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

Okay. Good morning, everybody. Let's just move to 9:00, and we can start. Welcome to everyone, ladies and gentlemen, fellow shareholders, colleagues and visitors. Welcome to the Pinnacle 2022 Annual General Meeting. Thank you for taking the time to join us here in person and online today. I wish to begin by acknowledging the Gadigal people of the Eora Nation, traditional custodians of the land on which this AGM is being held, and pay my respects to elders past and present. My name is Alan Watson, and I'm the Chairman of Pinnacle Investment Management Group Limited. Before we begin today with the agenda, I'd like to introduce my fellow Board members. Going to my right, first on my right, we have Ian Macoun, our Managing Director. Next to Ian is Deborah Beale, then Mr. Gerard Bradley and Ms. Lorraine Berends, our independent directors. And on my far right, we have Andrew Chambers and Adrian Whittingham, our executive directors. At this meeting, we're sad to say farewell to Adrian, who is not standing for reelection. On behalf of the Board, I would like to thank Adrian for his commitment and extraordinary contribution to the company for more than 15 years, both as an executive and as a director. We wish him the very best in his future endeavors. I also note that Gerard, Gerard Bradley AO, has provided notice of his intention to retire as a nonexecutive during 2023. Gerard has served as a director of the company since August 2016 and during his tenure has provided strong leadership as Chair of our Audit, Compliance and Risk Management Committee while also serving as a member of the Remuneration and Nominations Committee. I want to take the opportunity at this meeting, together with our shareholders, to express our gratitude for Gerard's dedication and contributions to the company during a period of very, very significant growth. Also here today is Calvin Kwok, our Company Secretary, Chief Legal and Commercial Officer; and Mr. Dan Longan at the back, who is our Chief Financial Officer. I would also like to welcome the company's auditor, Mr. Ben Woodbridge from PricewaterhouseCoopers, again at the back, who is here to answer any questions that shareholders may have in relation to the 2022 financial statements. Next slide. This slide contains important information and disclaimers in relation to the presentation, which I encourage shareholders to read. Okay. I now turn to the agenda for today's meeting as shown on the screen. The meeting will commence with the formal business. After that, Ian will provide an update from the Managing Director. I've been informed by the company secretary that we have a quorum, and I now declare the meeting open. I'm also advised, there are no apologies reported prior to the commencement of this meeting and that the Notice of Meeting was sent to all registered members within the notice period required. I now table the Notice of Meeting. And unless there are any objections, I will take the notice convening this meeting as read. I will now proceed with the formal business of the meeting in the order that it appears in the Notice of Meeting. There are 3 items of business to attend to: Being the formal tabling of 2022 financial statements, adoption of the remuneration report and reelection of 2 of the company's directors. Shareholders may ask questions prior to each resolution being put to the vote. [Operator Instructions] Shareholders joining online who would like to ask verbal questions, please follow the instructions below the broadcast window. You will be placed in a queue to ask your question. When it is your turn to ask, the moderator will advise you to introduce yourself and ask your question. I request that shareholders limit themselves to 2 questions and only ask questions at this time, in respect of matters relevant to the item of business being considered. Questions may be moderated or amalgamated if there are multiple questions on the same topic. As usual, Ian will be providing a fuller update after the formal business of the meeting has been dealt with, and there will be an opportunity for shareholders to ask general questions after that. Okay. The persons entitled to vote are shareholders, representatives and attorneys of shareholders and proxy holders, all of whom should be holding blue admission cards if you are attending in person. On the reverse of your blue admission card is your voting card and instructions. Please also ensure you print your name where indicated and sign the voting card. When you have completed your voting card, please lodge it in a ballot box to ensure the votes are counted. If you require any assistance, please raise your hand. If you're voting online, please click on the vote icon to access your voting card. Please select for, against or abstain on each resolution. Please note there is no enter or send button as votes are automatically recorded. You may also change your vote up until the time I declare voting closed. As noted in the Notice of Meetings, resolutions will be decided by a poll, which I now declare open. I will put the resolutions to the meeting shortly. All valid proxies received have been recorded, and these will be reported to the ASX after the meeting. For shareholders' information, we will now display on the screen prior to the consideration of each resolution the proxy voting for each resolution. The first item of formal business on the Notice of Meeting is to consider the financial statements of the company for the year-end 30th of June 2022, together with the directors' report and the auditor's report as set out in the 2022 annual report, which have been made available to shareholders. I formally table the financial statements of the company for the year-end June 2022 and the related directors' report, directors' declaration and auditor's report. If I may, I would take all of these reports as read. If anyone has any questions in relation to the financial statements, the content of PwC's audit report for the year-end June 2022, the accounting policies adopted by the company in relation to the preparation of financial statements or the independence of the auditor in relation to the conduct of the auditor, please either submit them now or raise your hand. There are no in the room and online. Okay. The next item of business is to consider the adoption of the remuneration report for the 2022 financial year. The remuneration report is contained within the 2022 annual report and forms part of the directors' report. The remuneration report incorporates information required by section 300A of the Corporations Act and sets out the remuneration policy for the company and reports the remuneration arrangements in place for key management personnel, including the directors. Section 250R(2) of the Corporations Act requires companies to put a resolution to their members that the remuneration report contained in the directors' report be adopted. If anyone has any questions in relation to this resolution, please submit them now or raise your hand. I now put the resolution shown on the screen to the meeting. The number of proxies received by the company as at 48 hours prior to the meeting are now shown on the screen. Can you all see that? Or do you want me to read it out? Okay. So there were 101 million votes passed, of which 99.35% were in favor. Okay. Please cast your vote on the voting card. [Voting]

