Ladies and gentlemen, thank you for standing by, and welcome to Pinnacle Investment Management Group Full Year twenty eighteen 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. I must advise you that this conference is being recorded today, the 08/28/2018. I would now like to hand the conference over to your first speaker today, Ian Macao.
Thank you. Please go ahead.
Good. Thanks, Rishi. And thank you to everyone on the call. We appreciate your interest, and we appreciate the support that we receive from our shareholders. So with me today is also Alan Watson, our Chairman and Adrian Whittingham, who's an Executive Director responsible, amongst other things, for retail distribution.
So this is a presentation of our annual results of P and I for the 2018 financial year. On the July 24, we announced the bottom line, our net profit after tax that we expected to be reporting for FY 2018, together with the June 30 funds under management and the net fund inflows for the year. Today, we are confirming all of those numbers, and we're providing further detail on our results. We're providing we have provided today our audited financial statements for the 2018 financial year and our FY 2018 annual report. We also announced on the July 20 an equity capital raise as well as the acquisition of 35% of Metrix Credit and 40% of Omega.
Now these have all now been completed smoothly. We raised $60,000,000 in the institutional placement and $10,000,000 in the share purchase plan. This was quite heavily oversubscribed. We deployed $48,000,000 of that $70,000,000 in acquiring Metrix Credit and Omega. That $22,000,000 surplus is now available to us, taking our total surplus capital to around $50,000,000 That's a number that moves around during the year as money comes in and out.
That's around $50,000,000 I should emphasize that we are very aware that we don't want to have a lazy balance sheet. We don't want a lot of money invested at earning less than 2% in a bank account. But this capital is strategically very important to us. We use it to invest in affiliate strategies in a fairly strategic way, particularly as seed fund for new strategies and to get fund to a certain level where market acceptance will be much stronger. We also use it from time to time to acquire small amounts of equity in affiliates.
And I would ask people to get used to the idea of equity holding in affiliates going up and down a little bit as we emphasize the recycling of equity in affiliates. And it's very useful for us to have that capital. We also think of this capital as dry powder to help in the event that opportunities for good Horizon three acquisitions arise. Now I'd better move to the highlights of the presentation and leave plenty of time for questions. So if I can invite you to go to the presentation.
Slide two provides summary detail of the financial results, and I will leave that to shareholders to read at their leisure and be in touch with any questions. But the financial highlights are on Slide three, which include net profit after tax from continuing operations attributable to shareholders of $23,100,000 which is up 92.5 from $12,000,000 in the prior year. Earnings per share from continuing operations of $0.01 $43 up 76.5% from $0.81 in the prior year. Our share of the net profit after tax from Pinnacle affiliates was $24,900,000 in the year, up 41.4% from $17,600,000 And we've declared a fully franked final dividend of $07 per share payable on the October 5, taking the year's total dividends to $0.01 $16 per share. Now all of these are confirmed as being the same as what we reported on the July 24.
Similarly, on Slide four, the business highlights, which are also unchanged, included funds under management of $38,000,000,000 at 06/30/2018, which was up $11,500,000,000 or 43.4% from a year earlier, 06/30/2017. We now show in the footnote on this Slide four a sum update at the July 31, which is $45,500,000,000 which, of course, includes the Metrix credit fund of $2,500,000,000 and Omega fund of $4,300,000,000 So these were added through the two acquisitions. We also reported in July that our net inflows for the year were $7,900,000,000 which, of course, was a record for us, and it included $2,200,000,000 of retail net inflows. In terms of other recent developments to update you with, in July, we guided that fire trail. We're expecting net inflows in excess of $1,000,000,000 by the September 30.
We're now guiding an update to that in Slide 25. That Fire Trail are now expecting net inflows in excess of $2,000,000,000 by the September 30. Another update item is on Slide 23, where we've indicated that Lorraine Behrens has been appointed to the P and I Board effective 09/01/2018. Lorraine's CV is included in the annual report that we lodged this morning. I think it's fair to describe Lorraine.
