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. At which time, if you wish to ask a question, you will need to press star one on your telephone. Please be advised that today's conference is being recorded on Friday the 23rd of February 2018. I would now like to hand the conference over to your speaker today, Mr. Ian Macoun. Thank you. Please go ahead.
Good. Thank you. Good morning to everyone on the call. It's Ian Macoun here. I'm the Managing Director of PNI. With me this morning also are our Chairman, Alan Watson, and Executive Director, Adrian Whittingham who's 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 4D, 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 10 minutes, then we will open the call up for questions. Questions, of course, can be to any of the three of us, and we'll 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 11 years ago, and we still very much have on ongoing success over the medium term. 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 2017-2018 financial year.
This will be the focus of my address. We'll have questions and answers after that, even though the presentation goes into a lot more detail on our business focus, et cetera. The first substantive slide in the preso, slide two, sets out the first half financial highlights. Net profit after tax from continuing operations attributable to shareholders was AUD 8.1 million, which was up 170% from AUD 3.0 million in the prior corresponding period. Diluted earnings per share from continuing operations were AUD 0.05, which was up 138% from AUD 0.021 in the prior corresponding period. Pinnacle's share of affiliates net profit after tax was AUD 9.9 million, which was up 39% from AUD 7.1 million in the prior corresponding period.
Our funds under management stood at AUD 32.3 billion at the 31st of December 2017. That was up from AUD 26.5 billion at 30th of June 2017. That was an increase of 22% in the six months, and up from AUD 23.3 billion at the 31st of December 2016, which was an increase of 39% over the 12-month period. We have declared a fully franked interim dividend of AUD 0.046 per share payable on the 23rd of March 2018. That is up 109% from AUD 0.022 per share in the prior corresponding period. Finally, cash and principal investments stood at AUD 33 million after nearly AUD 10 million 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 31st of December were AUD 32.3 billion. That was up AUD 5.8 billion in the six-month period or 22%. Up AUD 9 billion in the 12 months or a 39% increase from AUD 23.3 billion a year earlier. Retail funds under management now stand at AUD 7.1 billion, which is up 39% from AUD 5.1 billion at the 30th of June 2017. That's a 39% increase in six months thanks to Adrian here. Spheria's listed investment company listed on the 5th of December after raising AUD 132 million. Net inflows for the half year to the 31st of December were AUD 4.0 billion, including AUD 1.35 billion in retail net inflows.
Speaking of retail inflows, the average monthly rate of retail net inflows, excluding LICs and LITs, was AUD 200 million per month for the six-month period, and this exceeded the average for the 2017 financial year. Similarly, total 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 2017 financial year very substantially. 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 in this presentation is a graph showing the growth in our funds under management over the 10 years or so to the 31st of December 2017.
I'll just pass over that and allow 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 31st of December. 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. That is a more granular explanation of where our funds growth has come from. By affiliate, you see it, we've got it to the nearest million in each case and showing the percentage increases by affiliate over both the six-month period and the 12-month period to the 31st of December. Slide seven is a simple financial summary. I won't go into detail.
It shows the changes in the composition of the Pinnacle parent P&L over the last year. What I think you can take out of this is how significantly our parent P&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. 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 AUD 70.5 million for the half year, including only AUD 500,000, a very small amount of performance fees, which no doubt we'll talk about, and that compares with AUD 52.3 million, which included AUD 2.4 million 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 NPAT 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. 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 Pinnacle parent operating loss with a total reduction of AUD 2.1 million on the prior corresponding period to a loss of AUD 1.8 million. I think shareholders would recall that broadly we've always priced our services to our affiliates to broadly break even. It was a conscious policy. We deliberately then incur a loss at the Pinnacle parent 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 a higher equity percentage. This has just started to kick in for the first time in this half. We've had strong growth in distribution revenue, net of growth in cost from our affiliates.
We emphasize, and this is a very important theme, this has been balanced by continuing medium-term investment in what we call Horizon 2 initiatives, such as growing our distribution footprint including offshore and direct to retail. Also our results 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 an AUD 550,000 loss. The other one was the very low performance fees this half, which I mentioned before, partly due to some of our 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 our share, Pinnacle's share, of affiliate profits. Significant growth on the prior corresponding period.