Reelection of directors. The meeting now needs to consider the reelection of 2 directors in accordance with the constitution. The constitution requires that 1/3 of the company's directors eligible for rotation, being all directors other than the Managing Director and any director appointed as a casual vacancy, stand for reelection every 3 years. The directors to retire by rotation at each AGM are those who have been longest in office since their election or last reelection. Deborah Beale and Andrew Chambers are retiring from office and offer themselves for reelection. The explanatory statement attached to the Notice of Meetings provides information in relation to Deborah. In summary, Deborah has had a distinguished career in the finance industry, having worked for Merrill Lynch and Ernst & Young and has extensive experience in corporate governance, risk management, government and public relations. If anyone has any questions in relation to this resolution, please submit them now or raise your hand. Okay. The number of proxies received by the company as at 48 hours prior to the meeting of the resolution is on the screen, and that is a total of 127,394,916 votes, of which 99.67% are in favor. Please cast your vote on your voting card. Thank you. [Voting]

Turning now to Andrew. The explanatory statement attached to the Notice of Meeting provides information in relation to Andrew. In summary, Andrew is currently responsible for leading the company's institutional and international distribution divisions and has been a senior executive with the company since 2008. He has been an executive director of the company since 2016. If anyone has any questions in relation to this resolution, please submit them now or raise your hand. Do we have anything online? The number of proxies received by the company as at 48 hours prior are now on the screen, and that's slightly different. It's 127,395,116 have been received, and 99.51% are in favor of Andrew's reelection. Please cast your vote on the voting card. Please ensure you cast your vote on each of the resolutions. So now for shareholders attending in person, please lodge your completed voting cards in a ballot box. And if you need any help, please raise your hand or type a message in the Q&A box if you require more time to complete your voting cards. [Voting]

Anyone else? Everybody okay? One in the front row here. Okay. Is that everyone? Thank you. I now declare the poll close. The results of the poll will be announced to the ASX as soon as they're available, and that concludes the formal business of this meeting. I will now hand over to Ian, our Managing Director, for an update.

