Ladies and gentlemen, thank you for standing by, and welcome to Pinnacle Investment Management Group full year 2018 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. I must advise you that this conference is being recorded today, the 28th of August, 2018. I would now like to hand the conference over to your first speaker today, Ian Macoun. Thank you. Please go ahead.
Thanks, Rishi. Thank you to everyone on the call. We appreciate your interest and we appreciate the support that we receive from our shareholders. With me today is also Alan Watson, our Chairman, and Adrian Whittingham, who's an Executive Director responsible amongst other things for retail distribution. This is a presentation of our annual results of PNI for the 2018 financial year. On the 24th of July, we announced the bottom line, our net profit after tax that we expected to be reporting for FY 2018, together with the 30th of June 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 have provided today our audited financial statements for the 2018 financial year and our FY 2018 annual report.
We also announced on the 20th of July an equity capital raise, as well as the acquisition of 35% of Metrics Credit and 40% of Omega. These have all now been completed smoothly. We raised AUD 60 million in the institutional placement and AUD 10 million in the share purchase plan. This was quite heavily oversubscribed. We deployed AUD 48 million of that AUD 70 million in acquiring Metrics Credit and Omega. That AUD 22 million surplus is now available to us, taking our total surplus capital around AUD 50 million. That's a number that moves around during the year as money comes in and out, but it's around AUD 50 million. 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. This capital is strategically very important to us.
We use it to invest in affiliate strategies in a fairly strategic way, particularly as seed some for new strategies and to get some 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. I would ask people to get used to the idea of our equity holding in affiliates going up and down a little bit as we emphasize the recycling of equity in affiliates. 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 3 acquisitions arise. I'd better move to the highlights of the presentation and leave plenty of time for questions. If I can invite you to go to the presentation.
Slide two provides summary detail of the financial results. I will leave that to shareholders to read at their leisure and be in touch with any questions. The financial highlights are on slide three, which include net profit after tax from continuing operations attributable to shareholders of AUD 23.1 million, which is up 92.5% from AUD 12 million in the prior year. Earnings per share from continuing operations of AUD 0.143, up 76.5% from AUD 0.081 in the prior year. Our share of the net profit after tax from Pinnacle affiliates was AUD 24.9 million in the year, up 41.4% from AUD 17.6 million. We've declared a fully franked final dividend of AUD 0.07 per share, payable on the 5th of October, taking the year's total dividends to AUD 0.116 per share.
All of these are confirmed as being the same as what we reported on the 24th of July. Similarly, on slide four, the business highlights, which are also unchanged, included funds under management of AUD 38 billion at the 30th of June 2018, which was up AUD 11.5 billion or 43.4% from a year earlier, 30th of June 2017. We now show in the footnote on this slide four a FUM update at the 31st of July, which is AUD 45.5 billion. Which, of course, includes the Metrics Credit fund of AUD 2.5 billion and Omega fund of AUD 4.3 billion. These were added through the two acquisitions. We also reported in July that our net inflows for the year were US$7.9 billion, which, of course, was a record for us, and it included US$2.2 billion of retail net inflows.
In terms of other recent developments to update you with, in July, we guided that Firetrail, we're expecting net inflows in excess of AUD 1 billion by the 30th of September. We're now guiding an update to that in slide 25, that Firetrail are now expecting net inflows in excess of US$2 billion by the 30th of September. Another update item is on slide 23, where we've indicated that Lorraine Berends has been appointed to the PNI board effective 1st of September 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 IMCA, the Investment Management Consultants Association, for seven years and chair of ASFA, the Association of Superannuation Funds of Australia, for three years, amongst other non-executive 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, 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. There's Pinnacle Parent, which is essentially the revenues and costs 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.
The second component is 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 operating leverage is coming through now strongly and this should continue. Having said that, not only is Pinnacle continuing to invest from our P&L in resourcing for future growth, but several of our affiliates have added resources for future growth. 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 25. I think I've gone on for long enough. I should pause now and invite questions, please.
Ladies and gentlemen, you may press star one if you wish to ask a question. Again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. The first question comes from the line of Nick McGarrigle. Your line is now open.
Thank you. That was very well pronounced, much better than average, so well done. Congrats on the great result, which obviously was 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 are in the annual report. But maybe can you comment on Antipodes, given its high growth phase and maybe what margins it's producing at this point? Then maybe the losses in Firetrail and Two Trees that we should think about where those were made.