And as a person myself, who's been in the funds management industry for a long time, I can say this, describe her as an industry stalwart, highly respected, having had a long executive career in the industry, having been Chair of INCA, the Investment Management Consultants Association for seven years and Chair of ASFA for three years, amongst other nonexecutive roles in the last four years, including being on the Boards of our first three listed investment companies. I don't have time now to go through all of the presentation, but suffice to say that it includes detailed information on our financials, where I would refer you in particular to Slide 13, which is headed significant components of the FY 2018 results. Very briefly, we think of our results in two parts as pinnacle parent, which is essentially the revenues and cost of the services that we provide mainly to our affiliates. Both those revenues and the costs are up a long way in the financial year. And then the second component is our the most important one, our share of affiliates net profit after tax, also up a long way on obviously larger sum and so on.
The simple comment I would make is that I believe you can see the operating leverage that we've always said is inherent in our businesses. That operation our operating leverage is coming through now strongly, and this should continue. Having said that, not only is Pinnacle continuing to invest from our P and L in resourcing for future growth, but several of our affiliates have added resources for future growth. So the likes of Hyperion, Antipodes, Plato have all added significant resourcing for new strategies and so on. Just a reminder on Slide 16 that we remain focused on managing the business for the medium term, not just the short term.
There's some information here on our distribution capabilities, which, of course, are extremely important to us. Distribution is the heart of Pinnacle. There is an overview of our affiliates and updates on each of our affiliates. There's an investment performance update, and there's an outlook slide, Slide 25. But I think I've gone on for long enough.
I should pause now and invite questions, please.
Ladies and gentlemen, you may press 1 if you wish to ask a question. Again, ladies and gentlemen, if you wish to ask a question, please press 1 in your telephone and wait for your name to be announced. The first question comes from the line of Nick McGarrigal. Your line is now open.
Thank you. That was very well pronounced. Much better than average. So well done. Congrats on the the great result, which obviously we've guided to and came in line with, obviously, that prior guidance.
I just wanted to ask some questions about the profitability of the individual boutiques. Is there anything that stood out that might not be immediately obvious? Because obviously, the Hyperion, ResCap, Palisade and Solaris results in the annual report. But maybe can you comment on entities given its high growth phase and maybe what margins that's producing at this point? And then maybe the losses in FireTel and Q3 that we should think about were present in 'eighteen?
Yes. No, thanks, Nick. So as you said, there's a brief summary of the financials of our four largest affiliates in the financial report. In terms of activities, yes, so FY 2018 was kind of a transition year for Antipodes. I think it was the first year it was actually in profit.
The Antipodes profit was significant in 2018, but of course, it's been growing very rapidly. And obviously, FY 2019 will be a lot higher than FY 2018. I think people are aware that activities have continued to add resources. I think they have 20 or so people in the investment team now. They also added Andrew Finlay as Managing Director to take to free Jacob up to focus even more strongly on investment performance and the investment team.
So yes, Nick, it was kind of a transition year for Antipodes. Two Trees still made a loss this year. Spheria, it was its first year of profit, but again, it was in transition to a larger profit amount this year. Two Trees, I think, will make a profit. It's certainly run rate profitable now, and it's not as large, but it will start making profits this year as well.
And if I maybe, Nick, if I can daydream here, if I can just touch on a couple of aspects in regards to those affiliates looking forward. Certainly, we're very much aware of the adoption for Antipodes across the market, both retail, institutionally and offshore. The we are making progress on offshore distribution with Antipodes, so that will continue to provide support for that firm. In regards to Two Trees, that is another firm that whilst it hasn't come through in the numbers, we are quite pleased with the progress we're making in that absolute return or liquid alternative space. So if we continue on with the momentum that we expect over the next over this half, I think it's going put us in a good position in the medium term for Two Trees.
So we do expect Two Trees to be profitable in FY 2019. It's not large in the overall scheme of things, but it will be profitable, whereas it was loss making in FY 2018. The other one we didn't mention, Plato's profit lifted very significantly from 2017 to 2018 as its funds have grown and the operating leverage has come in there. Having said that, PLATO has added significant resourcing to ramp up global, global income, and now global market neutral. I think that's they're probably the highlights.
But Antipodes, of course, is on a major steep increase.
