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

Thank you for standing by, and welcome to PNI's Full Year FY 2022 Financial Results Teleconference. [Operator Instructions] I would now like to hand over to Managing Director, Mr. Ian Macoun. Please go ahead.

Thanks, Ashley, and welcome to everyone who's joined us on the call this morning. Thank you for your time. Thanks for being with us. As you've heard, this call is to discuss our results for the 2022 financial year. We posted with the ASX last night our formal results announcement; our annual report, including the audited financial statements for the year; our corporate governance statement; importantly, our corporate sustainability report; and also importantly, our investor presentation. We'll be speaking to the presentation this morning or rather to some parts of it. The colleagues on the call with me 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; and Dan Longan, our CFO. I'll call out the main themes and highlights of our results and also briefly provide some further context and elaborate a few aspects that we feel are particularly important for analysts and shareholders to understand. We'll leave plenty of time for questions, which you're welcome to direct to any of the Pinnacle representatives on the call. 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. Slide 2 is a disclaimer that is important, and we would ask you to read this at your leisure. Slide 3 is an agenda. Slide 5 is a very simple summary of our themes for the 2022 financial year. We continued our record of increasing our profit each year, notwithstanding that our financial year 2021 profit was double that of the previous year and that we had some annoying transitory factors lowering our profits this year. We benefited during financial year '22, and this will increasingly be the case going forward from having further diversified our business, including increasing the proportion of funds not exposed to equity markets. And Pinnacle, as well as many of our affiliates, undertook substantial further investments that will add to capacity and add to the growth in our funds under management and profits in future years. Slide 6 elaborates these themes. It starts off with the simple facts of the percentage increases during financial year '22 in net profit after tax, 14%; EPS, 8%; and dividends, 22% over the record results that we achieved in the 2021 financial year. Now we're obviously disappointed with the results that we're reporting for this financial year just past, financial year '22. Our profits are only modestly ahead of the previous year and well below what we were all expecting at the start of the financial year. And even late in the first half, we're still anticipating strong results. We work hard to be a high-growth company, and we don't like delivering anything less than high growth. Clearly, though, there is necessarily a degree of cyclicality to our earnings pattern, and the trajectory will not be a smooth upward straight line. What we have managed to date is very high growth during favorable market conditions, then holding on to that success with modest growth during market downturns, resulting in, nevertheless, still high average growth rates. We have the very recent example of only single-digit growth in financial year '20, a COVID-disruptive year, followed by a doubling of profits in financial year '21. Still, the average rate of growth in EPS is 32% per annum over the last 3 years even though this now includes 2 down periods in the space of just this 3-year period. There were also some factors, which we believe are transitory or one-off in nature, including particularly losses, mostly unrealized losses on seed FUM. This totaled about $5.7 million for Pinnacle's share that I will elaborate shortly, which held our financial year '22 profits to lower levels than would otherwise have been the case. So to point 2 on this slide, our aggregate base fees have continued to increase, notwithstanding the lower headline net inflows for this year. This is because, and you'll hear more of this later, especially from Andrew Chambers, the net institutional flow numbers mask a picture of quite large outflows during the '22 financial year, largely from old domestic institutional mandates, which are generally at modest fee rates and large inflows into higher fee asset classes and strategies from both local and international investors. The net effect of which has been to increase the aggregate base fees through the year. The large net inflows into retail in the first half also helped increase total revenue. The overall result is that the affiliate's run rate of aggregate revenues at 30th of June '22, was in the order of 20% higher than the aggregate revenues through the '22 financial year. We note that industry-wide pressures have had an impact on net inflows. Again, more on this later from Andrew and Ramsin. Retail inflows fell to very low levels in the second half of the year, $700 million net inflows compared with $2.9 billion in the first half. This was quite similar to what happened from March 2020. Equity markets dropped severely and aggregate industry flows dried up. This lasted several months during which time we recorded very low net inflows, but it was followed by us at Pinnacle by record inflows in financial year '21 and the first half of financial year '22 as soon as