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 Limited Full Year FY 2021 Financial Results Teleconference. [Operator Instructions] And just please be advised that today's call is being recorded. But without further ado, I'll hand the conference over to our first speaker for today, Mr. Ian Macoun. Thank you, and please go ahead, Ian.

Thanks, Myles, and welcome to everyone who's joined us on the call this morning. Thank you for your time. We appreciate your interest in PNI. So as you've heard, this call is to discuss our results for the 2021 financial year. We posted with the ASX last night our formal results announcement, our annual report audited financial statements, Appendix 4D and, importantly, our investor presentation. So we'll be speaking to the presentation this morning or rather to a few parts of it. So the colleagues with me on the call are Alan Watson, our Chairman; Andrew Chambers, Executive Director with particular responsibility for Institutional and International Distribution; Ramsin Jajoo, who leads our Retail Distribution Function; Dan Longan, our CFO. Besides finance and accounting, Dan's responsible for IT, middle office, back office, offshore vehicles and operations and a range of other major infrastructure functions. We'll hear later that we've done a lot of work enhancing our capabilities in preparation for further major expansion. So I'll simply call out our main theme and highlights of our results, briefly elaborate a few aspects that we feel are particularly important for analysts and for shareholders. The presentation is far too detailed for us to fully cover in a call of this duration. We'll make it this extensive to enable people to review as much detail as they wish in their own time. And we'll, of course, go into more detail in one-on-one meetings with largest shareholders. The presentations arranged in self-contained topic sections and is easy to navigate. We'll leave plenty of time for questions. You're welcome to direct to any of the Pinnacle representatives on the call, any questions that you have. As you can see on agenda Slide 3, there are sections where the relevant executive will be Andrew or Ramsin or Dan rather than me. So Slide 2 is a disclaimer that is important, and we'd ask you to read this at your leisure. Slide 3 is an agenda. Slide 4 is titled 2021 Financial Year Themes. So this sets out our opinion of the major themes for the year. Now we recognize and strongly believe that for our guests on this call, analysts and shareholders to form their own opinions on our performance and on the outcomes that we're delivering, and we always value feedback from you, by the way. But nevertheless, people do ask us for our view, our opinion on how things are traveling. And we're happy to do this to the best of our ability and in good faith. Now you'll see that our view of the themes this year is very upbeat and confident. We are indeed very proud of what has been achieved by our company this year. But we'll strive to always be objective and fully realistic and to seek to place our results in context. This year's themes are quite different from our opinion of the themes when we released our 2020 full year results. At that time, we said we felt we had delivered a solid financial outcome in the prevailing circumstances, although below expectations at the start of the year. Our profit was higher than in the previous year, but not by as much as we would have expected in the absence of the COVID crisis. So I'd like to make one particular point about the context of our very strong results for this year. Now we are reporting extremely strong growth in profit, buoyant share markets, record funds under management inflows and our strongest ever increasing funds under management. So we'll be saying that our status as a high-growth company remains intact. Indeed, it has been further enhanced this year. And we fully recovered from the virus and market challenges of FY '20. But we want to make it clear that in our excitement and confidence about the future for our company, we humbly, acutely, are aware of how fortunate we are. This virus has not been fair. Some have prospered, while so many have endured enormous difficulty. We are very respectful of this fact. Our company's mission is enabling better lives through investment excellence. We know that money itself cannot cure the wounds of the world, but it can be an enabler of better lives, and we must all do whatever we can to help in times of adversities. And of course, none of us knows what lies ahead with certainty. So with that caveat and context, our themes for this year are set out in Slide 4, a strong financial outcome and the resumption of strong growth in profitability, in funds under management and in net inflows. We've enjoyed continuing benefits from the growing diversity of our asset classes and the investment strategies of our affiliates, of the types and domicile of our clients and of our performance fee exposures. And happily, we are entering the new financial year very confidently anticipating further growth. Our funds under management at the start of the financial year are more than 20% ahead of the average funds under management throughout the financial year that these results relate to. We do recognize the possibility of further external adversity, but we have weathered adversity, major adversity in 2020 and proved ourselves to be resilient. We are well prepared for and actively seeking further meaningful expansion opportunities, both organic and inorganic, in Australia and offshore. Slide 5 sets out the financial highlights of the 2021 financial year. Net profit after tax of $67 million, up 108% from the 2020 financial year. Basic earnings per share of $0.382, up 103%. Diluted earnings per share, $0.365, up 104%. Our share of the net profit after tax from Pinnacle Affiliates were $66.4 million, up 75% from FY '20. This included our share of performance fees earned by Pinnacle Affiliates after tax of $19.5 million in FY '21 compared with $6.6 million in FY '20. We had cash and principal investments, so principal investments are basically investments in affiliate funds, of $155 million at the 30th of June. Our CBA facility was increased in order to provide dry powder for potential business investments. Additional funds are deployed meanwhile in liquid strategies managed by our affiliates. And we paid a fully franked final dividend of $0.17 per share, and we declared that dividend, that's up 100% or double the FY '20 final dividend, and it takes total dividends for the financial year to $0.287, up 86% on the financial year. Now there's one important footnote here, Footnote 1. So adjusting for the net return on principal investments, our NPAT is up 98% on the year. Now that's the comparison that we focus on in assessing how much of our profit -- how much our profit has grown from 1 year to the next. Now for those who are interested, Footnote 2, adjust also for our share of performance fees. I should emphasize that we don't make that adjustment ourselves. We regard performance fees as an important component of our profit. So look, in simple terms, our profits and EPS were approximately double the previous year. Slide 6 shows a bit more detail on the financials. Slide 7 shows the rates of growth in our net profit after tax, earnings per share and dividends over the 5 years since we rolled up. So since we became a pure-play listed Pinnacle. 