No, thanks, Nick. As you said, there's a brief summary of the financials of our four largest affiliates in the financial report. In terms of Antipodes, 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 Antipodes have continued to add resources. I think they have 20 or so people in the investment team now. They also added Andrew Findlay as managing director to free Jacob up to focus even more strongly on investment performance and the investment team. Yes, Nick, it was a transition year for Antipodes. Two Trees still made a loss this year.
Spheria, it was its first year of profit. 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. It's not as large, but it will start making profits this year as well.
If I, maybe Nick, Adrian 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. We are making progress on offshore distribution with Antipodes. 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. If we continue on with the momentum that we expect over this half, I think it's going to put us in a good position in the medium term for Two Trees.
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 income and now global market neutral. I think they're probably the highlights, Nick. Antipodes, of course, is on a major steep increase. Is that clear enough?
Okay, thank you. Maybe, sorry, just on I think that was good overview. Just, I noticed Solaris's profit was up substantially. Was that some reason performance fees or was that just an indication of operating leverage coming through given their FUM was up more than 50% year-over-year?
It was both. We're delighted with the increase in FUM in Solaris. Even though a lot of that is large FUM at reasonably modest fees, it's very profitable business. Their performance was outstanding in the year, and there were some performance fees for Solaris as well. The performance fee number of that AUD 17 million that we reported, the largest component was Palisade and Solaris and ResCap were the other main performance fee earners in this particular year.
The guidance for Firetrail 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, if a business like that had AUD 5 billion, would it produce similar operating EBIT margins to a Hyperion? Should we think about that business differently?
They're all somewhat different, Nick. 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 Firetrail FUM has performance fees on it. Obviously, depending on performance, there's a potential for quite big revenue in Firetrail. Firetrail is a reasonably expensive business. They've got a sizable team. The real gain in Firetrail Obviously they're going to be profitable this year, even on base fees. They're doing very well. The really big gain for them is performance fees. We should talk about performance fees generally.
Alan, in his chairman's letter, referred to We think a lot about what if there's a market drop, where we say we wouldn't be immune, but there are various factors that would protect us in that event. The fact that 27% of our FUM now has performance fees attached to it is a real mitigating factor.
What has represented again, sorry?
27% of our FUM Has performance fees generally around the 15%-20% of alpha. 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. 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.
Obviously Palisade was in the news throughout the FY 2018 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 to deal with some of those headlines?
Yeah. Palisade have explained that they did make some adjustments to their fee arrangements with particularly longstanding clients and the clients in their main diversified fund, but they are not going to affect the underlying fee revenue so much. They were related to future growth more than anything. No big changes there. Palisade had substantial performance fees because they have had great performance. Tends to be more consistent performance than for some of our other equity affiliates because their benchmark is generally the bond rate, a margin above the bond rate. And Palisade has done a wonderful job for its investors over a long period of time. Its fund does not grow as rapidly as some because they are very focused on deploying their money in strongly earning assets, so they get the performance fee rewards for that.
I think it is well-known that the investors in the diversified fund voted to change the arrangements whereby a 75% vote is required to change the manager there now, whereas previously 50%. It was a strong endorsement from all of the investors in PITF.
Great. Thanks for that update. I might ask one last one and then let someone else chip in. The Pinnacle overhead obviously was down to AUD 1.8. I think the year before it was around AUD 5.6 of loss. I know that you have historically said you are not looking to make a profit in that segment, but given Firetrail's rapid growth, Antipodes' continued growth, do you think that that will track towards breakeven in the short term?
Yeah. I have consistently said we do not target a particular level of outcome for Pinnacle Parent. It is a result of, as you say, strongly growing revenues from our affiliates, particularly for distribution. Whereas we broadly have priced in the past to break even, a few affiliates more recently, we have accepted lower percentage equity with more profitable fees for retail distribution in particular. That trend is there. We are also investing quite strongly in Pinnacle Parent. We have added quite a lot of resources. I think our staff numbers are about 55 in Pinnacle Parent at the end of the year versus 40 at the beginning of the year. Whilst we are disciplined in adding resource, we are absolutely investing in new initiatives for direct to retail, for offshore distribution and so on. The result is the outworking of those two factors, Nick, greater revenue and greater cost.
We're going to
Got it
We'll keep investing for the medium term. 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. We can meet their growth demands and that of our clients.
Yeah.
Okay. We'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 Liam 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 2019 and perhaps give us an update on where you see the LIC market. There's obviously been a fair bit of activity during FY 2018, just wondering how you're viewing that as a distribution channel in FY 2019.
Sure. Thanks for the question. 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 24 months. Where we see it going forward, I think certainly in intermediated retail distribution domestically, we are well-resourced. There will be incremental growth in that aspect. 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.