market conditions improved again. We note also that the sum with performance fee potential has continued to increase, both in absolute dollars and as a percentage of the total FUM. In point 3, we call out the fact that the diversity of our asset classes and markets have continued to increase with an increasing proportion of our FUM not being exposed to equity markets and also that the breadth of our performance fee FUM has further increased. We now have 22 strategies with the potential to deliver material performance fees, up from 18, a year earlier. And this year, it was helpful that 10 affiliates delivered performance fees. So we received material performance fees even though none of our large performance fee FUM strategies, except for Palisade as usual, fired this year. We look forward to those strategies firing in years ahead. In point 4, we are emphasizing how much Horizon 2 investment we have made throughout the group during the year, noting that this very substantial investment, which has been made within most of the affiliates as well as within Pinnacle itself will drive growth over the medium term, but this investment has very significantly moderated our financial year '22 profits. For the first time, we've sought to quantify this impact, estimating that our total NPAT in financial year '22 was reduced by in the order of $12 million as a result of these investments. We note that these investments, though reducing current year's profits, tend to generate extremely large returns over the medium term. We can go into some detail on that in the one-on-one sessions. We make the point in 5 that our balance sheet has been highly valuable. We use it as an enabler of growth, employing it as an accelerator for new affiliates and new strategies within existing affiliates. We've given a number of examples there. I won't read them out. Access to capital also enables us to facilitate succession within affiliates such as with the recycling of equities. We make the point that Pinnacle is the natural acquirer of additional equity of affiliates. As affiliates grow in value very substantially, long-serving affiliate executives can achieve some liquidity from their equity at the appropriate time, and a lesser percentage equity is needed in order to achieve the same incentivization impact as was achieved with larger percentages in earlier years. And we note that we have $120 million of dry powder available for the acquisition of equity in Horizon 3 initiatives, which could be strategically attractive and diversifying. We borrowed $120 million for this purpose and, meanwhile use it as an enabler of Horizon 2 initiatives. Turning to Slide 7, the financial highlights. We've reported net profit after tax of $76.4 million for the year, up 14% on a record financial year '21 NPAT of $67 million. Our diluted EPS was $0.395 per share, up 8% on the financial year '21 record. And we've declared a fully franked final dividend of $0.175 per share, the same as the interim dividend, taking total dividends for the year to $0.35 per share, up 22% on the financial year '21 total dividends. I mentioned earlier that one factor which impacted our NPAT this year quite significantly was unrealized losses on what we call principal investments on seed FUM. Both Pinnacle and a number of our affiliates had investments in affiliate funds for the purpose of seeding new funds. Although Pinnacle has had its equities exposure partly hedged, some affiliates did not hedge that exposure. Also, over the months ending up to 30th of June, Hyperion experienced quite substantial short-term negative alpha. Hyperion has invested AUD 15 million in its new U.S. fund for U.S. investors in December, and Pinnacle had invested AUD 5 million in the new Hyperion New Zealand PIE Fund in March. The net effect of all this during FY '22 on Pinnacle's P&L was an NPAT reduction of about $5.7 million, not including the interest cost of $2.2 million on the borrowings. The people who wish to take the view that this was a transitory factor and likely to reverse at some point, you can make your adjustments using these numbers. The aggregate revenue of the affiliate at 100% was $505 million, up 22% on financial year '21. $448 million of this revenue was base fee revenue, and that was up 36% on financial year '21. Now just before we get into FUM and fund flow numbers, I need to remind shareholders again of the distorting effect of a $3.9 billion very low fee inflow into Plato in April 2021, and then coincidentally, an even lower fee outflow of $3.9 billion from Omega in August 2021. These effectively offset each other, and we have urged shareholders to exclude them both when reviewing FUM and flow numbers for FY '21 and FY '22. Hence, we said, please think of our total net inflows in FY '21 as $12.8 billion, not the headline $16.7 billion. And for FY '22, we think of our total net inflows as $4.5 billion, not the headline $0.6 billion. Happily, we won't have to bore our shareholders with this adjustment beyond FY '22. So in terms of FUM, our aggregate affiliate FUM at the 30th of June 2022 was $83.7 billion. This was down $5.7 billion or 6.4% on $89.4 billion at 30th of June 2021, or down $1.8 billion or 2.1% adjusting for the Plato-only distortion. And retail FUM was $21.1 billion at 30th of June 2022, up $800 million or 4% on a year earlier. The ASX 300 index was down 10.4% over