63% per annum NPAT growth, 47% per annum EPS growth and 54% per annum dividend growth. So our growth has been consistently strong, except for FY '20, which was the year of the COVID stock market slump when we only grew earnings by about 5% or 6%. But as Slide 8 shows, we have really caught up on the slower FY '20 growth and restored our high-growth record. So on average, over the 2-year period to the 30th of June '21, which encompasses the entire crisis period to date, NPAT grew just about 60% per annum over the 2-year period on average; diluted EPS, 56.7%, per annum on average over the 2-year period; and FUM growth was 32% per annum over the 2-year period. Slide 9 shows our funds under management highlights. So aggregate affiliates fund was $89.4 billion at the 30th of June. Now we pointed out in Footnote 2 that Plato won an exceptionally large low-fee mandate in April, was $3.9 billion. So we're effectively inviting you to exclude that. If you're using our FUM numbers, for example, to estimate the run rate revenue growth starting in FY '22, you're using for that purpose, maybe you exclude that. Or if you're looking for a kind of normalized rate of FUM growth and inflows for FY '21, you might exclude that $3.9 billion. So this $89.4 billion was up $18.9 billion or 27% and over the 6 months from December or $15 billion or 21% excluding that low-fee mandate. Our FUM was up $30.7 billion or 52% over the 12 months or $26.8 billion or 46%, excluding the Plato mandate. Now aggregate retail fund, this is a really important retail fund, is now $20.3 billion. So we're delighted to have hit $20 billion in retail. That was up 22% from $16.7 billion a year ago -- sorry, 6 months ago in December, $16.7 billion, up 22% and up 55% from June a year ago. So the $30.7 billion increase comprised -- increases due to net inflows of the $16.7 billion, or $12.8 billion without the Plato, which is still a record by a long margin and $4.5 billion of that was retail also a record for retail by a large margin. We also got $14 billion increase due to market movements and investment performance. We make the point we have an increasingly diverse client base that's important, and our closing FUM of $89.4 billion is 28% higher than the average FUM through the FY '21 year or 23% higher, excluding the Plato mandate. So this gives us a strong starting base for revenue and profit growth in FY '22 over the FY '21 level. Or if you prefer, it gives us a healthy buffer against any stock market or economic growth diversity that might come our way. Slide 10 shows the size of our inflows during the period. We had record inflows, as I mentioned. Total net inflows, $16.7 billion, or in Footnote 1, $12.8 billion, excluding the Plato mandate, $12.8 billion for the year. $7.3 billion in the second half, excluding the Plato mandate. Again, still record inflows by a large margin. And retail at $4.5 billion, was $1.9 billion in the first half and $2.6 billion in the second half. Hyperion, Coolabah, Res Cap, Metrics, Firetrail and Solaris, all growing strongly in retail. Our institutional net inflows for the year were $12.2 billion, $8.3 billion excluding the Plato one-off, $3.6 billion in the first half and $8.6 billion in the second half or $4.3 billion, including that one-off. So recognizing that institutional flows can be large and uncertain, we are delighted by the results for the year and the momentum with which we enter FY '22, both within Australia and offshore. I'm sure you can ask Andrew Chambers about the Insto pipeline and Ramsin about retail. Slide 11 sets out some affiliate business highlights. Slide 12, some further detail on the financials. Slides 13 and 14 provide some detail on our performance fee growth. And there's further detail on performance fees later in the presentation as well. Slide 15 outlines significant components of the Pinnacle period component of the financial results. Slide 16, balance sheet details. Slide 18 records our history of FUM growth over the years. Slide 19 is one that many shareholders look for, which shows the funds under management by affiliate. So the first row across the top shows the 30th of June '21 FUM for all of our affiliates. It is very pleasing to see Res Cap at $16.3 billion; Hyperion at almost $12 billion; Solaris and Plato both above $10 billion; and strong growth in other affiliates, especially Coolabah and Metrics. Slides 20, 21 and 22 show the overall continuing strong investment performance of our Affiliates. 80% of strategies with a track record exceeding 5 years have outperformed their benchmark over the 5 years to 30th of June. That's the classic measure used for medium-term performance 5 years. You could also see the long-term since inception numbers in the right-hand columns. Now I'd like to spend just a few minutes on Slide 26, and then we'll go to questions. So Slide 26 is headed Growth and Resilience. You'll notice our focus on growth throughout the presentation. We spoke quite a lot about resilience during 2021 and 2020. And we're delighted that our business has proved resilient to the sharp albeit fairly short lives so far as it turned out, FY '20 market downturn. We retain our vigilance and preparedness to face any adversity that might come, but we're also now very focused on growth ahead. We've shown in Slide 7 that we managed EPS growth of 47% per annum over the 5 years since we rolled up. And over the past 2 years, EPS grew by 57% per annum. We are very focused on continuing to be a high-growth company. Our strategy in this regard is to be careful, that is not to seek to grow by taking excessive risk and to have multiple sources of growth. So that both increases the likelihood of strong growth irrespective of challenges in any particular market or affiliate. It also increases the size or quantum of our growth. So you'll hear us talking more -- a lot more about offshore markets, offshore Horizon 2 and 3 opportunities, retail expansion, further affiliates and so on. So without spending even more time. I apologize for going on. Let's go to questions, please, Myles.