Thanks, Alan, and good morning, everyone. So what I would like to do today is: firstly, to review the key themes and outcomes for your company for the 2022 financial year; to briefly review the financial highlights for the 2022 financial year, then to provide an update on developments during the first quarter of the new 2023 financial year; to elaborate on the success we have had during the past several years in executing on our strategy of increasing the diversity and robustness of the business whilst growing rapidly; to explain how this has created an excellent platform from which we can continue to grow both in Australia and internationally in a variety of ways with 3 mutually reinforcing horizons of growth, whilst being robust, to the kinds of external diversity experienced in both 2020 and 2022 financial years; and to share some detail on the strong progress that we have made in the vitally important area of corporate sustainability and the great work of the Pinnacle Charitable Foundation. As shareholders are aware, the 2022 financial year was a difficult year for your company as market and funds management industry conditions deteriorated, commencing around the beginning of the second half of the financial year. The buoyant conditions in the world's share markets that prevailed through 2021 financial year and the first part of 2022 financial year gave way to weak conditions, which prevailed through the second half of FY '22 and the first quarter of FY '23. The result was that our profitability for the 2022 financial year increased only modestly over the record of FY '21 and was below what would have been predicted at the beginning of that 2022 financial year. Happily, markets have strengthened again during the period of about 6 weeks since the end of September, but that is a relatively short period of time, and there is a long way to go before the current year ends. So predicting the outcomes for this financial year is extremely difficult. The slide that's now showing on the screen has been extracted from our annual results presentation of the 2nd of August that sets out how we summarize the key themes and outcomes for your company for the 2022 financial year. We continued our unblemished record of increasing our profit every year, notwithstanding that the FY '21 profit was double that of the previous year. We benefited during FY '22, and this will increasingly be the case going forward, from having further diversified our business, including increasing the proportion of funds under management not exposed to equity markets. All Pinnacle and -- sorry, and Pinnacle and all of our affiliates all undertook substantial further investments that will add to capacity and add to the growth in our funds under management and profits in future years. I'll provide further detail on our profit, funds under management and flows shortly. The fact that we're able to hold to the FY '21 net profit after tax and earnings per share and, in fact, provide some modest increase over the record levels of FY '21 was a useful demonstration of the continuing benefits from the increasing diversity in our business of asset class and investment strategies of the affiliates, client type and domicile and performance fee exposure. Although we are planning to continue this diversification process for many more years, the outcomes we've delivered during the recent period of difficult conditions give us confidence in the robustness of the business and our ability to be resilient in the face of further external diversity that may lie ahead. Slide 18 elaborates these themes. It starts off with the simple facts of the percentage increases during FY '22: 14% increase in net profit after tax, 8% increase in earnings per share and 22% increase in dividends on the record results that we achieved in FY '21. As I mentioned earlier, the reality is that our FY '22 profits were only modestly ahead of the previous year and far below what we were all anticipating at the start of that financial year. We work hard to be a high-growth company, and we don't like to disappoint our shareholders by delivering anything less than high growth. Clearly, though, there's a significant degree of cyclicality to our earnings pattern, and the trajectory will not be a smooth upward straight line. What we've managed to date is very high growth during favorable market conditions, then holding on to that success with just modest growth during market downturns, resulting in still high average growth rates. We have the very recent example of only single-digit growth in FY '20. Recall this was the initial seriously COVID-disrupted year, and that was followed by a doubling of our profits in FY '21. The average growth in earnings per share is now 32% per annum over the last 3 years, even though this includes 2 down periods in the space of these 3 years. We've always said that we cannot predict future market conditions and that we would not be immune from any market downturns, but we've worked hard to make the company increasingly resilient. Market downturns are, of course, part and parcel of our industry. I'm old enough to have experienced many during my career, as have my colleagues. We can't predict precisely when we will come out of them, but we do know that recovery does inevitably come. And our job right now is to achieve the best possible outcomes in the current circumstances but, at the same time, importantly, to keep your company strong and our high-quality capabilities intact and match fit so we can continue rapid growth and take full advantage when conditions again become more favorable. In point 2 of this slide, our aggregate base fees have continued to increase, notwithstanding the much lower headline net inflows this year, following the record net inflows last year. This is because the net institutional flow numbers mask a picture of quite large outflows during the 2022 financial year, largely from old domestic institutional mandates, which are at generally 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 average base fee rates and the aggregate base fees through the year. The large net inflows into retail in the first half also helped increase total revenue. The result is that Affiliates run rate of aggregate revenues at 30th of June '22 was significantly higher than the aggregate revenues through the 2022 financial year. We note that industry-wide pressures have had an impact on net inflows. Retail inflows fell to low levels in the second half of the year, $700 million of net inflows compared with $2.9 billion in the first half. This was quite similar to what happened from March 2020. Equity markets dropped substantially, and aggregate industry flows dried up. But that was followed by record inflows in FY '21 and the first half of FY '22 as soon as market conditions improved again. We note also that the FUM 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 has 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, of course, Palisade, fired this year. We look forward to those strategies firing in the years ahead. In point 4, we're emphasizing how much Horizon 2 investment we've made throughout the group during the year, noting that this very substantial investment, which was made within just about all of the Affiliates as well as within Pinnacle itself, will drive growth over the medium term. But this investment has very significantly moderated our FY '22 profits. For the first time, we've sought to quantify this impact, estimating that our net profit after tax in FY '22 was reduced by in the order of $12 million as a result of these investments. We believe this approach within the Pinnacle group of deliberately incurring large P&L expense on initiatives such as major new investment strategies, which will not produce revenue for several years, is of such magnitude as to cause many analysts and shareholders to underestimate Pinnacle's true profitability. Though they reduce current year's profits, these investments tend to generate extremely large returns over the medium term. 