listed infrastructure capabilities over time. Additionally, MFG intends to seed the launch of 3 new global equities related strategies over the next 12-18 months.


Institutional Business (Source: Company Reports)
 
Track record of delivering better returns on a long term basis:MFG has actively managed portfolio of 20 to 40 high quality, low volatility global securities with overall beta cap of 0.8. Moreover, MFG’s portfolio turnover is 17.5% p.a. since inception and is designed for capital preservation and absolute return. To continue its growth track, MFG has launched an ASX-quoted version of its top-performing listed infrastructure fund. The Magellan Infrastructure Fund (Currency Hedged) has started trading on the ASX with the code MICH in July 2016. Moreover, the new exchange-quoted managed fund (EQMF) is the third major listing from the group after its currency hedged and unhedged versions of the global equities strategy which is successfully managed by chief executive Hamish Douglass. The firm's EQMFs have already crossed over $500 million in assets. Meanwhile, MFG has launched its currency hedged infrastructure strategy in July 2007 and currently has over $1 billion in funds under management. The fund has built a strong track record which delivered a long term average annual return of 15.4% since the last five years ended 30^th June 2016. Despite the volatile markets, the group never disappointed investors by delivering negative returns since the last five years.  In contrast, both global equities and the ASX have delivered negative annual returns more than a third of the time. The group would seed its new ASX-quoted version of the strategy with $10 million of its own capital. Additionally, on a long term basis, the global opportunity for the listed infrastructure sector is significant with investment opportunities available across the world in a range of different segments including regulated utilities (water and energy), toll roads, airports, ports, communications infrastructure and social infrastructure.
 

Investment Performance for the periods to 30^th June 2016 (Source: Company Reports)
 
Other Highlights: The group reported that its assessable offshore banking income would be subject to a concessional tax rate of 10% (under current legislation). Moreover, MFG’s effective tax rate is decreasing this year which would be 23.6% for fiscal year of 2016 as compared to 24.3% for the twelve months ended at 30 June 2015. The group intends to maintain its dividend policy in the range of 75%-80% of underlying profit of funds management segment. MFG is also constantly bringing talent on board, to build a strong investment team. Portfolio Managers/Analysts reached 33 as of June 30^th, 2016 as compared to 22 as at June 30^th, 2014. Overall employees reached 101 as of June 30^th, 2016 from 69 and 91 as of June 30^th, 2014 and June 2015 respectively. MFG is making efforts for further hires in other business areas in 2016/17 and even formed a public policy institute in 2016/17. Accordingly, the group estimates its staff expense to grow over 15% to 18% in 2016/17 financial year.
 
Stock Performance: The shares of MFG have fallen over22.26% this year to date (as of October 07, 2016) due to concerns over the volatility of markets impacting their fund under management performance. Moreover, the stock lost over 6.8% in the last four weeks alone as the group’s funds under management for September 2016 fell to $42,310 million as compared to $42,459 million in August 2016. But this pressure came from the Institutional component which fell to $29,673 million during the month from $29,887 in August 2016. The group’s retail component continues to grow, with funds under management increasing to $12,637 million during the month from $12,572 million in August 2016. Moreover, the funds under management performance in August has been decent wherein the Australia Global Equities funds also improved to $14,486 million in August 2016 from $14,034 million in earlier month. Overall funds under management for August 2016 rose to $ 42,459 million as compared to $ 41,481 million in July 2016.
 

Five-year performance summary (Source: Company Reports)
 
The stock has already recovered 2.6% on October 10, 2016. We believe investor’s need to leverage the correction in the stock as entry opportunity given its solid expertise. MFG also has a decent dividend yield. Looking at the past five-year decent performance and long-term potential, we give a “Buy” recommendation on the stock ahead of its Annual General Meeting on October 13, 2016, at the current price of $22.23
 

MFG Daily Chart (Source: Thomson Reuters)

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