Pinnacle Investment Management Group Limited (PNI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Pinnacle Investment Management Group's half year results. [Operator Instructions] I'd now like to hand over to Managing Director, Ian Macoun. Thank you. Please go ahead.

Good. Thank you. Welcome, everyone, and thanks to all who've taken the time to join the call. As you've heard, this is the first half 2020 financial year results for PNI. On the call, we have myself, Ian Macoun; our Executive Chairman -- our Non-Executive Chairman, Alan Watson; and Executive Director, Adrian Whittingham. You would have all seen that we lodged with the ASX earlier this morning, a formal ASX announcement and a presentation. I hope that everyone participating on the call has access to these. I'll be using the presentation, at least initially. So I'll start by stating the key numbers and highlights of the results. I'll do that quickly because I know that we can all read these numbers, but I think it's important that I call them out. And then I'll seek to summarize and go into some more detail on some key issues that are relevant to the results. Also, I'll comment on the performance of the company during the period, make a few comments on the road ahead, how we're seeing markets and the opportunities for ongoing growth as well as I'd just mention the increasing diversity and resilience of the company. We'll leave plenty of time for questions. And please, everyone, feel welcome to address any one of the 3 of us who are here with your questions. So into the presentation. Slide 1 contains some disclaimers. So moving to Slide 3, first half 2020 financial year financial highlights. Our net profit after tax was $13.8 million which was up 37% from the prior corresponding period. Basic earnings per share was $0.081, up 33% from the prior corresponding period. Diluted earnings per share $0.077 cents, up 35% from the prior corresponding period. Our share of the net profit after tax of affiliates was $17.7 million, up 24% from $14.3 million in the prior corresponding period. We had cash and principal investments of $44.7 million at the end of December, that's our dry powder that we talk about. Our new $30 million CBA loan facility was fully drawn in December, and this was used to fund the acquisition of a 25% interest in Coolabah Capital. And we've declared a fully franked interim dividend of $0.069 per share payable on the 20th of March. Now footnote 1 on this slide is important. The $13.8 million headline profit number includes a net positive return on principal investments of $385,000. And in the PCP, this was a net loss of $600,000. So if we adjust for these, it's actually a 25% lift in net profit after tax, eliminating the returns on principal investments. And so that's what I really think of as the true increase in net profit after tax in the half over the NPAT from the first half of 2019. So I think of it as a 25% result. Slide 4 covers the business highlights, funds under management and funds' flows. Aggregate affiliates' funds under management at 31st of December at 100% of affiliates' FUM was $61.6 billion. Now you'll note that we're making it clear that this number is 100% of the total affiliates fund, not our effective share, which, of course, is substantially less. And I'll mention that a little more -- in a little more detail later. But this aggregate number is what people most focus on and are interested in as a broad measure of our fund growth. The effective share numbers are on Slide 12. So we're at $61.6 billion. This $61.6 billion was up $7.3 billion from $54.3 billion at the 30th of June. So $7.3 billion increase for the 6 months. Aggregate retail funds under management, again, at 100% of affiliates total was $14.9 billion, up from $11.6 billion at the 30th of June. Net inflows for the half year were $2 billion, so $2.0 billion. This included $900 million of retail, of which $200 million was with the investment companies or listed investment trusts. So retail net inflows for the half year were lower than for the prior corresponding period and lower than for the second half of FY '19. So in the prior corresponding period, retail net inflows were $1.4 billion, of which $200 million were LIC and LITs. And in the second half of FY '19, these were $1.5 billion, of which $800 million was LICs and LITs. So a little more on that later. I know people are very focused on our flows. And I'd like to go into some detail about the market conditions and so on. Institutional net inflows of $1.1 billion were lower than expected but the institutional pipeline remains strong. And pleasingly, this pipeline is from an increasingly diverse client set, diverse by geography, diverse by client type and so on. And this should support a higher rate of net inflows over the coming year or 2, recognizing always that institutional flows are lumpy and it's not possible to accurately predict them over any 12-month period. Now this lumpiness is simply the reality of the institutional market, both in Australia and offshore, and the bane of all of us when we try to talk about flows over particular periods of time. We've also mentioned on this slide that the equities markets generally and our manager performance also added to funds under management during the period. The ASX 300 was up 1.2% over the 6 months. And the MSCI World Index was up 8% over the 6-month period, 9.2% in AUD. So we also identify and quantify the fund increases that resulted from these market movements and investment performance. And during that 6-month period, it was a $2.3 billion gain, $300 million of which was retail. That's from market movements performance which we can't really separate out. And then finally, we emphasize that we have a well-diversified and increasingly well-diversified client base. I would like to spend a few minutes talking about the growing diversification of our client base. I'll explain in more detail shortly that we've decided to begin to share some more detail on the composition of our client base. Now we have, for many years, deliberately sought, wherever possible, to maximize client diversification. As people are aware, we've been operating in the Australian institutional funds market for a long time. We're very experienced in it. We've had strategies and approaches for a long time to ensure that we have a very robust business in that market. There's been a lot of commentary about changes in that market. And there are definitely some trends that we've called out and we'd like to continue to talk about, but it remains a very attractive market for us and no, we don't see significant concerns. And as I mentioned, we had a significant pipeline, and we think we will get -- well, it augers well for larger flows going forward. So Slide 5, I'll be brief from here, the business highlights, affiliates. We've added 2 new affiliates during the period: one was Horizon 3, which was Coolabah; and one was Horizon 2, which is a new build called Reminiscent Capital. We've had a program going for pretty much the last year, but we're announcing that now as it's reached a stage where we're really taking that to the market. So it's initially a team of 3 led by David Adams, who's ex-Brevan Howard Asia and ex-Morgan Stanley Australia. So 2 new affiliates during the period. And we've launched some new liquid alternative UCITS funds. One was the Plato Global Market Neutral Fund led by...