[Operator Instructions] I'll first go to Scott Murdoch from Morgans.

Well done, great result this year. Just start on the offshore strategy. Clearly, that's a focus you've signaled offshore for a while now. But maybe can you just give us a bit of a picture of the 5-year expectation? Obviously, distribution a massive part of the Australian business. Are you sort of thinking that you can replicate your distribution capabilities that you have here in offshore jurisdiction?

Yes. Thanks, Scott. I'll start off answering that, but then I might ask Andrew Chambers, who's responsible for our offshore distribution, to make a comment. So you're right that we've been signaling this for some time. I'm also delighted that Adrian Whittingham, who built our retail capability and then handed it over so successfully to Ramsin is back full time, charged with the responsibility for building and growing our offshore Pinnacle International. So that is a significant initiative that we're taking. We started with distribution offshore, and we're having a lot of success there. So that's going great. But we are signaling that we are very interested in doing the Pinnacle model offshore. I can't give you a 5-year forecast, of course. We're telling you that we have ambition offshore. We probably would have done more by now if it wasn't for our inability to travel over there. But we think the Pinnacle model has a lot of good prospects for offshore. We're not going to be silly. We're not going to take big risks, but we think there's good opportunities offshore. Chambers, would you like to say something about distribution offshore?

Yes. So I'd just highlight that we've been quite modest to date in our investment offshore relative to the payoff. So if you think about our offshore business today, it represents about 10% of our total AUM as a firm. In the last 12 months, we've sourced $3 billion of our total net inflows from international investors. This was sourced from 26 countries outside of Australia. 40% from the United States across Antipodes, Res Cap and Riparian; 28% of that was from the United Kingdom across Aikya, Antipodes and Res Cap; and 32% from the Rest of the World across effectively 6 affiliated firms. So very good momentum internationally. And we expect that to continue looking into the future. In fact, the early signs in this new financial year are pretty positive across a number of affiliates unrelated to those, which raised capital last year. The consultant ratings are very much in place with the global consultants for a lot of our global equity, global real estate securities, global emerging market equity managers, which gives us confidence about our capacity to continue to compound that momentum we've built to date. We intend to continue investing in offshore distribution in terms of adding more people on the ground, both in the United Kingdom and in the Americas, representing our efforts in the Americas from Canada through to South America and also out of London for the Europe, Middle East and Africa region. And of course, we look after Japan from Australia with our Japanese sales team here.

