Ladies and gentlemen, thank you for standing by, and welcome to the Pinnacle Investment Management Group Half Year Results Investor Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. Please be advised that today's conference is being recorded on Friday, 02/23/2018. I would now like to hand the conference over to your speaker today, Mr.
Ian McCown. Thank you. Please go ahead.
Good. Thank you, and good morning to everyone on the call. It's Ian MacCowen here. I'm the Managing Director of T and I. With me this morning also are our Chairman, Alan Watson and Executive Director, Adrian Whittingham, who is responsible amongst a lot of other things for our retail distribution capabilities.
This is a call in which all shareholders and interested parties are invited to participate. The purpose is to announce and discuss the half yearly results for our company, PNI, Pinnacle Investment Management Group Limited. In relation to those results, we released to the ASX earlier this morning our Appendix four d, our interim financial report and a four page announcement together with a PowerPoint presentation. Before we begin, I'd like to draw your attention to the disclaimers, including in relation to forward looking statements in the announcement. Those disclaimers also apply to this call, including the planned question and answer session.
The format for today is that I will speak to the presentation for around five or ten minutes. Then we will open the call up for questions. And questions, of course, can be to any of the three of us. We'll And have questions for the remaining time that we have available. Hopefully, shareholders will recognize that this result continues to deliver on the theme of consistent growth in funds and profits, resulting from our strong focus that we've had ever since we started Pinnacle over eleven years ago, and we still very much have on ongoing success over the medium term.
So the first slide in the presentation sets out our simple agenda for this morning. We cover the financial highlights, business highlights and a results discussion for the first half of the twenty seventeen-twenty eighteen financial year. This will be the focus of my address, and we'll have questions and answers after that, even though the presentation goes into a lot more detail on our business focus, etcetera. So the first substandard slide in the preo, Slide two, sets out the first half financial highlights. Net profit after tax from continuing operations attributable to shareholders was $8,100,000 which was up 170% from 3,000,000 in the prior corresponding period.
Diluted earnings per share from continuing operations were $0.50 which was up 138% from $0.21 in the prior corresponding period. Pinnacle's share of affiliates net profit after tax was $9,900,000 which was up 39% from $7,100,000 in the prior corresponding period. Our funds under management stood at $32,300,000,000 at the 12/31/2017. That was up from $26,500,000,000 at 06/30/2017. So that was an increase of 22% in the six months and up from $23,300,000,000 at the 12/31/2016, which was an increase of 39% over the twelve month period.
We have declared a fully franked interim dividend of $0.46 per share payable on the 03/23/2018. That is up 109% from $0.22 per share in the prior corresponding period. And finally, cash and principal investments stood at $33,000,000 after nearly $10,000,000 of our cash was applied for affiliate equity recycling loans and affiliate equity purchased probably for later recycling. Next slide is the business highlights for the first half. We have enjoyed record funds under management, funds under management inflows and affiliate revenues in the half year.
As already mentioned, funds under management at the December 31 were $32,300,000,000 That was up $5,800,000,000 in the six month period, or 22%, and up $9,000,000,000 in the twelve months, or a 39% increase from $23,300,000,000 a year earlier. Retail funds under management now stand at $7,100,000,000 which is up 39% from $5,100,000,000 at June 3017. So that's a 39 increase in six months. Thanks to Adrian here. Spheria's listed investment company listed on the December 5 after raising $132,000,000 Net inflows for the half year to the December 31 were $4,000,000,000 including 1,350,000,000 in retail net inflows.
And speaking of retail inflows, the average monthly rate of retail net inflows, excluding LICs and LITs, was $200,000,000 per month for the six month period, and this exceeded the average for the 2017 financial year. Similarly, net inflows, the average monthly total net inflows for the half year have also exceeded the average monthly rate of such inflows for the FY 'seventeen financial year very substantially. But we remind shareholders that institutional inflows are lumpy and vary substantially from period to period. The footnote there that notes that none of these numbers include the metrics credit funds, which we have also been responsible for distributing very successfully. Slide four, there's in this presentation is a graph showing the growth in our funds under management over the ten years or so to the 12/31/2017.
I'll just pass over that and allow our shareholders to take a look at that at their leisure. This is followed, Slide five, by a graph showing the growth in retail funds under management over the last four years or so to the December 31. Shareholders would recall the emphasis that we've been placing on retail. Questions on that will be for Adrian. But we are having significant success in retail distribution, which we're very pleased about.