the year, and the MSCI World index down 17.1%. Total retail net inflows for the year were $3.6 billion in a tale of 2 very different halves compared with $4.5 billion in FY '21. Section 4 of the presentation provides a retail market update, and Ramsin will elaborate during questions and one-on-ones. Total institutional net inflows, including international, were $0.9 billion, adjusting for the Plato-only distortion compared with $8.4 billion in FY '21. Section 3 of the presentation provides an institutional and international market update, and Andrew Chambers will explain the subtle factors at work in these markets during question time and in one-on-ones. It's important to note in summary that in contrast to the underwhelming headline flow and FUM change numbers. Aggregate base fee revenue of the affiliates at 100% was up 36% in FY '22 and FY '21, and the run rate aggregate base fee revenue number at 30th of June 22 was in the order of 20% higher than the aggregate revenue through the FY '22 year. So we've added the '23 financial year in better shape than might be implied by the headline 30th of June 2022 FUM number. Cash and principal investments totaled $177. 2 million at 30th of June, and our debt facility is fully drawn at $120 million. It's also pleasing to note that 83% of affiliate strategies that have a track record of 5 years or more have outperformed their benchmarks over the classic 5-year measurement time frame. We've had what we know to be style-related and cyclical or transitory short-term underperformance in a couple of affiliates during the year, but the crucially important longer-term records remain intact and strong. Slide 8 shows the detail of the affiliate platform and highlights the 2022 finance -- and highlights of the financial '22 financial year. Slides 9 and 10 show our record of earnings growth over the 6 years that have -- that we have been listed Pinnacle. Slide 11 provides the specifics of the 5-year performance track records of the 26 affiliated funds or strategies. Slide 56 to 58 provides further performance detail. Slide 12 shows our 16-year FUM and net flow history. Slide 59 at the back shows FUM at 30th of June by affiliate, a lot of people like to look at that, together with the 6-monthly history back to 2020 -- sorry, 2011. Slide 13 shows some detail on our performance fee record and opportunities. As mentioned, we are growing the size and diversity of our performance fee potential and look forward to larger performance fee FUM strategies delivering in future years. And again, Slide 14 provides some detail on the increasing diversification of our business. Slide 15 updates on our more recent major industry awards. I'll skip over Sections 2, 3 and 4, leaving that detail to questions and one-on-ones. I think I've referred to the key points from those sections in any event. I'll move to Section 5, total growth agenda. That's Slide 37 to 44. On Slide 38, we remind shareholders that we think in terms of 3 horizons of growth. Horizon 1 is the main game. It is continuing to pursue net inflows into existing strategies of existing affiliates. We remain very confident of our ability to continue to do that and particularly to grow affiliate revenue. We conservatively estimate the capacity of the affiliates' existing strategies at $300 billion, so there is plenty of Horizon 1 runway left with the attendant strong gains in operating leverage that will be accompanied by such growth. Horizon 2 investments increased capacity over and above the existing $300 billion plus and remains the subject of an enormous amount of activity, both within Pinnacle itself and within the affiliates. We've stated that we estimate this is costing in the order of $12 million to Pinnacle's bottom line NPAT. This is a slow patient process where we invest now for medium-term gain, but we've been doing this for a long time and have a very strong record of very high returns on our past Horizon 2 investments, not even including the unrealized capital gains on the value of these businesses and strategies that we have built. And we are confident we will -- this will continue to be the case in the future. We've mentioned specific Horizon 2 initiatives in Slides 40, 41 and 42 and the overseas Horizon 2 initiatives in Slide 43. In relation to Horizon 3, which, of course, is where we use capital to buy into existing businesses, we were pleased to have completed our acquisition of 25% of private equity and venture capital manager, Five V, during the year. In terms of potential further opportunities, Slide 44 explains in summary that we've done a lot of work on a large range of opportunities. But in the final analysis, we haven't progressed so far with any, and we make no apologies for remaining disciplined and patient. I'm out of time, but I really want to mention Section 6 corporate responsibility. We're proud of the progress we've made on so many fronts, but I will leave it to shareholders to ask questions or read Slides 46 to 50 of the presentation and the corporate sustainability report that we've lodged with the ASX last night. So in conclusion, I'd like to remind shareholders of the basis on which we remain so confident of our company's ability to continue to grow and prosper, which is all about our distinctive business model and the competitive advantages that brings to us. We should turn to questions now, please.