Thank you. And then maybe sorry, just on I that was a good overview. Just I noticed Solaris' profit was up substantially. Was that some reason to comment, please? Or was that just an indication of operating leverage coming through given that FUM was up sort of more than 60% year on year?
Yes. So it was kind of both. We're delighted with the increase in FUM in Solaris. And even though a lot of that is sort of large FUM at reasonably modest fees, it's very profitable business. And of course, their performance was outstanding in the year.
And there were some performance fees for Solaris as well. The performance fee number of that $17,000,000 that we reported was the largest component was Palisade and Solaris and ResCap are the other main performance fee earners in this particular year.
The guidance for fire trial is obviously really positive, and they seem to be running at an incredible pace. Can you give us a sense I know it's hard to draw a line in the sand, but if we said, for instance, that the business like that had $5,000,000,000 would it produce similar operating EBIT margins to Hyperion? Or should we think about that business differently?
So they're all somewhat different, Nick. And I hesitate a little bit to draw direct comparisons. We love all our children. They're all a bit different. They all have their own personalities.
Firetrail, of course, we own about 24% of, whereas we own almost 50% of Hyperion. The biggest difference is that the vast majority of fire trial FUM has performance fees on it. And so obviously depending on performance, there's a potential for quite big revenue in fire trial. Fire trial is a reasonably expensive business. They've got a sizable team.
But the real game in Firetrail I mean, obviously, they're going to be profitable this year even on base fees. They're doing very well. But the really big gain for them is performance fees. And we should talk about performance fees generally. Alan, in his chairman's letter, referred to well, we think a lot about what if there's a market drop where we say we wouldn't be immune, but we've got the various factors that would protect us in that event.
And the fact that 27% of our fund now has performance fees attached to it is a real mitigating factor.
What is that percentage, you mean? Sorry.
27% of our fund has performance fees, generally around the 15% to 20% of alpha. And the point about them is that they are unrelated to the overall market. They're all based on alpha, and they're all independent of each other. So there are seven or eight different strategies that can earn substantial performance fees, and they're uncorrelated with each other and uncorrelated with the market.
And obviously, Palisade was in the news throughout the FY 'eighteen year. Their result was up substantially. Is there any way we should think about that result into next year? Were there any final changes made to some of their mandates deal with some of those headlines?
Yes. So Palisade have explained that they did make some adjustments to their fee arrangements with particularly long standing clients and the clients in their main diversified fund. But they're not going to affect the underlying fee revenue so much. They were related to future growth more than anything. So no big changes there.
I mean, Palisade had substantial performance fees because they've had great performance. It tends to be more consistent performance than to some of our other equity affiliates because their benchmark is generally the bond rate, a margin above the bond rate. And Performance has done a wonderful job for its investors over a long period of time. Its sum doesn't grow as rapidly as sum because they're very focused on deploying their money in strongly earning assets. So they get the performance fee rewards for that.
But I think it's well known that the investors in the diversified fund voted to change the arrangements whereby 75% vote required to change the manager there now, whereas previously 50%. So it was a strong endorsement from all of the investors in Pitith.
Great. And that's thanks for that update. And then I might ask one last one, and then I'll let someone else check-in. But the Pinnacle overhead obviously was down to 1.8. I think the year before was around 5.6 of loss.
Do you think I know that you historically said you're not looking to make a profit in that segment, but given Fire Trail's rapid growth, Antipodes continued growth, do you think that that will track towards breakeven in the short term?
Yes. So I've consistently said we don't target a particular level of outcome for Pinnacle Parent. It's a result of, as you say, strongly growing revenues from our affiliates, particularly for distribution. And whereas we broadly have priced in the past to breakeven, a few affiliates more recently, we've accepted lower percentage equity with more profitable fees in for retail distribution in particular. So that trend is there.
But we're also investing quite strongly in Pinnacle Parent. We've added quite a lot of resources. I think our staff numbers are about fifty fifty five in Pinnacle Parent at the end of the year versus 40 at the beginning of
the
year. So whilst we are disciplined in adding resource, we are absolutely investing in new initiatives for direct to retail, for offshore distribution and so on. So the result is the outworking of those two factors, Nick, greater revenue and greater cost. And we're going to keep we'll keep investing for the medium term so we don't shy away from adding resource if it's important to our future growth.