Note there is still significant investment for future growth occurring within a number of our affiliates. This is something we're 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. Palisade's NPAT is down a lot in the second half, and that's due to the impact of annual performance fees that were included. Sorry. Palisade's 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 AUD 33 million 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, also the strong inflows of dividends that we receive from our affiliates at this time of the year. Also make the point that we have a large franking credit balance. With that, 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. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, it's star one to ask questions. Your first question comes from the line of Glenn Cummings from Wilsons Advisory. Please go ahead.
Hi, gents. You hear me?
Yes, thanks, Glenn.
Great. Guys, congratulations on another strong result. Particularly pleasing to see the rebound in that affiliate NPAT margin after the investment you made in distribution during the course of 2017. Can we just touch on the plans for further investment in your distribution capacity going forward and maybe secondly from where you are at the moment, if I can say, the utilization of the team and scope for accommodating additional funds or additional third-party agreements?
I might pass that to Adrian if I may. The very short answer is we've said that we've been growing our distribution footprint strongly. Indeed we 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. 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, as you have seen, we have seen strong engagement on the institutional side of the market. Over the last 18 months, we have added to that team, whereby we believe we're very well positioned domestically to service the institutional needs of investors. As we look from an institutional or wealth management perspective, as Ian's referred to, we also are rolling out our global distribution strategy. We've seen very cautious and conservative before we implement that in particular regions. We have committed by putting someone on the ground in London.
That appointment was made in January. You will see a follow-up appointment in the next few months, and further additions I would expect throughout this calendar year. 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 market 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. You can also expect in, I'd say, pre-30 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. Whilst it's still at its infancy, it is a transition we are seeing in the market. 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. 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. 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. We really do look for the right individuals to join the firm. 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 but has a three-and-a-half-year track record of delivering more than 8% alpha per annum, 20% returns per annum over three years. We also have.
In global.
in global, we also have a number of growth options in Two Trees, strong interest in Solaris long short, Spheria small companies, and also Plato Global Income.
Great. 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 which was recommended. We have platform submissions in place. 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 McGarrigle from Ord Minnett. 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?
Thanks, Nick. As I mentioned, we have historically priced our services to our affiliates to more or less break even once they're profitable. We do invest in future growth, especially in resources for distribution and so on, up in the Pinnacle Parent level. I've guided people to expect no more than AUD 5 million loss in that area. What's happened is that Antipodes, in particular, has grown faster than one might have imagined. 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. Over time, you will see probably further improvement there in the Pinnacle Parent loss. This is balanced, as I mentioned, by we are continuing to invest for the medium term for ongoing growth.
It'll 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, that won't just keep going.
Growing. We'll have some growth from other affiliates in that regard as well. 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 in that improvement in the short term. Is that sort of clear enough, Nick?
Yeah, that's fine. Yeah, that's great. Just in terms of the complexion of future affiliate deals, we potentially see more of a structure like Antipodes than we have with the traditional ones.
Yeah. Everyone is unique. We do a deal according to the circumstances in each case. As a general statement, that is the trend. We are certainly looking for more revenue in the top line, particularly for distribution. 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.
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 the products up and running and ratings and all the like?
It's Antipodes, Spheria, and Two Trees are 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 AUD 6 billion less than 3 years in, the growth during that 6-month period has been very strong. That's both in retail and in institutional. Spheria has been a great success. Adrian, how long has Spheria been going?
Spheria is just north of 18 months into the business there. As you can see from the results, they're sitting at about AUD 600 million. Strong support both institutionally and also retail. Obviously, it is a capacity-constrained strategy both on micro-caps and small caps. There has been some early interest in an opportunity strategy that they also run.
Broader cap and higher capacity.
We're very comfortable and pleased with where they're positioned in the retail market, getting strong flows. Two Trees, which is at the earliest stage of its development. We've started to get good engagement offshore from the offshore hedge fund investors. Also domestic investors in hedge funds, we've started the retail strategy for distribution there as well straight away. It is a space where there are less competitors for retail investors in hedge funds. We've started the ratings and also the platform submissions, we've already appeared on a couple of platforms, we're pleased with the progress to date.
Again, I think we can claim that the early success has been bigger and faster for our most recent new affiliates than it was historically. Again, enormous 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 from 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 and investments from the FY 2017 to the 1H. I know there were 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?
Yeah. It does jump around a fair bit within a year, and is a bit period-specific, Nick. During this half, the big factor was the AUD 10 million 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'll 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. Look, looking forward, you'll see the dividend we've declared is a fairly high percentage of our NPAT. 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 AUD 40-odd million, now it's AUD 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 AUD 5 million 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.