Dave Allen.

Dave Allen. And Two Trees, we've launched a new UCITS fund for them with their Systematic Global Macro. So just briefly now, the next slide is understanding the first half financial outcome. We want to draw to attention just a few points. Firstly, as always, we remind shareholders of this first half, second half skew in our results. Last year, the first half was 33% of the total financial year results. The year before, it was 35%. I think most of our shareholders are quite well aware of the reasons for that, the various annual performance fees in Palisade, for example, and the annual success fees that we earn in Pinnacle as a distributor. They all come in the second half, so that skews the result quite strongly. We've also pointed out that our costs were higher, the cost of Pinnacle parent, largely due to the full year effect of some significant resource increases throughout the FY '19 financial year. We've got the headcount numbers there. We addressed this very extensively in our full year results 6 months ago, so probably no need to go into it a lot more now. I mean I know it sounds like I'm a broken record with this. I keep talking about our continued investment in Horizon 2. I do that because it's very important. We know that these investments will bring us a lot of growth and revenue in the medium term, but they're a drag on our P&L in the short term. We still think it's very sensible to do that. And I'll talk a little about the extra people we're planning to put offshore and so on. This is all costs ahead of revenue but we believe it's very important for future medium-term growth to keep doing that. And then we just made this statement on Slide 6 that we remain well positioned to deliver superior business and financial performance in the medium term. We put in lots of effort and expense to keep this growth going. We look always for multiple sources of growth. So at any point in time, we expect to look forward several years and have -- whatever market conditions are out there, we expect to have growth from a number of different sources. Slide 7, group financial summary. I think these numbers are fairly self-explanatory. I'll leave it for people to read. You will see there -- I mentioned at the beginning because I thought it was important, the adjustment to our NPAT by excluding the net gains and losses on principal investments, which shows a growth of 25% rather than the headline 37%. We also make an adjustment for the LTI expense, which is a positive adjustment in the sense that -- so this is a noncash expense. The auditors require us to value our LTI and expenses. It only began, our large LTI, partway through the PCP, and it was, of course, a full period effect this year. So we had $1 million write-up this year -- this half and then $0.5 million in the PCP. If you adjusted for that, as some people do, our growth was 29%. But I'm very happy for us to talk about a 25% period. We talked a bit about our hedging losses, which is this PI return. I just want people to realize that we hedge a substantial part of our market exposure. We use our capital -- it's dry powder but we use it in the meantime to invest as seed in a whole range of our affiliates' new funds. So it's not principally return maximizing. We do expect to make a return on it, of course. But we've taken the view that shareholders would think there's enough market exposure in the PNI stock. They don't want that exacerbated by having our balance sheet too market exposed. So we just simply put some hedging in there. Now in the last couple of years, those have produced losses. They really are offsetting gains from the market. So that just explains where those kind of losses come from. Slide 8. Just a couple more points on understanding our financial outcome. Slide 8 focuses on the affiliates' financials rather than Pinnacle parent, fairly straightforward. Total affiliates revenues were $132.5 million, up 28.5%. Slide 9, again, just elaborating a little further the first kind of -- the top half of the slide is about Pinnacle parent where our revenues and our capabilities and costs have been increasing with our growth. And then the second half is about the affiliates, where their profits are also growing quite strongly on higher FUM. But we do make the point that there's a drag on that, which is the investment in the affiliates that are not yet profitable. And now Pinnacle parent, there's a drag in servicing those new affiliates, but directly in our share of affiliates profits, they are a negative from Two Trees, Longwave, Riparian and Reminiscent. And as they -- you'll see they're all making progress, Two Trees, in particular. Longwave wave is making very good progress. Riparian and Reminiscent are out in the market. As they win FUM, move to profit, that grade goes away and becomes positive. But of course, they're likely to have some more new affiliates by then that will also have some drag. Our balance sheet is there. I think it's straightforward. I'm not going to spend further time on that. I want to leave time for questions. Slide 11 is the graph of our FUM growth. Again, nothing very new there; dot points I've already really referred to. The $7.3 billion increase in our FUM for the half year is simply $3 billion that we acquired when we acquired Coolabah, net inflows of $2.0 billion and market movements investment performance of $2.3 billion. Slide 12 is a slide that analysts like to see, which is the full detail by affiliate of our funds under management. Historical, the top line is 31st of December. That's the composition of the $61.6 billion. The bottom area is our effective