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, be it ETFs, LICs and LITs. You will see us resource up in that space. We have planned two LICs/LITs before the end of this first half. 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. The offshore team, particularly based out of London, we're making some progress there. 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 would probably see us increase resourcing in marketing, in capital markets, which is the listed channel, and also potentially offshore once we start to see further revenue come through.
Great. Thanks for that. Maybe, Ian, I know you 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 expectations around how we should be thinking of the margin as you ramp or deploy some of these new strategies and funds.
Yeah. 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, so probably not a big impact probably on FY 2019, really.
Yeah. Great.
We're looking to add. We've always said we'll look to add a couple a year of builds, and we're certainly on track for that.
[Plus], if I can add to that. Certainly, the pipeline is as strong as ever in regards to potential incubations. That's both for those that we're engaged or have approached us. 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. I would say that as per Ian's comment, sometimes you can't necessarily control the timeline.
Yeah.
However, the environment does look quite positive for us in regards to future incubation.
Great. Maybe one final one from me. It is great to hear that Two Trees is now running on a profitable run rate. Just for clarity, and I may have missed this in the presentation, 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.
Okay, got you.
Yeah.
Okay. No, that's fine. Thanks, guys.
Thank you. There are currently no questions. If you would like to ask a question, ladies and gentlemen, please press star one on your telephone. We have a follow-up question from Nick McGarrigle. Your line is now open.
Just two follow-up ones from me. Can you give us an update on the U.S. distribution strategy for Hyperion, particularly in light of their performance record over the last year? It's pretty impressive, high teens alpha versus the [audio distortion]. Obviously, they've engaged with some U.S. distribution partners. Just an update there.
Yeah. 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.
I mean.
We can't really report.
Yeah. Nick, for example, two of the key investors were in the U.S. only two months ago. Feedback, 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. 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 portfolio based in the U.S. 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, the process has become quite elongated.
We're just breaking the back of that now. We're all quite excited about the opportunity for Hyperion in the intermediated and direct retail space. Clearly, we need to convert that, and that's what this FY 2019 is about. We need to get the results on the board.
Okay. One last one from me. I notice that the dividends or the distributions out of the boutiques 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 2019 in cash?
Yeah. 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. 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. 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. That's just kind of a temporary thing, Nick, and that'll begin to be released imminently.
Again, I think, just as I said, you could expect that Pinnacle's balance sheet can be used a little bit to facilitate equity recycling. You'll see our affiliates doing that from time to time, and that's with our blessing and encouragement. We have a veto right. It's one of our shareholder agreement protections, is dividend payout ratios. Hyperion did that with our full encouragement and blessing.
Thanks [for that] .
Yeah. What I would say, 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 they actually pay that, is often into the new year. That relates to the previous year, which is lower because the affiliates are growing strongly.
I understand. Please, maybe I'm just hogging 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, that kind of stuff?
Yeah. Again, I think Adrian talked a little bit about retail where he said that there's a particular environment with Royal Commissions and things happening I guess that it takes longer to get the slots. 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 Aussie strategies, which I understand have been sort of not generating inflows over the last little while, just partly because they've been soft close or hard close.
Yeah. What we are doing, the small company fund has been hard closed. We've moved that to soft close as more capacity has been created over the last 18 months. There's not a lot of capacity there. We will engage key clients in regards to making them aware that that is the case. In their large companies fund, again, that is a strategy whereby the team want to be conservative in regards to fund growth. I would expect a greater focus to be on the global strategies as opposed to domestic.
Good. Thank you.
Thank you. We also have a follow-up question from Liam Cummins. Your line is open.
Hi, guys. Just one quick one on the bump up on the inflow expectations for Firetrail. I know to date you've been quite firm in the commentary that you're only really going to accept retail-esque money. I'm assuming that we shouldn't be making any change on the back of this sort of AUD 1 billion-AUD 2 billion inflow number?
Yeah. No, I think what we've said, Liam, is that there's a certain amount reserved for institutional-
Yeah. Correct. Yep
That's what really we're seeing now. We're very pleased with the retail flows for Firetrail as well. It's been well-received, but of course, retail takes longer.
Yeah. You're up and running across all funds with ratings with Zenith now, is that right? Isn't it?
Firetrail.
Yes, that's correct.
Yep.
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 for getting on platforms or approved lists across dealer networks. We're making good progress on the retail side off the back of strong demand.
Great. Thanks for that.
Thank you. Ladies and gentlemen, if you wish to ask a question, you may press star one 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.