Slide six shows our funds under management by affiliate. So that is a more granular explanation of where our funds growth has come from. By affiliate, you see it, we've got to the nearest million in each case, and showing the percentage increases by affiliate over both the six month period and the twelve month period to the December 31. Slide seven is a simple financial summary. I won't go into detail.
It shows the changes in the composition of the Pinnacle Parrot P and L over the last year. What I think you can take out of this is how significantly our parent P and L has changed, that we've moved on from the remnants of the Wilson Group, the group overheads and so on. They've all been just absorbed now into Pinnacle overheads. And I think people would agree we've done a good job of absorbing all of that legacy. So more substantively, Slide eight shows highlights of our interim results.
Again, the numbers are there for the analysts on the line. I won't go into detail. A couple of points to note is that total affiliates revenues were $70,500,000 for the half year, including only $500,000 a very small amount of performance fees, which no doubt we'll talk about. And that compares with $52,300,000 which included $2,400,000 of performance fees in the prior corresponding period. We'd again remind shareholders that our after tax profit during the first half of each financial year is typically a smaller proportion of the full year impact than the NPAT during the second half for a few reasons, including the fact that substantial performance fees are annual, and we don't include them at all even if we have substantial accruals.
We don't include them at all in the first half results. Now very briefly on to Slide nine, where we've set out some of the significant components of our first half results. First of all, pleasingly, there has been a substantial reduction in the parent Pinnacle parent operating loss, with a total reduction of $2,100,000 on the prior corresponding period to a loss of $1,800,000 I think shareholders would recall that broadly we've always priced our services to our affiliates to broadly breakeven. It was a conscious policy. And we deliberately then incur a loss at the Pinnacle current level when we invest for future growth.
However, starting with Antipodes, the concept has been introduced of higher distribution fees, particularly for retail distribution, and this is partly in lieu of the higher equity percentage. This has just started to kick in for the first time in this half. So we've had strong growth in distribution revenue, net of growth in cost from our affiliates. However, we emphasize, and this is a very important theme, this has been balanced by continuing medium term investment in what we call Horizon two initiatives, such as growing our distribution footprint, including offshore and direct to retail. So we also our result for this half has been impacted by a loss on principal investments, including what we call a hedging mismatch in this particular period.
The net impact of that was $550,000 loss. And the other one was the very low performance fees this half, which I mentioned before partly due to some of that performance fees being annual. But also partly, it's just what happened in this period. The second element of our half year results, and then I'm done, is the significant growth in share, Pinnacle's share of affiliate profits, significant growth on the prior corresponding period. But note, there is still significant investment for future growth occurring within a number of our affiliates.
This is something we are quite happy about. Our affiliates only invest for future growth when it makes a lot of sense. And I believe our shareholders want us to continue to grow strongly. The cost of Two Trees, our most recent new affiliate, is included as a negative NPAT from affiliates, and Spheria's NPAT is also not yet large. Palisades NPAT is down a lot in the second half, and that's due to the impact of annual performance fees that were included sorry, Palisades NPAT is down a lot on the second half of last financial year, because that included performance fees.
Also mentioned that there is no NPAT growth in Hyperion, and that will be the case until global equities kick in. And I've mentioned the low performance fees in this half. The final point from me before we go to questions is Slide 10, is that we make the point that we have a strong and flexible balance sheet with $33,000,000 of cash and principal investments. Most of this is invested in strategies managed by various Pinnacle affiliates. I won't go on about our balance sheet now.
It doesn't include the post balance impact of our interim dividend, but also the strong inflows of dividends that we received from our affiliates at this time of the year. Also, I make the point that we have a large franking credit balance. I think that's more than enough from me in terms of this initial address. We'd like to now turn the call over to questions, please.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Glenn Cummings from Wilson Advisory. Please go ahead.
Hi, gents. You hear me?
Yes. Thanks, William.
Guys, congratulations on another strong result. Particularly pleasing to see the rebound in that affiliate impact margin after the investment you made in distribution during the course of 2017. Can we just touch on the plans of sort of further investment in your distribution capacity going forward? And maybe secondly, from where you are at the moment, if I can say that the utilization of the team and scope for accommodating additional funds or additional third party agreements?
So I might pass that to Adrian, if I may. But the very short answer is we've said that we've been growing our distribution footprint strongly. Indeed, have, and that is very much ongoing. That is both traditional retail distribution, traditional institutional distribution, but also increasingly offshore, direct to retail, the listed market and so on. But Adrian is our guru of distribution.