share of the FUM. So we simply multiply each affiliate's FUM by our effective share, and you'll see that our like look through, if you like, effective share of FUM is $23.1 billion for people who like to look at that. But twice a year, we give this full breakdown of FUM by affiliate. There it is at 31st of December 2019. So that really completes what we might call the kind of factual part of the results, the financials, the funds and flows facts for the period. So I'd like to kind of summarize a little bit how we see this half year period. And I think I'd summarize by saying that we're very pleased with the progress that we made during the 6-month period in what was essentially kind of a solid, steady-as-she-goes period, okay? We didn't have the really large inflows that we've had in some past periods. But in market conditions, which I think we can talk a little bit more about, I think it's a pretty solid flows result. We've continued to do a lot of good work during the period in laying further groundwork for further growth and building an even more robust, diversified and resilient business. I would say we've been measured and disciplined in our investing in the face of very extensive growth opportunities and a somewhat challenging market. But we're optimistic and positive about future growth, whatever market conditions might be experienced going forward. And we can all talk about the concerns that are out there, the latest one being coronavirus, et cetera. So we recognize that the path of a strong growth company, which we believe that ours is and very much continues to be, is rarely a smooth upward line. You have periods of kind of explosive growth and then there's other periods where the growth is not as strong. But the important thing is that you do -- that happens occasionally. The important thing is you do very good work during that time so you can keep growing as conditions get a little bit better. People remember we had exceptionally high growth in the couple of years to the September quarter of 2018 before that market dropped in the last quarter of calendar '18. I think we had $7.9 billion of net inflows in '18, and we acquired Metrics and so on. Last year's net inflows had been lower, as I mentioned. But we look at the Australian insto market, the offshore sales prospects. So we have a strong pipeline in Australian insto. We've got a growing pipeline in offshore, where the hard work we've done over the last few years is beginning to pay off. So I would say in relation to offshore, watch this space. And in the retail market, in Slide 20, we've listed the key considerations there. There have been significant changes that have occurred there post [ Hanes ], and it remains to see -- to be seen where all this will settle. But certainly, it's been a tougher environment in retail in the last, I'd say the last calendar year. I've got points there on Slide 20 that I'm very happy to go through. Slide 17 are points on the Aussie insto market. I'm very happy to go through those. But I'm starting to feel as though I'm rabbiting on a little bit too much, and I should perhaps pause and take questions. And if we have time after questions, I will revisit talking further, Slides 17 and 20, about the Aussie insto and the retail markets. But perhaps if I pause there and invite questions. And again, please feel free to ask questions of any of the 3 of us.

[Operator Instructions] Our first question comes from Tim Lawson from Macquarie.

Just regards to your comments in -- on the sort of FUM diversification and where it's come from. Can you talk what that might mean in terms of fee base in regards to what the diversity impact is but also just market trends across sort of where you're concentrated?

Yes, absolutely. Thanks, Tim. So Slide 17 and then 18, we've sought to put out some more granularity about the diversification of our client base. People are aware that by asset class, we're diversifying, adding Metrics and Coolabah, for example, and then a range of alternative-type strategies. We believe these are in substantial demand in both the institutional and the retail market, and we want to be a significant player there. Fees is always a bit of a tough one, Tim, because we have such a range of offerings. And we've talked about previously, we don't target a particular fee level. We look to get a fair fee for every one of our strategies, depending on what it is, depending on what its capacity is and so on. I would say as a general statement -- so we're all aware of the fee pressures and these trends in the institutional market. We've talked about industry fund consolidation, some insourcing, some move to indexing and so on, and the pressure for fees to continually come down somewhat. Those fees -- those pressures are real, they've been going on ever since I was a young man, which, trust me, was a long time ago. But the total FUM is growing a lot. And keeping all that in perspective, we feel very good about the insto market. And in terms of fees, sometimes, we're very happy to take large mandates at quite low fees, where we have a lot of capacity. Where we have limited capacity, we won't accept fee pressure. But in terms of the trends for our asset classes, it is fairly mixed, but things like Coolabah, their average fees are pretty high because they charge performance fees as they make gains. Metrics, they're kind of low-risk products and modest fees, but we do large volumes of those and they -- they're very -- it's very good business. But some of their more recent strategies have significantly higher fees, including performance fees and upfronts, et cetera.