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 couple of examples there. Access to capital also enables us to facilitate succession within Affiliates, such as with the recycling of equity. We make the point also that Pinnacle is a 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 in earlier years. And we note that we had $120 million of dry powder available for the acquisition of equity in Horizon 3 initiatives. We borrowed $120 million for this purpose. Turning to Slide 19, the FY '22 financial highlights. We reported net profit after tax of $76.4 million for the year, up 14% on the record FY '21 NPAT of $67 million. Our diluted earnings per share was $0.395 per share, up 8% on the FY '21 record. And we 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 FY '21 dividends. The aggregate revenue of the Affiliates at 100% was $505 million, up 22% on FY '21. $448 million of this revenue was base fee revenue, and that was up 36% on FY '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 '21 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 of $600 million, although I have said I'm pleased this is the last time I'm going to have to focus on that particular detail. So in terms of funds under management, our aggregate Affiliate FUM at 30th of June '22 was $83.7 billion. This was down $5.7 billion or 6.4% on $89.4 billion at 30th of June '21 or down $1.8 billion, 2%, adjusting for the Plato/Omega distortion. Aggregate retail funds under management was $21.1 billion at 30th of June '22, 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 net inflows for the year were $3.6 billion in a tale of 2 very different half year periods compared with $4.4 billion in FY '21. Slides 46 to 52 of the presentation provide a retail market update. Total net institutional inflows, including international, were $900 million, adjusting for the Plato/Omega distortion, compared with $8.4 billion in FY '21. Slides 44 and 45 of the presentation provide an institutional and international market update. 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 on FY '21, and the run rate aggregate base fee revenue number at 30th of June '22 was substantially higher than the aggregate revenue through the FY '22 year. Cash and principal investments totaled $178.2 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 outperformed their benchmarks over the classic 5-year measurement time frame. We have 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 record remains intact and strong. Slide 20 shows our record of earnings growth over the 6 years that we have been listed Pinnacle. Slide 21 provides some additional commentary on this subject. Slide 22 shows our 16-year FUM and net flow history. FUM has grown at a compound annual growth rate of 23.7% per annum. Our institutional pipeline remains strong. And our client base is increasingly diversified, including overseas as we grow and evolve, recognizing changing market circumstances. Slide 23 shows some detail on our performance fee record and opportunity. 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. Turning now to the September quarter, the first quarter of this new financial year. The aggregate of the Affiliates funds under management stood at $80.5 billion at 30th of September 2022. This was down $3.2 billion or 4% from $83.7 billion at 30th of June '22. The $3.2 billion reduction comprised $1.2 billion of net outflows and $2 billion resulting from a drop in listed markets. Total retail funds under management at 30th of September 2022 stood at $20.4 billion, which was down $700 million or 3.3% from $21.1 billion at 30th of June 2022 despite the fact that net inflows of $200 million were achieved. Overall, equities markets had a material effect, negative impact on fund levels from the beginning to the end of that 3-month period. The S&P ASX 300 index was down 1.3% over the 3 months ending 30th September, and the MSCI World Index was down 7.3%. Whilst headline flows were negative for the quarter, there were modest positive net inflows from both retail and offshore channels with negligible impact on overall management fee revenues in aggregate. Slide 26 provides the specifics of the 5-year performance track records of the 26 Affiliate funds or strategies. Slides 27 and 28 provide further performance detail. Slide 29 updates on our more recent major industry awards. Slide 31. In this slide, 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 continue 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 is the subject of an enormous amount of activity both within Pinnacle itself and within all of the Affiliates. We have stated that we estimate this is costing in the order of $12 million per annum to Pinnacle's bottom line NPAT. This is a slow, patient process where we invest now for medium-term gain. But we have been doing this for a long time, and we have a strong record of very high returns on our past Horizon 2 investments, not even including unrealized capital gains on the value of the businesses and strategies that we have built. We are confident that we can -- that, that will continue to be the case in the future. We've mentioned specific Horizon 2 initiatives in Slides 33, 34 and 35 and the overseas Horizon 2 initiatives in Slide 36. In relation to Horizon 3, which, of course, is where we use capital to buy into existing business, 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 new opportunities, Slide 37 explains in summary that we have done a lot of work on a large range of opportunities. But in the final analysis, we haven't so far progressed with any. We make no apologies for remaining disciplined and patient. Slide 38 commences the section of the presentation on corporate responsibility. We are proud of the progress we have made on so many fronts in this important area. Now because of time limitations, I'll leave it to shareholders to ask questions or read Slides 38 to 43 of the presentation and the corporate sustainability report on our website. Slide 39 summarizes our corporate responsibility initiatives during the year covering the ESG Working Group, our Women in Finance scholarships, our climate strategy, our ESG charter, our community partnerships and our human rights initiatives. Slide 42 explains the total donations by the Pinnacle Charitable Foundation in FY '22, exceeded $900,000 with a further $285,000 donated by Affiliates. Slide 45 provides an update on the institutional and international markets and flows. Slides 47 to 52 provide an update on the retail market and retail flows. Slide 53. In conclusion, I would like to remind shareholders of the basis on which we remain so confident of your company's ability to grow and prosper, which is the strong funds management platform that we have built and our highly regarded, distinctive business model. Shareholders can be assured that nothing has fundamentally changed in your company's ambitions, strategies and growth plans. We have simply had to show some patience in the face of short-term turbulence, and it is not the first time we have had to do that during our 16-year history. That concludes the commentary I wanted to provide on the slides and on the performance of the business during the last financial year and the September quarter, Q1 of the current financial year. Thank you, everyone, for listening. But before I close, there is one very important matter on which I would like to comment. Alan mentioned earlier that this is to be Adrian Whittingham's last AGM. Adrian has decided to retire from the Board today and as an executive of the company from 31st of December. When we announced this to the stock exchange a month or so ago, I said Adrian's contribution to building Pinnacle into the strong, diversified business it is today is a credit to his tireless commitment to the company, its Affiliates, fund investors and his fellow shareholders and partners. But at a personal level, I am enormously grateful for his friendship, partnership and support over more than 15 years. And then I will miss him greatly as a colleague. All of that is a massive understatement. This company has benefited greatly on the tremendous job that Adrian has done over the past 15 years. It is not just his tremendous talent as an executive that has been so valuable, but also his exceptional personality, his warm, inclusive personal style that have contributed both to his success as a key executive, but also his popularity both within the company and with the enormous number of people important to the company but external to it with whom Adrian has interacted on a daily basis for so many years. I wish I could have talked him into staying longer. But after 15 years, it would be extremely ungracious of me to expect him to forego other pursuits that he will no doubt undertake over the years ahead. Adrian, we wish you all the best with those, and thank you most sincerely for all you have done for us over the past 15 years.