[Operator Instructions] Your first question comes from Scott Murdoch with Morgans.

Ian and team, maybe just a couple, on the $12 million investment that you called out there, Ian, that's been incurred at the NPAT line. Just interested if you could give us just a little bit of detail of where that spend has been focused and just, I guess, the timing of some expected results from that investment within the affiliates.

Yes. So I might ask Dan to help me with specifics on these numbers. I should mention, Scott, that it was with a little bit of trepidation that we start bringing forward more and more detail and estimates and so on. We do that in good faith, in the interest of bringing our shareholders along with the journey, but there's always a degree of we make these investments. We're very careful to do it in our very high-quality people and so on. But then, well, we're never sure exactly how long it will take or the returns to come, but we do know that they're big when they do come. But Dan, would you like to take that?

Sure.

In [indiscernible] dollars.

Sure. So Scott, on Slide 41, we called out the major initiatives within affiliates, with 8 affiliates listed there with multiple initiatives happening in most of them. Now the aggregate spend at an affiliate level within the order of [ $16 million ]. Our share of that is about $5 million. And then the balance of that was spent within Pinnacle itself, furthering international distribution and our international expansion.

Okay. Maybe following on from that. Ian, Dan, on that offshore expansion piece, that was obviously had a fair bit of focus going back 6 months ago on sort of potential acquisition opportunities. And you mentioned that in the call, Ian, that there was previously a funnel shown. So just interested in an update on, I guess, what that capability, distribution capability offshore is there, the investment made, and further investment expected.

So in terms of distribution of share -- offshore, we'll ask Andrew Chambers to speak to that. We've added people, and we will sort of carefully add more people. But in terms of looking for Horizon 3 and some Horizon 2 offshore, yes, we've done a huge amount of work. We had a fellow who we paid for probably a year, an expensive experienced seller on the ground over there helping us. And yes, we've had a team, and all of us have spent some time on things. We have become quite advanced with some of them. In the end, we'd emerged on some quality aspects. We have very high standards in terms of quality. And also, so our preference was in private markets, asset classes, very diversifying asset classes if we could. And in the end, we found that valuations have remained very high overseas in private markets, and we didn't want to overpay. So that's it in terms of Horizon 2 and 3. But in terms of offshore distribution, Andrew, do you want to just take that?

Yes. So over the last 12 months, we've added 2 senior people on the ground, one in the Americas, one in the EMEA region, outside of London. And in addition to that, we've added people in operational roles, both in London as well as on the ground in Canada, in particular what we're building out a hub as well, and we're also looking at distribution opportunity there. So it comes in the form of not just distribution and sales executives and incrementally added to the team, but also in terms of operations to support fund infrastructure and compliance and risk as well.

Okay. Maybe while I've got Andrew there, just one last one for me, just maybe a little bit of color on the institutional pipeline. I think it's called out there to be pretty confident in the demand. Just interested where you're seeing the strongest demand in terms of affiliate and channel and also if you could just touch on maybe outflow exposure and changes in risks associated with MySuper.

Sure. Happy to take those questions. So in terms of the strongest demand, notwithstanding the fact that really significant bear market and core confidence in global emerging markets right now is an amazing opportunity, we think, to take market share in that space amongst managers with our community. We have noted that we more than doubled the AUM here over the last 12 months in that business. So within side 2.5 years, we're proud to achieve a run rate breakeven throughout institutional and international distribution team. The one of the [ breakthrough ] out of the [indiscernible] compliance of emerging market matches under sustainable finance disclosure regulations. So plenty of very strong demand out of places like Europe for managers like that. Very strong consultant ratings across the board and some infrastructure in place both [indiscernible] as well as PIP and brands in the United States. So we think there's a great opportunity in global and emerging markets, and the low-grade inbound inquiries from consultants and [indiscernible] as well there. In Antipodes Partners, we think there's a lot of demand in that global value category. In the last 10 years, as value has underperformed, obviously, a recent rebound in the last 6 or so months within a real spinning of a herd of high-quality global value managers. And so your capacity to contest mandates there is really enhanced. That was underwritten by the more than $1 billion of sales we made the financial year in activities. We think there'll be more to come in budgets here in Australia, where we're seeing good demand but also internationally as well, particularly out of the Americas, both Canada and the United States. Metrics Credit Partners Private Credit continues to have incredibly strong demand both domestically and internationally. It aims to provide enormous amount of [ [indiscernible] in portfolios when duration both fixed income portfolio has had the biggest drawdowns for certainly in about 30-odd years. They've shown themselves the incredibly stable asset classes and strongly yielding asset classes. So we've delivered a record net inflows for metrics on year surpassing last year's record number. That's across institutional and international. So we think there will continue to be strong demand there. And also in areas like real assets in particular, most of the major assets we're talking to locally and globally have a strongly favorable to new allocations to both real assets, infrastructure and real estate in particular, giving them there's been very good inflation hedges and offering still very good upside. So that's probably one of the other areas we can see ongoing demand across both Palisade as well as regulation capital. In terms of greater headwinds, so that's somewhat linked to Your Future Your Super, and you would see that called out and [indiscernible] this issue around portfolio derisking capacities in response to Your Future Your Super. I think trustee as well as fund executive have more mindful benchmarks than it's ever been as a result of this legislation. And it's also encouraging a lot of these underperforming funds, which are being called out by APRA in the press, to accelerate fund consolidation and [ merge ] without funds. That creates both opportunity and risk, if using -- we're seeing both in-sourcing opportunities as well as outsourcing. So where superannuation funds, those very large funds have been historically managing extremely larger asset classes in-house, we're actually setting opportunities to take those mandates externally in areas like private and public credit from those internal teams. So it's not just one-way traffic in terms of internalization there, but it does impact some of the large equity asset class, particularly Australian equities. So you would have seen some outflows in Solaris during the course of the year and also Plato as well. One of those was owing to internalization. The others was owing to derisking of portfolios and moving more into indexation-style portfolios. That's always been with it. Nothing new about that. But obviously, Your Future Your Super heightened people's sensitivity to basis risk they're willing to take relative to market benchmarks. Is that a helpful summary?