And Tim, to give you an example of that. So if we look back at the previous corresponding period, we had circa 5 managers that had north of $4 billion. We now have 8 who are north of $4 billion. And if you look at each manager, Hyperion is going into global. The global fund, both offshore but also retail, both tend to attract higher fee rates. Plato is the same for market neutral, both domestically and offshore, although we recognized that early. Resolution Capital is getting good traction offshore, which tend to be higher -- on average, higher fee rates than what can be achieved domestically. Firetrail, again, on retail, with performance bouncing back, and then I talked about Metrics. So I would say it's not only the breadth of managers now with 8 well and truly, with momentum, above $4 billion, but it's also the -- as we've talked about, the geographies of where we're going and also the channel, the mix of where we're raising the assets.

Yes. So that's right. So as a generalization, as I said, we don't target that we want particular fee rates. It depends on the strategies in the markets. But as a general statement, our average fees across the board have been floating up modestly. And that's a trend -- it's partly because of the increase in retail. So retail fees are substantially higher than institutional. And as we move offshore, what we found happily is that like-for-like, offshore investors pay higher fees than Australian institutional investors. So that's good for us, too, as we grow our offshore FUM.

Our next question comes from Nicholas McGarrigle from Ord Minnett.

I think it was a good result from my reading overall. Just to understand the skewness, you've given sort of an indication what the last couple of years was. But do you think that maybe this year, there's even a greater skewness to the second half, given you've got even more of those private vehicles like Metrics, Palisade's obviously grown. There's some quite large LIC raisings and LIT raisings going on in the second half and then you've got Coolabah coming through with the contribution. Do you think that the skew to the second half could actually be greater than those last couple of years?

Yes. It's very hard to say, Nick, there's a lot of moving parts. Of course, if we get -- if we did get some performance fees in addition to Palisade, that would have that kind of impact. But I think if people want to do conservative sort of forecasts and so on, we don't make forecasts ourselves, but I've been using the likes of that 35%, like the pattern is not a lot different from past years. But who knows, you could prove me wrong and you could be right. But it's a stronger second half, relatively, compared with the past, but I don't know. And if I was just -- if I was doing my best, I'd probably conservatively use the 35%, something like that.

All right. And then just in terms of the Coolabah business, we haven't sort of spoken about that, I think, on a conference call or anything. So can you give us a bit of detail around their business, how you see that fitting into the Pinnacle platform and how we should think about kind of the style of investment in terms of what you paid for it versus how prospective it is? And I know you've not given any indications on what that would contribute.

All right. So we're very happy with our acquisition. We're absolutely delighted that they chose to partner with us. Everything we've seen during our extensive due diligence that, since then, makes us pleased that the prospects are good, both in institutional and retail. It's a bit hard to say because performance fees are significant for them. But I can tell you they are very well regarded and they have good pipelines in both institutional and retail.

And Nick, further to that, Slide 35 provides a brief summary of our views on alternative credit and fixed income. And then Slides 28 and 29 talk about Coolabah in more detail. If I can sort of provide a summary of both, one thing that we've been very cognizant of is that we have been underrepresented somewhat in fixed income within our portfolio of affiliates. Notwithstanding, obviously, we did the Metrics deal not too long ago. And we've never been a firm that is about ticking boxes, as in we need to have a manager in this space and a manager in another space. However, when -- what we've been witnessing, the Australian marketplace as a whole is probably underweight, fixed income and credits relative to global peers. And we've had a view for some time that we do see a greater migration into more fixed income type of assets. So when we had the opportunity to partner with Coolabah, we were very pleased to do the work and ultimately, get the deal completed. What's very exciting about Coolabah is that if you look at the results, if you look at the hit rate, if you look at the differentiation and the quality of the investment team, it is up there with the best in the marketplace. And the results speak for themselves, and they're publicly available. The other aspect is that if you look at the peer group, the peer set in [ defensive ] by number, there are less peers that you compete with in that space compared to equities generally. So I think not only does it -- meet the quality criteria, but it also meets the trajection of where we see flows and demand in that asset class.