Tough one to follow, that's for sure. Thank you, Ian, for those very generous words and one that I appreciate greatly. When Pinnacle became listed in 2016, the firm announced a net profit of $4.5 million. If we forward this to 6 years later, and as Ian reported, that net profit now sits at $76.4 million. That's been an incredible result for shareholders. And as part of a broad team, to have achieved this for shareholders is something that I'll always cherish and be proud of. We have to remember that this was delivered under the industry headlines of consolidation, the disruption in retail and the constant question marks of the value of active management. I'm incredibly proud to have served the company and its shareholders, of which -- those of you that are here today and many thanks for this opportunity. In particular, the shareholders and the Board, led by Alan Watson with nonexec directors Deb, Gerard and Lorraine, I appreciate their support during my tenure and the last 6 years of being on the Board. This business does not exist without clients, first and foremost. I've enjoyed working for them and alongside them on this journey. We're strong believers in the saying, which is other people's money. That is, never forget that you are managing money on behalf of a broad range of clients, and we are lucky to be trusted with this opportunity. That task was considerably easier with the quality of Affiliate firms we have partnered with and the vision for them to be the best in the industry. The leaders and colleagues in these firms have been fantastic to work with, and it's been very satisfying to see them deliver outstanding results for our clients. There's also been so many clients in the firm that have made my contribution so enjoyable. And let's face it, they made me look good. In particular, Alex Ihlenfeldt, Mark Cormack, Andrew Findlay up the back, Dan Longan, Calvin Kwok, Tim Samway, Ramsin Jajoo and a host of others. Last but not least, Andrew Chambers and Ian Macoun, we've seen our children grow up and mature alongside the growth of this company. It is well said that you spend more time at work than with your family. I can vouch for that, but I don't regret one minute. We challenged each other along the way, at times testing our resolve. However, that is what partners do. They listen, support and are honest with each other. Andrew, thank you for your unwavering support and many early morning phone calls. And always remember, we both started this journey with hair. Ian, you've been the most wonderful leader and mentor on my journey of personal growth and development, which would not have been achieved without your support and guidance. The vision which you communicated when I joined the firm was the light on the hill, and remember that one. This continues to shine bright under your leadership, and thank you for your friendship. Whilst 31 December may be my final day of Pinnacle, the shareholders, Affiliates, colleagues and clients will always be part of me, and I thank you for the opportunity.