Yes. That's great detail.

Your next question comes from Tim Lawson with Macquarie.

Just 2 quick ones. In terms of the $12 million after tax you've called out in terms of the Horizon 2 investment, how does that amount compared to history? Is there any particular reason why you're calling it out now?

It is -- we haven't sort of disclosed those numbers previously. It is larger -- Dan, I'd say it's larger than any year so far. It certainly -- I know it's larger than last year. If you'd like to give a little bit of flavor on that, Dan. We did sort of put the foot down on all of this, recognizing that we were going into this year with things looking very good. But Dan, do you want to mention the number from last year roughly? .

Yes. So it's in the order of 50% higher than it was last year, Tim. And you'll note again from that Slide 41, the number of initiatives that are happening now, and a number of those were either started or substantially accelerated during the past 12 months. So as Ian said, it has been a step change in terms of that investment this year on last.

I had $7 million or $8 million in mind for last year.

Yes, do you anticipate that this sort of a new run rate? Is that you're disclosing it? Or do you think you're just trying to point out that there's been a step-up and you don't keep showing it?

Well, we're certainly learning that the way disclosure works, once you disclose something, people look for you to continue to do that. So I think we're probably likely to. I don't say that it's a step change that will be sort of, let's say, permanent. The way we think of it. I mean we love Horizon 2. We've done it for a long time. I think we've done it very well, and we've had tremendous gains from it. So we don't say our wealth, this is the amount we're going to spend on it. We're looking continually at what the opportunities are, and we resource up. It has to be somewhat ahead of revenue. We don't like to overdo it. So I won't sort of make a prediction there, Tim. What you can be assured of is that everything we spend on Horizon 2 is on good quality stuff that we have high confidence in. We don't just sort of gladly go on spending money on these things. We're continually asking ourselves are they good, what we're doing. But yes, we've always done Horizon 2. People have always underestimated our profitability and overestimated our PE as a result. I'm sure we'll keep doing Horizon 2, but I'm not going to say it will be $12 million a year. This was a sort of a higher level than in the past. We called it out because people are sort of asking us.

Yes. And then just a second question. In terms of the 5.7 impact from fee commitments. You've noted they're mostly unrealized. Would you comment on how much of that is now hedged and what the market might be. Also, just how that's different to what you normally do. And do you normally try and hedge these sort of exposures? .

Yes. So we sort of have in the past, partially hedged them. We can't hedge Alpha, obviously. It's just the market movement, and we've done that. I don't know what we'll do in the future, Tim. We'll take our views on it as we go. But we have, in the past, sort of substantially hedged the Pinnacle. Our affiliates make their own decisions, and there's been quite a lot of extra some really as our affiliates have progressively built their own capital by paying out not quite 100%. So that number invested by affiliates in C has gone up quite a lot. I think that will be ongoing. And I think, I mean, some hedge, I think 5 trail hedge, but many of them don't. And that will be their decision, but I would assume they will continue to leave it unhedged. I mean over time, it ought to be positive. It just adds to volatility in the short term. But I think the amount exposed will remain sort of at these levels, more or less.