What is the stock?
Pinnacle Investment Management (PNI) currently has equity interests in seven boutique Australian fund managers. Cumulatively, these managers manage $25bn on behalf of clients. PNI adds value to its affiliated fund managers by providing infrastructure, resources and distribution services, allowing the fund manager to largely concentrate on investment performance.
How long have you held the stock?
We have owned PNI since October last year when it was trading around $2.00.
What do you like about it?
PNI gives us exposure to a suite of good fund managers, with robust performance track records. A number of these fund managers are at the early stages of building up their businesses — which means the runway for growth could be long. PNI is well-positioned to assist these fund managers extend their investment management performance record into growing out their businesses.
How is it better than its competitors?
There are very few investment management companies listed in Australia. We do like the fact that PNI’s affiliated fund managers have good performance track records. Finally, the quality of investment professionals is high.
What do you like about its management?
We see management as well considered and experienced. We believe this is important, especially in establishing nascent businesses – sometimes a holding hand during a difficult period can be extremely helpful.
What is your target price?
PNI is trading at an FY17 PER of 35x. It’s not cheap based on near term earnings. Rather than investing for the ‘now’, we are investing for the potential for PNI to extend its growth i.e. take a three to five-year investment horizon. PNI has the potential to be a much larger business.
At what point would you sell it?
Reputation is important in funds management, a risk we are well-aware of, being fund managers ourselves. We will sell PNI should there be evidence of significant reputation damage. This could arise from extremely poor investment decisions or perhaps unethical practices. We expect to see significant fund outflows should a fund suffer reputational damage.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
PNI is a relatively large position in the Prime Value Emerging Opportunities Fund, a fund that invests in the smaller capitalisation equity market category for underappreciated shares using a concentrated, high conviction approach. PNI’s strong performance has added approximately 100 basis points to fund performance.
Where do you see the value?
PNI’s position is dynamic. We expect PNI to maintain a pipeline of ‘products’ that could be introduced in the future – these products would be funds or funds manager that would be complimentary to PNI’s existing business. We see these as PNI’s latent potential.
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