No worries. Thank you.
Your next question comes from the line of Andrew Tan from Bell Potter. Please go ahead.
Morning, guys, well done on the result. Just a bit more detail about Palisade and the further investment in Palisade. It looks like Pinnacle spent AUD four and a half mil for additional shares. What kind of multiple do you buy those additional stakes at?
This was a situation where a Palisade executive retired and his equity was recycled back. As you can see, the amounts are becoming larger 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. 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. You'll see this happening fairly often, really. We did a little bit with ResCap late last year, a couple of %.
Okay, you bought some of ResCap last year as well?
Yeah, it was 2% you'll see sitting there. We're actually in the process of recycling back a half a percent of that 2% to a young, emerging executive who's important to the future.
Okay. All right. The retail net inflows of AUD 200 million a month is very impressive. What is the secret sauce and is it sustainable? Given the focus on the LIC market, will you see that accelerate, I guess, in the coming 12 months?
I'll let Adrian comment on the secret sauce, but just from me on flows. The average net inflows for the last financial year are about AUD 400 million a month in aggregate and about AUD 160 million a month for retail, excluding LICs, et cetera. Those were very impressive numbers, I 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. As it happens, the six months that we're reporting on now, the rate of flows has been substantially higher again. I just don't want to promise a continuation of those flows.
It is possible that we will see a continuation of them, 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. 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, many other things. It is a big topic to sort of really address, I'm not shying away from it. It is multiple factors, 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. That's one aspect. The other is distribution is a game of size now, in my opinion, from a retail side of things. Doesn't mean, though, that if you have the big numbers that you're going to get success, it certainly does provide the ability to get across the market.
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 advisors or a large number of advisors are going and setting up their own license, et cetera. It's one about quality, size. The other is also in regards to execution, That is one area which we are very focused on is really understanding our investors and having a high level of service. We have the market very well segmented. We deal with the larger practices. We know who they are and we service them well and we need to continue to do that. Then on the execution side is making sure that we continue to work very closely with the research houses, platforms and also the advisors and the end investors.
I'm more than happy to address that in a one-on-one because it is a big topic.
Sure. Andrew, distribution. There'll be a lot of questions on distribution. Adrian will be at all of the manager meetings in Sydney and Andrew Chambers in Melbourne. We'll have lots of time at manager meetings to go into more detail on distribution.
Okay. 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? I understand that 12 months ago, there was a bit of an investment at the affiliate level in their teams 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 we price very rationally according to whatever the market is for all the different strategies. We don't target any particular margin. We just do whatever's sensible. Sometimes you'll sell AUD 1 billion at a fairly low fee, and that's good business if you've got a lot of capacity. Other times, we'll only accept high fees. The general trends, the operating leverage, the fact that we are 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.
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 and also.
With higher fees.
Yeah, also with Two Trees being a hedge fund. We're also implementing a strategy to diversify our revenue or our FUM to non-equity-like revenue. That's one thing that we're working on as well.
Very generally, we started with Aussie equities, we're doing global, now we're doing alternatives and so on. The fee levels on average are higher in each step.
Sure. All right. Thanks very much.
Once again, if you wish to ask a question, it's star one. Your next question comes from the line of Glenn Cummings from Wilsons Advisory. Please go ahead.
Hey, guys. It's Glenn again. Can we maybe just touch on your Dublin platform? I know that you're looking at Antipodes Global as the sort of strategy that's being pushed via that channel at the moment, is there any other strategies internally at the moment you think are suitable to push out via? Is Hyperion Global something we should be thinking about there or?
Did you say for offshore?
Yeah. Via the UCITS platform that you've got over in.
Yeah. Our UCITS platform is live. The first two strategies to be seeded were both Antipodes. No, actually, ResCap has been there in that market, not on that particular UCITS, for some time. It's got a few hundred million AUD already. That is growing very nicely. ResCap first. On the UCITS platform, two Antipodes strategies are already seeded with client seed funds. Yes, indeed, we will be seeking to add Two Trees-
Two Trees and Hyperion
Hyperion Global, et cetera. We do have high hopes for the U.K., Europe, and also in time, the U.S.
That's matching 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.K.
Great. Cool. That was it on that one for me. Thanks, guys.
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 remains to thank everyone for coming onto the call. We need to take off now and go to our first manager meeting. 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. 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.