Okay. Great. And just in terms of the debt facility versus the principal book, just give us a sense on how you see the balance sheet going forward. Is there more appetite going forward to take on more debt? Or would significant Horizon 3 opportunities need -- require equity?

Yes. So we've always said we don't want to be highly geared. We don't think that's a smart idea. But the $30 million that we took on, that's like extremely comfortable. Given where interest rates are, it was a pretty easy decision to take on a little more dry powder. We'd love to have more dry powder because there are plenty of opportunities out there. We'll wait and see what market conditions are, Nick. We didn't want to do an equity raise just given where things are and where our share price is and so on. So going forward, we'll just have to see. We'll have to see what the share price does, what the opportunities are and so on. As a general statement, we don't want to take on a lot of debt. We could certainly do a bit more if that was convenient. If we had opportunities and a need, we could do a bit more. But I don't know, I don't think I'm speaking out of school in saying I don't think there's been an appetite at the Board level for a lot of gearing of this company. We want to have a bit -- we think we've got a great company that's going to do well in all conditions. We don't ever want anything that sort of stresses us in any way. So we'll see, Nick. We just have to wait and see. We've got a nice amount -- I mean, effectively, we've got the same amount of dry powder that we had post the capital raise because we borrowed $30 million and we spent it, so it's largely unchanged. So we've got a nice amount of dry powder there. But obviously, it depends on the size of opportunities.

[Operator Instructions] Our next question comes from Liam Cummins from Wilsons.

Team, well done on the result. It all looks pretty good so far. Just wanted to have a quick question just on maybe the pulse of LIC/LIT market as you see it at the moment. We're obviously in the midst of an MXT rating, so it's good enough, I suppose. But sort of how you see that maybe going forward versus where it's been over the last 6 to 12 months. And then secondly, maybe where Coolabah might be positioned for their appetite in that market, just given how vocal sort of Chris is, at least on a part of -- how that part of the market functions.

Yes. Sure. Thanks, Liam. So look, it's somewhat up in the air at the moment, isn't it? The treasury is undertaking a review of stamping fees and so on, so we need to wait and see where that ends up. We do have the Metrics raise going on. That was well underway before this review was announced. And so that is live at the moment, as you said. And so we can't really say a lot about that. I would say that I think the Metrics offering is a very good offering. And it's been extremely popular since it started sort of 2.5 years ago. It's pretty much always been at a premium and it's delivered everything that investors have ever wanted. So I'm not surprised that there was -- we perceived strong demand for when we announced the raise. In terms of Coolabah, I mean, obviously, I've talked a lot with Chris about this. So he's not against LITs is my understanding. He just is very much against the payment of stamping fees. So I think we just got to wait and see.

And Liam, if I can add, our entry into this space is all about giving our clients choice. We've talked about being agnostic to alternative products. So we still have a very strong view on listed as a whole and that includes ETFs. So you could well see us do more on the ETF side, or I should say, our affiliates do more on the ETF side. So we still have this view that there will be migration to the exchange, and that listed as a whole, and we're seeing that with other ETFs, to be frank, where flows are happening in that space. So we take the position that it's important to provide choice to investors.

And maybe sort of more broadly within the retail market. I think last time we all spoke, you're sort of talking about, I guess, the headwinds for inflows being an industry-wide sort of issue. Sort of maybe how you've seen that change over the last 6 months, if there's been any change in sort of how you've positioned yourself around that.

Sure. Yes, definitely. I still think structurally, the -- those headwinds exist. Perhaps for the short term -- and there is a slide, I think it's on Slide 19 that we referred to, which is the retail market develop -- oh, that's Slide 20, I should say. They're very high level. What I would say is that you can still -- there are still winners in retail, as we have said previously, if your strategy is differentiated and you can execute on distribution. We're still seeing that with our own flows, whilst they're down on PCP. Last period, we had 4 managers that delivered north of $100 million of net retail flows, the previous half PCP. This time around, we've got 5 managers that have delivered north of $100 million. So our breadth of distribution on retail flows is increasing, which is really pleasing. And we have opportunities like Palisade and Riparian coming forward in that wholesale, high net worth retail market space. So I think it will still stay somewhat challenged that you see with some of the newer platform solutions or they're probably not new now [ they have been met well ]. They're still gaining flows. Index is gaining flows. ETF is gaining flows. I think the key thing is have a really good sales team, have a clear strategy, obviously, high-quality offerings and make sure you execute on it. And that's been our thesis for some time, and it's the way we continue to operate in that channel.