Okay. That's great detail. And probably steps into a question on flows. You've sort of called out there in the presentation that the Insto pipeline remains strong still. Obviously, a lot came through in this half and in this year, just interested in sort of the quantum and the quality of the Insto pipeline as it stands now compared to, say, 6 to 12 months ago?

That's also one for Andrew.

Yes. So I always say that the pipeline is as strong as what it's been before. The thing I can't ever anticipate in advance is the timing of when things will actually crystallize, which is always the great challenge in the institutional market. But the size and quantum is the same as what it's been, and I expect it to actually increase as we continue to add more distribution professionals to the team. So -- but if you think about the context for where the assets were raised in the last 12 months and where I think will be raised in the next 12 months, if you look at the last 12 months, $10 billion of that money was sourced from public markets -- in public market asset classes; $2.2 billion in private markets; $7.4 billion was sourced in domestic-facing asset classes; and $4.8 billion in global asset classes. I think if we look forward to the next 12 months, most of the growth will move from -- I think we'll retain our growth in credit-based strategies, given where base rates are around the world, both across Coolabah and Metrics. But I think the leadership on the equity side will move from Australian equities and Global real estate securities to Global equities and Global emerging markets, recognizing the fact that both resolution capital and a number of Australian equity managers are up against capacity limits and may be going through periods of recycling into retail.

Okay. Again, thanks, great detail. And just I may as well ask on retail flows while I'm here. I mean, obviously, retail flow is going to be influenced sort of by, I guess, sentiment in the market, and that's been pretty positive. I guess if you attempt to strip that out, which is probably impossible what you sort of expect in terms of is there anything under the banner there that can sustain this elevated retail flows that we're seeing in the last 6 months?

So we'll throw this to Ramsin, but I would just make the comment. So Scott, we haven't been reliant on positive sentiment in the retail market for outflows. We've had some periods of pretty significant negative sentiment when the market tanked and so on. We're taking market share. So we're growing in retail irrespective of the sentiment of retail investors, albeit that is becoming quite strong and positive again. But we don't need total system to be growing for us to keep getting retail inflows. Our retail inflows are across quite a large number of affiliates. That's another reason that gives us such confidence. But we've also built strong momentum in a number of our affiliates in retail. But Ramsin, would you like to comment further?

Just a quick comment. The biggest driver of success in retail is momentum in terms of flows. So once you actually get on to APLs, approved product lists, or once you get into many managed portfolios, model portfolio programs, the top turns on and momentum becomes a key driver of future success. And to Ian's point, we do have a good support base across many strategies in retail. So unless there's some massive market dislocations from here on in, which even in those cases, we do take market share, there is some confidence in our retail future pipeline.

Okay. Just one last one and then I'll hand it over to someone else. Just on Horizon 3, obviously, acquisitions, you've got the capital base there. Just interested that capital position, would you prefer to leave that as it is until you are sort of able to look at something offshore? Or is Australia still on the horizon in terms of Horizon 3 opportunities?

So it's always difficult for us to comment too specifically about Horizon 3, Scott. We've said we're having lots of discussions, and we have ambition to do some Horizon 3, and there are opportunities in Australia as well as offshore. So it's very difficult to be too specific. We took on this expert CBA money to have dry powder. We love having dry powder because it creates optionality and puts you in a stronger position in negotiating any potential acquisitions. But -- so we want to tell the market that we're actively looking. We don't want to promise something. I don't want people asking me every day where is your acquisition. So we're trying to strike that balance and just signal that we have the wherewithal now with over $100 million of capacity there. We have said to the Commonwealth Bank, if we deploy that with acquisitions, we would seek to top it up probably with equity, but it all depends on the circumstances.

[Operator Instructions] But next one, I'll hand to Nicholas McGarrigle from Barrenjoey.

My question probably extended on Scott's a little bit, but I know that in the past, you've been hampered in terms of executing on acquisitions in global markets. Can you talk about potentially the capacity of the team to be comfortable with due diligence in a post-COVID world? And if that's going to impede progress? Or do you feel like you've sold for that in a way?