Thanks, Ian. Good morning, everyone. To answer your query really is what is the strategy about leveraging our distribution capability and obviously the strategies of our managers or potential new managers. If I can perhaps start with on the domestic side, we as you have seen, we have seen strong engagement on the institutional side of the market. Over the last eighteen months, we have added to that team, whereby we believe we're very well positioned domestically to serve the institutional needs of investors.
As we look from an institutional or wealth management perspective, as Ian referred to, we also are rolling out our global distribution strategy. We've been very cautious and conservative before we implement that in particular regions. And we have committed by putting someone on the ground in London. So that appointment was made in January. And you will see a follow-up appointment in the next few months and further additions, would expect, throughout this calendar year.
And that's really off the back of strong engagement with our affiliates from potential investors offshore as well as Pinnacle looking to expand its presence in areas where we believe we will get good traction that aligns with the capabilities of our underlying affiliates. On the domestic retail side, as you would be aware, we have been building out our retail distribution capability mainly in two areas. We have established what we call a capital markets capability, and that is working with investors in taking high quality managers into the listed investment company or listed investment trust part of the market. We have resourced that up, and we have had success in that segment. You can expect that we will continue to apply resource and commitment to that part of the market.
And you can also expect in, I'd say, pre-thirty June, a commitment around the EQMF part of segment of the market, which aligns with what we've described previously, this migration from managed funds to the exchange. And whilst it's still at its infancy, it is a transition we are seeing in the market. So we will have some capabilities in that space. We've been looking at it for quite a long period of time. We just want to make sure that when we take a capability to market that it's structured appropriately and that it is an outstanding outcome for investors.
And then on the team basis, how do we work across our affiliates? We've been busy adding resource to what we call our internal wholesale team. They provide us a lot of breadth and leverage across our managers and also adding to the resources in the field BDM side of the market. Again, we are very much about adding quality, not just to the managers, but also to our distribution team. So we really do look for the right individuals to join the firm.
And then finally, your last question about other strategies or growth for retail. We're very excited that Hyperion now is approaching its four year track record. It has a three point five year track record of delivering more than 8% alpha per annum, 20% returns per annum over three years. We also have a number in Global. And we also have a number of growth options in Two Trees, strong interest in Solaris LongShort, Superior Small Companies and also PLAYDO Global Income.
Great. So that probably leads me to the next question. It sounds like Hyperion Global is pretty close to going live.
Well, they achieved their first positive rating from Zenith recently on the record which was recommended. We have platform submissions in place. So yes, I would say it is definitely live, and we will be going out to the market to gain traction in that strategy.
Awesome. Cool. That's it for me. I'll jump back in the queue and come back later if need be. Thanks, guys.
Thanks.
Your next question comes from the line of Nicholas McGarrigal from Odd Minute. Please go ahead.
Good day, guys. Congrats on the result. It's looking like the Pinnacle parent overhead is really diminishing quite quickly. Can you just give us some flavor on what drove the significant increase in revenues and how we can think about that now over the medium term?
Yes. Thanks, Nick. Yes. So as I mentioned, we have historically priced our services to our affiliates to more or breakeven once they're profitable. And we do invest in future growth, especially in resources for distribution and so on, up in the Pinnacle current level.
And I've guided people to expect no more than $5,000,000 loss in that area. What's happened is that Antipodes in particular has grown faster than one might have imagined, and Antipodes pays us more than cost recovery for distribution, and that's really kicked in. We are seeking to implement this with any other new deals we do with fund managers. And so over time, you will see probably further improvement there in the Pinnacle Parent loss. But this is balanced, as I mentioned, by we are continuing to invest for the medium term for ongoing growth.
So it will be just a matter of the decisions that we make on an ongoing basis of the balance between those two items. I'd also mention that there is a cap on the Antipodes fee, and so that won't just keep going forever growing. But we'll have some growth from other affiliates in that regard as well. So look, I think you can comfortably bank the improvement that's come through already, but I wouldn't be encouraging people to get too carried away with big growth on that in that improvement in the short term. Is that sort of clear enough?
Yes, that's fine. Yes, that's great. And just in terms of the complexion of future affiliate deals, we potentially see more restructure like Antibodies than we have with the traditional ones.
Yes. Everyone is unique. We do a deal according to the circumstances in each case. But as a general statement, that is the trend. We are certainly looking for more revenue in the top line, particularly for distribution.
And Adrian wouldn't say this, but I think it's increasingly being acknowledged that we are a real distribution powerhouse. And people who are looking to partner with us recognize that and are very happy to pay up for the quality of our distribution. It just makes such a big impact when you have top quality distribution.