Thank you, Adrian. So now I'll just turn to the general Q&A session of the meeting. I will be slightly rude on trying to keep it under control because Ian and Chamber and the team have to head off to the UBS investor 2-day conference in about 15 to 20 minutes time. So if we get to that point in order not to keep our investors waiting, I will draw things to a conclusion. But it's open to general questions if any have -- people have one now. Please.

Hi, my name is [ Anita Sherman ]. I'm a member of -- a shareholder and a member of Teaminvest. My first question about the direct -- sorry, about the retail market. So the number of advisers are declining. I assume that, that means that the retail fund coming through advisers is declining. In your investor presentation that was sent out on ASX -- announcement recently, on Page 43, you mentioned that you made some progress towards appointing a platform provider for -- basically will better to serve the retail direct investors. I'm interested just to understand better how you go about access to these retail funds from direct investors.

So I might call on either Adrian or Ramsin to help me with this. So -- but I'll just -- a couple of comments first. So our main retail market is what we call the intermediated retail market. So that is financial advisers. And though it's certainly true the number of advisers has diminished, as all of the forces that we're aware of out there have come on to the industry, that is still our mainstream market, and it's still enormous. And we continue to penetrate more and more advice groups and to take our high-quality investment capabilities to reach more and more people who are advised. I think your question relates to retail investors who are nonadvised, so the direct investor market. It's kind of early stages for us in that regard. We have the view that, and I hope this isn't -- doesn't sound arrogant, but everyone has a right to get access to these really high-quality investment strategies and capabilities. So we would love to reach that market, but it's difficult. We don't want to sponsor the cricket. We don't want to spend a huge amount of money on retail advertising, but technology is advancing and making this more and more possible. Now what -- the quote that you referred to, which is well picked up, we're signaling there that we are doing a lot of work on identifying a platform, so this is the technology party, that will enable us to offer our capabilities to individual investors in a very convenient way. So imagine they have an app on their phone, it will be fairly easy for them to find us and to invest. So we haven't made a decision. So we haven't announced anything yet. But we are -- I think we're fairly close to doing that, and we look forward to offering our services to that market because I do think personally, there are some good investors individually. But we see in the aggregate numbers, individual investors have a shopping time. They tend to come into the market after prices have moved up. They get out after prices have moved down, and just it's difficult for them. So I look forward to offering us a more -- us offering them a more professional service. But I don't know. Did you want to say anything, Ramsin?

Yes. Sure, that's an excellent question. Thanks for that question. The number of advisers has shrunk from about 25,000 down to about 17,500 based on the asset register. At the same time, about 11,000 advisers today are consuming products from Pinnacle and our Affiliates. The number of managers that support you [ have gone down ] to 3 managers. There used 1 or 2 previously. So there's a lot of runway to go from 11,000 [ sitting-down ] advisers, and we've got the quality of investments that we have today.

Yes. I don't think it's correct to say that the size of that market is shrinking just because the number of advisers are shrinking. There's, again, technology and so on. There's a lot of advice still coming to those. People -- absolutely, the flows have been down in the last year, but that's related to markets. That's key. That's both advisers and investors being afraid to commit to equity markets, and that's a shame. It has pretty good value at the moment, although I'm not allowed to make forecasts. So I'll be in trouble with my Chairman after -- for that.

Yes. Again, any -- next question? Steve?

Firstly, I just wanted to add very briefly to the comments that Ian made about Adrian but also about Gerard, who [indiscernible] in the case of [indiscernible] he owned. It's very rare in life to build a great strategy [indiscernible] what this is. And it will only happen with stability, [ good job ], patience and mostly [indiscernible]. So thank you very much. [ I might say things that come out ]. So my name is [ Steve Wilson ], and I'm a shareholder.

Market shareholder.