Yes. So that's a crucial point. I would say we have been impeded. So you can do a lot -- and we've been working on laying the groundwork for offshore really for a number of years. Our Chairman has a lot of offshore experience. And we've been sort of laying the groundwork. So I would probably say we would have done more offshore by now. You can't say for certain, but the inability to travel because the way we operate, when we partner with people, we seek to get to know them very well before we partner. Because we put so much store on, are these people the real deal? What's their character? So it's -- you can do a lot with video conference. And we have had many, many, many dozens of video conferences with people offshore who we're contemplating partnering with, either Horizon 2 or Horizon 3. But it's difficult to make a big move without meeting people. So we have been held back. Who knows what lies ahead with the vaccine, but we're getting ready for post-COVID.

Yes. I mean the commentary in the presentation talks to Horizon 2 and Horizon 3 opportunities. Can you help us understand what the shape of those that are most prospective may look like? And I think there's a comment about additional investment maybe through the OpEx line into more Horizon 2 opportunities and maybe where some of that option -- where some of those options are for you at the moment?

Yes. So it's easier to do Horizon 2 than Horizon 3 remotely. So Adrian has done a lot of terrific work. So we could do some of what you see -- what we've always done in Australia, building a new affiliate or a new capability from scratch, working with talented experienced people. So you could see us -- I don't want to go forecasting things. You could see us doing Horizon 2 offshore before we're able to travel. You can get pretty comfortable on those things. And it's not very risky. We're not outlaying a lot of money. Harder to do Horizon 3. But yes, we are looking in Australia and overseas at both Horizon 2 and 3.

In terms of -- I think just turning to the Pinnacle Parent level, there was some really good success-based revenues and some, I guess, retail revenue sharing in the Pinnacle Parent. How should we think about the way that evolves into next year? You obviously made a small profit at the Parent level? How does that evolve over time?

So that revenue is -- it's a bit of a mixture. As you mentioned, some of it is success-based. So we got something of a boost this year by, for example, very strong inflows into Res Cap. But quite a lot of it is like trailing, quite a lot of it is a percentage of revenue, especially retail revenue or so many basis points. So that will be ongoing. So certainly, our revenue in Pinnacle Parent has grown to a higher level, which is sustainable, at least in part. But we don't target to make a profit or a certain loss in Pinnacle Parent. We've always been happy to invest off our P&L in Horizon 2. And we could do some more of that. So I can't give you a lot of visibility on it. It won't move enormously, a little bit above or potentially somewhat below zero breakeven.

Sure. And in terms of the -- I think looking through some of the operating leverage, there were some really strong margin improvements for some of the managers and probably less so for others. But potentially that's driven around investment in future capability. Can you talk through maybe the top 3 investments that have been made in the affiliates to power new strategies that have yet to sort of seen material distribution success?

Yes. So clearly, there is major operating leverage in our affiliates. That's the nature of the beast. You have to put the resources in place ahead of growth. And then once the FUM grows and grows strongly, the operating leverage kicks in very strongly. So our affiliates are a mixture of maturing ones where that operating leverage is really, really coming home to roost and investment in new strategies. So even in some of our more mature affiliates, we are investing in new strategies, which means adding some people to doing new strategies. I can't think of a single one of our affiliates that isn't building new strategies. And of course, that retards the profitability of the affiliate and makes it less operating leverage than they otherwise would be. But you look at a Hyperion, for example, they invested in global, some people. And now as the global FUM comes in, you'll see the operating leverage just keep growing there. All the suspects, Nick, you can see which ones are having operating leverage kick in. The bigger growth managers -- well, you can see it in the FUM table who's grown the most, Res Cap, Riparian, et cetera. And new affiliates haven't yet kicked in, but they will over time. You'll see in long way even Aikya starting to kick in. I expect flows into them this year. So does that more or less answer it for you?

Yes, that's definitely useful. I mean it's interesting to see that the strategy is being invested in that haven't seen flows. For instance, Res Cap has built out a real asset strategy that most of the flows have been into the global REIT fund, which is long standing. So [indiscernible]

Correct.

Which is good to know. Maybe...

If we had time, we could go through -- sorry, I was saying if we had time, we can go through all of them, they're all adding extra strategy, Firetrail...