And can I just get some commentary around some of the new affiliates that have come on in the last year and how they're tracking and where they're at in terms of getting products up and running and ratings and all the like?
Yes. So it's Antipodes, Spheria and Two Trees, our most recent ones. I don't know that we need to say a lot more about Antipodes, except you can see the growth in that table. It's now over $6,000,000,000 less than three years in, and the growth during that six month period has been very strong. That's both in retail and in institutional.
Spheria has been a great success. Adrian, how long has Seria been going?
So Seria is just north of eighteen months into the business there. As you can see from the results, they're sitting at about $600,000,000 Strong support both institutionally and also retail. Obviously, it is a capacity constrained strategy both on microcaps and smallcaps. However, there has been some early interest in an opportunity strategy that they also run So
broader cap and higher capacity.
So we're very comfortable and pleased with where they're positioned in the retail market, getting strong flows. And then Two Trees, which is at the earlier stage of its development, we've started to get good engagement offshore from the offshore hedge fund investors, also domestic investors in hedge funds. And also, we've started the retail strategy for distribution there as well straight away. And it is a space where there are less competitors in the retail for retail investors in hedge funds. So we started the ratings and also the platform submissions, and we've already appeared on a couple of platforms.
So we're pleased with the progress to date.
So again, I think we can claim that our the early success has been bigger and faster for our most recent new affiliates than it was historically. And again, credit well, not only to the quality of the affiliates and the investment professionals in there, but enormous credit to our distribution team.
One last one for me, and then I'll jump off. But just some commentary on the balance sheet and the net cash position sort of deteriorated net cash new investments from the full year 'seventeen to the 1H. And I noticed there was some investments into affiliates in loans and other things. Can you just give us a flavor on how that changes half on half and as the distributions come in?
Yes. It does jump around a fair bit within a year and is a bit period specific, Nick. But during this half, the big factor was the $10,000,000 that we spent in one of our affiliates with the recycling of an outgoing executive's equity. We provided both some loans for recycling of that equity, and we acquired some of the equity. That is something you will see us doing on an ongoing basis, and then the money will come back to us as the equity is sold and the loans are repaid.
We think that's a very good use of our balance sheet. But looking forward, you'll see the dividend we've declared is a fairly high percentage of our impact. So we're not looking to accumulate substantial further cash from operations. But we really like having this I think your point is that it was sort of $40 odd million, now it's $33 but we've shown you where that was deployed. We like having this cash.
We call it dry powder in the event that some opportunities come along that we'd like to deploy capital. And we're also using some of it as seed fund. We put $5,000,000 into Two Trees, for example. It's very helpful to be able to seed new strategies and to just generally deploy it within our affiliates. I think that's probably all we could say about that.
There's no sort of structural deterioration or whatever, Nick. It's just the way we've deployed it.
Your
next question comes from the line of Andrew Tan from Bell Potter.
Well done on the result. Just a bit more detail about Palisade and the further investment in Palisade. It looks like Pinnacle spent $4,500,000 for additional shares. So what kind of multiple do you buy those additional stakes at?
So this was a situation where a Palisade executive retired and his equity was recycled back. As you can see, the amounts are becoming large because the value of these businesses is increasing. I don't think we've declared the multiple. These multiples are much lower than the sort of multiple that Pinnacle is on. Typically they are in the high single digit to low teen multiples of NPAT, but it varies by affiliate.
The circumstances are different for each of them. But suffice to say, it's a very good thing for us to do. The recycling of equity, succession planning within affiliates and so on is incredibly important to us. And using a bit of our balance sheet for that is always a good thing to do. So you'll see this happening fairly often, really.
We did a little bit with res cap late last year, couple of percent.
Okay. So you bought some of res cap last year as well?
Yes, it was 2%. You'll see sitting there, we're actually in the process of recycling back 05% of that 2% to a young emerging executive who's important to the future.
Okay. All right. And the retail net inflows of £200,000,000 a month is very impressive. What is the secret source? And is it sustainable?
And given the focus on the LIC market, will that will you see that accelerate, I guess, in the coming twelve months?
I'll let Adrian comment on the secret sauce, but just from me on flows. So the average net inflows for the last financial year, about £400,000,000 a month in aggregate and about £160,000,000 a month for retail excluding LICs, etcetera. Now those were very impressive numbers, believe. I think everyone would acknowledge that's a very strong rate of inflow. I have no problem putting my hand on my heart and saying we are very confident for as far out as we can reasonably see that we can sustain those levels of inflows.