Now [indiscernible] small part of the question, so I'll try and zero in. One is you broadly mentioned something about return on equity in your 3 horizons. The return on incubation versus the return on acquisition, are you -- I've done some maths and I think the answer is -- I think I know the answer. Could you perhaps explain to us a little bit about that? And my math suggests the return on incubation, so dollars spend on incubation, are normal, and return on acquisition is very good. Could you embellish on that?

Yes. No. Well, that's a perfect summary. Yes, I was at some pains to explain what we call Horizon 2, which is we spend money that we expense right off that P&L on resources, investing in future growth, which retards our profitability for the time being, and the benefits of that won't come through for a few years. This is what Steve has referred to as incubation, where we build things. Absolutely, all of the incubating that we've done over 15 years, really, we started it at the beginning, has produced extremely high returns. Now Dan has some numbers. They're enormous. It's like at least 10x what we've invested, and that is only on the realized returns and excludes any capital gains. Of course, the main gain is that we are building capital value of these businesses. And if the earnings that we achieved on them is so great, then you can imagine what's happened at the capital value. That's the reason that our market cap is $1.7 billion or whatever it is, even though our balance sheet value is much lower because we've been growing the value of these businesses. So yes, Horizon 2 returns have been enormous, about 10x a lot more than that, which we are quantifying when we're conforming our views of what today's Affiliates is worth. Horizon 3, relatively recent because we only had capital really once we became listed to buy into things. We got that with Metrics and Coolabah and now Five V. It's too early for Five V to produce -- to say what returns, but we're very confident they'll be very good returns. Also, a delay a little bit because of you have to wait for performance fees to come through. Metrics and Coolabah have been very good, and they're definitely worth not a lot more than we've paid to buy into them. So Horizon 3 returns have been good. But I think you summarized it. I think you said something like Horizon 2, sort of huge, and Horizon 3, good, and that's about right.

So staying -- following on from that, can you comment on the prospects, and you kind of have but, of the incubation globally? And have you talked a lot of about the Pinnacle model and how it's distinct? Or are there similar lines, particularly in America and in the U.K. and Europe?

Yes. So there are a few similar ones, as you'd expect in such enormous markets. But knowing there was many as one might imagine, what we found is that not a lot of people have been able to manage these owning minority stakes and still getting very good outcomes, private equity groups who own a majority, and they don't nurture the affiliates in the way that we do. So there isn't as much competition. So we think we will be able to incubate new Affiliates overseas. We've done 2 so far: Aikya in London is going very well, provided Andrew is selling their funds at a great rate or not; and then even more recently, Langdon in Toronto in Canada, which is a global small caps and Canadian small caps manager. Aikya is a global emerging markets manager. So only 2 so far. We're very, very selective. It's a little bit harder overseas to get to know these people, but it's definitely doable. So I look forward to a lot more of that over time because the returns are tremendous. But they make us look less profitable than other fund managers with similar amounts of fund, for example. Happily, most of the analysts who follow us, they understand this. As I said, we've started to actually quantify it because people sort of know it's there but don't know how much of an impact it's making. So it's definitely a major commitment, but it will be worth it. But that's one of the reasons why we have such a high PE.

There is no volatile start-ups internationally by way of [indiscernible] where essentially, succession [indiscernible]. We're going to be a public company buying a private business on a lot of multiple without [indiscernible] into the business and buying into existing businesses, whereas a start-up move is consistently backed by very wealthy individuals. And they provide large-scale centralized distribution to help add a lot of value to these businesses. They don't pass from us with institutional asset consultants or asset owners when they go through due diligence processes. So there is no model that matches down quite to this incubation model. Not to say they won't come in the future. They're incredibly hard to do. That's why we don't do them.

And I have a follow-up question on overseas but not incubation distribution. So I guess there's -- one of our great upsides is that the rest of the world [ wants to know how many ] our Affiliates are. And now you've been doing that for some time. So can you give us some sense of where you got to in terms of foreigners investing their money into our affiliates? And then secondly, what it looks like? Because I'm assuming if they have for several years, there must be something that will take off without [indiscernible].

This is Andrew's area.