That is fundamental for our firm is to ensure that we grow ahead of the affiliates, the boutiques, so we can meet their growth demands and that of our clients.
Yeah.
Okay. I'll I'll let someone else have a go, and I'll come back.
Thank you. Anybody else?
Thank you. We have the next question from the line of Leon Cummins. Your line is now open.
Hi, gents. Well done on another good result. Maybe a question for Adrian. I was wondering if you could perhaps touch on your expectations for growth within the distribution team in FY twenty nineteen and perhaps give us an update on where you see the LIC market. There's obviously been a fair bit of activity during FY twenty eighteen.
So wondering how you're viewing that as a distribution channel in FY 'nineteen?
Sure. Thanks for the question. Look, if I can if you look at the current size of the distribution team, we're just under 30, so we're sitting at 29, which has also experienced rapid growth over the last, say, twenty four months. Where we see it going forward, I think certainly in intermediated retail distribution domestically, we are well resourced. So there will be incremental growth in that aspect.
So we will be increasing resources from a national perspective. We'll be putting on another resource in Queensland and Victoria as an example. Where we see the key growth is along the lines of the trend that something we've been early on. As you know, we've participated in a number of listed investment companies and trusts. We firmly see this movement to the exchange.
It's still early. It's early like the fragmentation away from what was the big six into self licensed boutique firms. But the key thing for us is to make sure that we participate in that segment as our clients move off platform move to the exchange via ETS, LICs and LITs. So you will see us resource up in that space. We have planned two LICLITs before the end of this first half.
And the other aspect where we're seeing some quite good green shoots as we've completed a number of due diligence processes is offshore in the private wealth channels. So the offshore team, particularly based out of London, we're making some progress there. So if I look through I'd prefer not to just focus on this financial year in regards to growth because we firmly do want to take a medium term view. However, you'd probably see us increase resourcing in marketing, in capital markets, which is the lifted channel, and also potentially offshore once we start to see further revenue come through.
Great. And maybe, Ian, can we I know you've previously flagged at the capital raising announcement, there's an expectation for new affiliates to be rolled out this half. I wonder if you could get an update there and sort of expectations around how we should be thinking of the margin as you sort of ramp or deploy some of those new strategies and funds?
Yes. So we have to be careful. We can't really say much ahead of actually implementing new affiliates. But we're talking about builds at this stage, building new affiliates. Probably not a big impact probably on FY 2019, really.
But we are we're looking to add you know, we we've always said we'll look to add a couple of year bills, and we're certainly on track for that.
Perhaps if I I can add to that. Certainly, the pipeline is as strong as ever in regards to potential incubations. That's both for those that were engaged or have approached us. So for us, as always, it's about the quality of the opportunity and the investment team. And we continue to go through that due diligence process and ensuring we have a strong understanding of what the motivating factors are for those individuals to want to start their own affiliate.
So I would say that as per Ian's comment, sometimes you can't necessarily control the time line. However, the environment does look quite positive for us in regards to future innovation.
Great. And then maybe one final one for me. Just it's great to hear that Two Trades is now running on a profitable run rate. That just for clarity, and I may have missed this in the present, but that is in the absence of the deployment of this new strategy relating to the Cornerstone. Is that correct?
No. Not really. It sort of includes that, I think. Got you.
Yeah. Okay.
No. That's that's fine. Thanks, guys.
Thank you. There are currently no questions. We have a follow-up question from Nick Matt Caracall. Your line is now open.
Just two follow-up ones for me. Can you give us an update on The US distribution strategy for Hyperion, particularly in light of the the performance record over the last year is pretty impressive, sort of high teens alpha versus the Misty. And obviously, they've engaged with some U. Distribution partners just an update there.
Yes. So we are very happy with the way that's going. We have to be a bit careful. There's always a lag between sales activity and actual outcomes. So we can't really report.
Yes. So for example, the two of the key investors were in The States only two months ago. Feedback was the engagement was very strong. A number of those prospects were new as well as some of those were follow-up appointments. We have also had one of those offshore investors come through Australia and have further meetings.