Now as it happens, the six months that we're reporting on now, the rate of flows have been substantially higher again. And I just don't want to promise a continuation of those flows. It is possible, but we will see a continuation of them. But I think if the market assumes the sort of averages for the last financial year, very strong growth, and I think that's a sensible level of assumption. Just don't want to get no, these are enormous rates of flows, and I don't want people to get ahead of themselves.
The secret sauce, Adrian, is a lot of hard work, isn't it?
Yes, and many other things. It is a big topic to sort of really address, and I'm not shying away from it. But it is multiple factors. And obviously, it starts with outstanding affiliates and also strategies which are really applicable to where the investor base has moved to, and that is focused on high conviction, really differentiated offerings to the market. So that's one aspect.
The other is distribution is a game of size now in my opinion from a retail side of things. It doesn't mean though that if you have the big numbers that you're going to get success, but it certainly does provide the ability to get across the market. And as I have mentioned previously, we've been very early on this view and also what is currently unraveling in the market is this enormous fragmentation of advice or intermediated investors whereby a number of advisers or a large number of advisers are going and setting up their own license, etcetera. So it's one about quality, size. The other is also in regards to execution, and that is one area which we are very focused on is really understanding our investors and having a high level of service.
So we have the market very well segmented. We deal with the larger practices. We know who they are, and we go and we service them well, and we need to continue to do that. And then on the execution side is making sure that we continue to work very closely with the research houses platforms and also the advisers and the investors. But I'm more than happy to address that in a one on one it is a big topic.
Sure. So Andrew, distribution there'll
be a lot of questions on distribution. Adrian will be all of the manager meetings in Sydney and Andrew Chambers in Melbourne. So we can we'll have lots of time at manager meetings to go into more detail on distribution.
Okay. And just one more from me. I guess at the affiliate level, the margins improved in the first half. I guess what's the scope there? Understand that twelve months ago, there was a bit of an investment at the affiliate level in their terms in terms of their internal resources.
Do you see scope for further improvement at the affiliate level in terms of cost to income ratio?
Look, as an overall theme, there is operating leverage generally in our affiliates. And as they grow, that cost to income ratio will improve. In terms of pricing and margins, we believe rationally according to whatever the market is for all the different strategies. We don't target any particular margin. We just do whatever is sensible.
And sometimes you'll sell $1,000,000,000 at a fairly low fee, and that's good business if you've got a lot of capacity. Other times, we will only accept high fees. But the general trends, the operating leverage, the fact that we're doing more retail, and clearly retail fees are higher than institutional fees, all else being equal. The other thing is that performance fees will grow. And of course, they vary period to period, but on the whole, they will deliver us higher average fees.
And then if I can add to that, also our business mix on overall as a business but also on the retail side, we are attracting strong support in long short, so lower beta strategies also with Yes. And also with Two Trees being a hedge fund, we're also implementing the strategy to diversify our revenue or our fund to nonequity like revenue. So that's one thing that we're working on as well.
So very generally, we started with all the equities. We're doing global, and now we're doing alternatives and so on. The fee levels on average are higher in each step.
Your next question comes from the line of Glen Cummings from Wilson Advisory. Please go ahead.
Hey guys, it's Glen again.
Can we maybe just touch on your Dublin platform? And I know that you're looking at Antipodes Global as the strategy that's being pushed by that channel at the moment. But is there any other strategies internally at the moment you think is suitable to push Is it Hyperion Global something we should be thinking about there?
Did you say for offshore?
Yes. The via the usage platform that you've got over in
Yes. So our usage platform is live. The first two strategies to be seeded were both no, actually, ResCap has been there in that market, not on that particular usage for some time. It's got a few $100,000,000 already, but it's growing very nicely. So ResCap first.
But on the use of platform two, Antipodes strategies are already seeded with clients seeded some. And yes, indeed, we will be seeking to add two trees, trees Hydrogen global, etcetera. We do have high hopes for The UK, Europe and also in time, The U. S.
And that's matching the not only the product capability offshore to meet the investor needs, but also matching that up with the distribution commitment that we have placed in The U.
There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.
Great. Thank you. Well, I think it just reminds to thank everyone for coming onto the call. We need to take off now and go to our first manager's meeting. So thank you, everyone, for participating.
Our annual General Meeting will be later in the year and our full year results in you'll probably hear from us in July and August. But thanks again. Thanks for your support and your interest.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.