Yes. So this is all been done organically. We have to acquire FUM internationally. So there's now $10 billion of our total AUM comes from outside the scope of 47 countries around the world. Five of the biggest markets today, the United States, the United Kingdom, UAE, New Zealand and South Africa, which are the marquee markets, so a lot of the large Anglo-Saxon [indiscernible] markets. We have people based in the EMEA region, London, Calgary, the Middle East and Africa. And New York and Philadelphia cover the America. And we covered both Australia and Asia, including Japan from a geographical [indiscernible] the Japanese [indiscernible] still into Japan because that's a $20 billion market, which is very long and starting to get short investment. But if you think about the size of the addressable market in Australia today, it's pretty much AUD 1 trillion, even USD 100 trillion which is managed by the third-party [indiscernible] capacity in Australia, including us. So if you think addressable markets, from a real opportunity [indiscernible] globalized, having been [indiscernible] outside of Australia and inside of Australia, there is massive verification on client type, [indiscernible] talked about currency. So you have very big different pieces connecting you to [indiscernible] addressable market. The operating margins you can get internationally compared with Australia is [indiscernible] and much more attractive. [indiscernible] manage your results. When you have dollar-to-dollar, we were at about $200 million in global equity in the U.S. versus Australia. There's a tremendous pickup in the margin you earn. So that's very attractive to wealthy institutional [indiscernible]. And then there's a wealth management [indiscernible] material money from private banks, private wealth groups internationally. And we see ourselves expanding distribution in those key channels, particularly in major Anglo-Saxon markets. So think about Canada, New Zealand, U.S., where we have similar market structures in terms of financial advice, [indiscernible] asset managers. So think about building a future of institutional and wholesale distribution. And incubation internationally as well has continued on the acquisition part of wealth. That's why we're very excited about the growth, potential growth of the business. They're changing the mix in the underlying revenues. I should say there's a pretty outlook in our margins here at the moment if we participate.

So there's an important runway [ that's yet to come ]. I'd like to have another one, but I don't know [indiscernible].

No. Go. Yes.

Okay. So following on from what you just said, contained annual revenue return that you started to talk about, I think I read somewhere that you said it was up 20% vis-à-vis June 30. And then accordingly, you said in those on [indiscernible], it has had negligible [indiscernible].

Yes.

So my simple head says you still have 20% contained annual revenue on top of last year. Am I missing something?

That logic is completely correct. The only thing I'd say, there are a lot of moving parts [indiscernible]. And so who knows where it all ends up. But that -- what you've said there is completely correct. The term contained annual revenue, the reason we are quoting that now, is that like people just look at headline funds under management numbers, and there's huge variation in the fee rates types of FUM. So what is important is that the funds multiplied by the fee rate on them. So we call that the contained annual revenue in our flows. So we will be reporting that more in the future because the headline FUM numbers can be misleading.

So should it also be amount of FUM margin underpinning [ the next stage ]?

Yes. Absolutely. That's right. And the analysts do that. We just have to be careful in our sort of broad communications not to get so complicated that people get lost by it, but yes.

Trade-off in complexity and maybe relevance to that.

Absolutely. But we do -- twice a year, we set out our FUM by Affiliate. And so people can get at that sort of -- broadly at that sort of information. But there's a limit to how much -- so our Affiliates don't want things like their fee rates to be too granular in terms of competitive information. It's a balance.

Yes. Imagine if the same fund can be [indiscernible]. You have lots of $1 billion [ issued ] one time at the same time, funded [indiscernible] trading with $1 billion at [indiscernible]. So there's nothing [indiscernible] headline [indiscernible] improvement in [indiscernible] per share.

Okay. How is it that you have the other fund managers in Australia, most obviously not [ naming ] Magellan, but these takeovers and things started to flow through into our [indiscernible]. So [ embellish ] needs more buying.

So we've always said, we don't need other fund managers to be doing poorly in order for us to do well. We just get on, do an excellent job, and there are also people who invest with us. That's the broad strategy. I've always said to people, don't overly focus on the competitor. Be aware of what they're doing, but don't be excessively focused on them. So what's happening? And Magellan, Platinum, others, it's complicated, [ Steve ], because you do have changes in the environment. So this has all been happening recently at a time when equities have not been in favor. So I think quite a lot of money that's gone out of Magellan has gone into either cash or passive or private markets things. It's like -- it's money moving all over the place. But it can only help us if Magellan and Platinum are in our play and others. So that's been the case. But the aggregate markets has been in play. So it's a complicated mix.

In terms of the money plays there, isn't ETFs and especially the way they're being promoted relentlessly, isn't that affecting managers as well?

So yes. So you're thinking of passive ETFs. I think, in particular, that their proposition is cheap.