Meet one of Australia’s best performing small caps

The last year has seen many companies post massive new records – both on the upside and the downside. In fact, more than one in 10 companies in the S&P/ASX 200 has doubled (or more) in share price over the past 12 months. Among all this, the best performer outside the mining industry has been Pinnacle Investment Management Group (ASX: PNI), up 157% at the time of writing.

In a recent episode of The Rules of Investing, my guest Richard Ivers from Prime Value Management spoke very highly of Pinnacle. Considering they’re in the same industry, this really piqued my interest. 

"They (Pinnacle) are improving the quality of the business over time. The type of FUM (Funds Under Management) that they’re generating is stickier, high-quality FUM. And they’re bringing on more and more affiliates which is diversifying the type of assets in the funds management group.” – Richard Ivers, Prime Value Management.

Given their outstanding performance, and the respect they demand from their peers, I jumped at the opportunity to interview Ian Macoun, founder and Managing Director of the firm.

As an interview with the head of a listed company, this piece is a little different to what you might’ve come to expect on Livewire, but I trust you’ll find it as interesting and insightful as I did.

What makes Pinnacle different?

Active funds management is a very competitive industry. As any proponent of passive management would be happy to tell you, most fund managers underperform the index they’re measured against. However, when it comes to boutiques, the value equation is very different. Research from Affiliated Managers Group in the US has shown that over twenty years, the average boutique strategy has beaten the index in 9 out of 11 equities categories. And not by a small margin either – an average of 1.35% p.a. after fees.

But boutique funds managers face a major existential threat: distribution. Most fund managers are very good at just that – managing funds. Many of them lack the marketing and distribution resources required to build a successful business, and managing a fund (or several) is a full-time job.

That’s where Pinnacle comes in. 

"There's no room for anything other than excellence"

They partner with a range of affiliates (16 currently) and handle the marketing and distribution, leaving the manager free to focus on what they do best. This arrangement has seen funds under management explode to nearly $90 billion at last count. It seems to be working for investors too, with 86% of affiliates’ strategies and products (among those with a track record of 5+ years) having outperformed their benchmark over the 5 years to 31 December 2020.

Macoun says the key for him has always been a focus on investment excellence.

“I got my early experience in investing in institutions as pretty much everyone does, even most Pinnacle people. I'd been at Queensland Treasury and QIC and I'd run Westpac's funds management business. And it was out of that experience that I said, "Look, if we're going to do active management, we'd better be excellent at it, right? 

There's no room for anything other than excellence. You need to set things up to give you the maximum prospects of success. And that means what we call the best of both worlds environment. The boutique environment where the most talented investment professionals can maximise performance and be very focused on performance and their clients.

“The formula for investment excellence involves experienced, dedicated, passionate money-makers, free from distractions, spending most of their time on investing. I really do believe the multi-affiliate model is the only model that fully enables this. Although it sounds obvious and straightforward it is incredible how investment professionals inevitably get sucked into all manner of distractions in institutions and larger organisations and lose focus.

“A fund manager within our multi-affiliate family is spending the vast majority of his or her time doing what our clients pay them to do – investing, yet courtesy of Pinnacle they are able to maintain institutional-grade non-investment support (distribution, and all ‘investment infrastructure’ functions) without themselves having to expend significant energy and focus – and this allows enduring and sustainable business growth without distracting our investment professionals from their investment focus. 

Knowing that they have access to high-quality non-investment functions and enduring and sustainable business growth, in addition to strong investment performance, are also important for investors.”

In addition to this support, the affiliates maintain majority ownership of their business, allowing them to “own what it delivers” and deliver great outcomes for investors.

“This is a very different cultural and operational dynamic to a large institution where, to be frank, I believe many in the funds management industry can have long careers being paid a lot of money, while achieving very little in terms of genuine and real client outcomes.”

The beginnings

After a career spanning 22 years across Queensland Treasury, Queensland Investment Corporation (QIC), and Westpac, Ian departed ways with his employers in 1997 to set up Perennial Investment Partners – the first multi-affiliate funds management firm in Australia.

 But at the height of the pre-GFC bull market, IOOF, which already owned part of the equity in Perennial, decided to buy the rest. So with the backing of Wilsons Advisory (not to be confused with the unrelated Wilson Asset Management), he decided to start again. But this time, he wanted “to do it bigger and better.”

So with just a handful of distribution experts, and one boutique (Hyperion Asset Management – which had only recently launched), Pinnacle was born. That was 15 years ago. Today, many of the boutiques they’ve worked with have now outgrown the moniker, with Resolution Capital managing $16 billion, while Hyperion, Plato, Solaris, and Antipodes all manage between $9 billion and $12 billion. Bigger and better indeed!

The explosive growth of the past year

Across the 16 affiliates, there’s been over $4 billion of net inflows from retail investors alone in the last 12 months. An amount that Macoun calls “market leading”. This type of retail money is often ‘stickier’ than institutional mandates due to the diversified nature of the customer base. And he expects these trends to continue:

“They're performing well, they have good brands, and good reputations in the market. The market loves our model and they love our affiliates. Whether you're talking Hyperion, Plato, Resolution Capital, Solaris, Antipodes, Spheria, Firetrail, or Coolabah and Metrics more recently. The retail market loves them, so there's no reason to believe we won't continue to get strong inflows.”

It’s not just FUM that’s been growing over the last year or so, it’s already translating into increased revenues. Across the affiliates, a total of $85.9 million of performance fees were crystallised in FY21, of which Pinnacle keeps $19.5 million - over 20%. In FY20, these figures were $25.8 million and $6.7 million respectively.

This outstanding performance has seen its share price rally by over 150% in the last 12 months, making it the number one performing non-mining stock in the ASX 200 over that period.

“I think analysts are coming to really understand that performance fees in a top performing group such as Pinnacle, they're a major part of our income.”

Making predictions is hard (especially about a Delta future)

Macoun has been bullish about markets in the past year or so, and with good reason. After the market tanked 30% last year and governments and central banks promised endless stimulus, it was easy to see a path to higher asset prices.

“After dramatic and devastating periods of disaster, you tend to get a renewal or recovery boom that can be very strong and can persist for quite a long time. It's because people are feeling confident, relieved and optimistic after a depressing period. It unleashes a wave of innovation, energy, and entrepreneurial vigour. I still think we'll get that.”

However, over the shorter term, he feels there could be some instances of volatility. Why?

“Well, first of all, markets are up further, and the more they go up the harder it is for them to keep going up. 

"But also, I don't think anyone really anticipated the tremendous strength of this Delta variant. It's been much worse than people expected. So that's going to give us pause. In Australia, for example, we have banned construction which is further than they’ve gone previously. 

"Also, the fiscal response from the federal government has not been as vigorous this time. There's no JobKeeper this time around, for example. The Delta variant is something that we need to worry about.”

That doesn’t mean the investment thesis has been derailed, as he thinks a combination of renewed animal spirits, vaccinations, and fiscal and monetary stimulus will reignite the bull market.

So what does the future look like?

Despite the wide range of asset classes and niches covered, Macoun still sees plenty of room for more affiliates. He says that ESG, ethical, sustainable, and impact investing are areas that they’re interested in at the moment.

“A range of our affiliates are already doing a lot, but I think we could do more there.”

He also sees opportunities in private markets, such as private equity and direct real estate.

As far as vehicles for investment go, he is agnostic. He sees unlisted, open-ended unit trusts remaining as the backbone of the industry, while listed investment companies and active ETFs as being useful extras – to be used in addition to unit trusts, not instead of. 

One innovation that you may see in future is the combination of an ETF and a unit trust in the same vehicle, so watch this space.

As for Pinnacle, while he expects many years of continued growth for the Australian business, he sees demand for the Pinnacle model offshore.

“We think we will expand overseas. We have a simple philosophy; we think we can bring people very high-quality active management and what many people are looking for. The volume of funds keeps growing, the need for quality active management keeps growing, so we want to keep servicing that. So, we think Australia will grow. 

"We've grown from very little to $90 billion in 15 years. We think Australia will keep growing, especially in the Australian retail market with self-managed super funds.

"But it seems our model is also in demand overseas, so we think we should be taking the model over there. We'll do it carefully, we'll make sure we don't ever do anything that inhibits our ability to keep delivering for our existing clients and our existing affiliates, but we do think we can expand it further. 

"I think Pinnacle will end up far bigger, it'll be beyond my time horizon, I'll be retired by then, but if we're 90 billion now we'll be way beyond that in years to come well.”

Hear from Pinnacle’s affiliated fund managers at the Pinnacle Investment Summit 2021

At the Pinnacle Investment Summit 2021, discover your edge for the road ahead during a series of exclusive interactive digital presentations. Register here for the summit on Thursday 5th August.

Please be advised the Pinnacle Investment Summit 2021 is designed for wholesale investors only.