So I think it's probably still a little bit early. However, you are right. Clearly, not only has the performance been an area where there's been good engagement, but it's the differentiation of the strategy relative to a number of the incumbents in the portfolios based in The U. S. So that looks quite positive.
Whilst we talk about the offshore side, we are making progress domestically as well, particularly in the retail space. The retail environment has been challenging in that to now have funds listed on platforms, process has become quite elongated. But we're just sort of breaking the back of that now. So we're all quite excited about the opportunity for Hyperion in the intermediated and direct retail space. But clearly, we need to convert that, and that's what this FY 'nineteen is about.
We need to get the results on the board.
Okay. And then one last thing for me. I noticed that the dividend or the distributions out of the that were reported in the annual report were down on PCP. Is there a reason that they're holding on to more cash? Or do you expect that to release into FY 'nineteen in cash?
Yes. So Hyperion, with our agreement, held back a significant amount of their earnings for the year that we've just finished. That's related to the recycling of some equity, where there's an opportunity to acquire some equity from a couple of executives. That will be recycled in time, but Hyperion has a sort of employee equity trust whereby the company funds the recycling of equity in advance of younger executives being able to afford to take it on and in advance of they have a system which determines the rate at which existing executives are able to acquire more equity. And so there's a hiatus period, and the company's funding that.
So that's just kind of a temporary thing, Nick. And that'll begin to be released imminently. And again, I think you could expect, just as I said, you could expect that Pinnacle's balance sheet can be used a little bit to facilitate that equity recycling. You'll see our affiliates doing that from time to time, and that's with our blessing and encouragement. I mean, we have a veto right.
It's one of our shareholder agreement protections is giving out payout ratios. So Hyperion did that with our full encouragement and blessing.
Thanks, Ross.
Yeah. What what I would say in just adding to that, Nick, there will always be a little bit of a lag in that, let's say, 80% or 90% of affiliates' profits are paid out in dividends. There's a little bit of a lag because by the time I actually pay that, it's often into the new year that relates to the previous year, which is lower because the affiliates are growing strongly.
Understand. And please, maybe I'm just holding the call, but an update on Hyperion's distribution sort of success on the existing Australian product. And any changes there in terms of open, closed momentum and that kind stuff?
Yes. So again, I think Adrian talked a little bit about retail where he said that there's, you know, a particular environment with royal commissions and things happening, I guess, that it takes longer to get the slots. But it's full steam ahead for Hyperion retail, and you'll see more of that before too much longer.
Nick, you're referring to the domestic equity strategies. Is that right?
Yeah. The other strategies, which I understand have been sort of not generating inflows over the last quarter, partly because they've been soft close or hard close?
Yes. So what we are doing, the small company fund has been hard close. We've moved that to soft close as more capacity has been created over the last eighteen months. There's not a lot of capacity there, so we will engage key clients in regards to making them aware that, that is the case. Then in their large companies' funds, again, that is a strategy whereby the team want to be conservative in regards to fund growth.
So I would expect a greater focus to be on the global strategies as opposed to domestic.
We also have a follow-up question from Liam Comments. Your line is open.
Hi, guys. Just one quick one on the bump up on the inflow expectations for Firetrial. I know today you've been quite firm in the commentary that you're only really going to accept retail money. I'm assuming that we shouldn't bake in any change on the back of this sort of 1,000,000,000 to $2,000,000,000 inflow number?
Yes. No, no. I think what we said, Liam, is that there's a certain amount reserved for institutional, and that's what really we're seeing now. We're very pleased with the retail flows for Fire Trail as well. It's been well received, but of course, takes longer.
Yes. And you're up and running across all funds with ratings with Zenith now, is that right, isn't it?
Fire Trail. Yes, that's correct. We expect to have another rating in the very near future as well. Both of those are supportive as in they're not a hindrance to getting on platforms or approved lists across dealer networks. So we're making good progress on the retail side off the back of strong demand.
Ladies and gentlemen, if you wish to ask a question, you may press 1 on your telephone and wait for your name to be announced. Again, it is star one if you wish to ask a question. There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.
Okay. Well, if there isn't anything more that people would like to ask, we'll probably close off now. Thanks very much for your participation, everyone. As I said at the beginning, we really appreciate the interest.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating.