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Edited Transcript of WIG.AX earnings conference call or presentation 5-Aug-19 11:00pm GMT

Full Year 2019 Pinnacle Investment Management Group Ltd Earnings Call

Sep 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Pinnacle Investment Management Group Ltd earnings conference call or presentation Monday, August 5, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adrian Whittingham

Pinnacle Investment Management Group Limited - Executive Director

* Alan James D. Watson

Pinnacle Investment Management Group Limited - Non-Executive Independent Chairman

* Ian Macoun

Pinnacle Investment Management Group Limited - MD & Executive Director

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Conference Call Participants

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* Liam Cummins

Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst

* Nicholas McGarrigle

Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst

* Scott Murdoch

Morgans Financial Limited, Research Division - Senior Analyst

* Tim Lawson

Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Pinnacle Investment Management Group Full Year 2019 Results Conference Call. (Operator Instructions)

I'm now going to hand the conference over to your speaker today, to Ian. Please go ahead.

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [2]

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Thanks, Miles, and thank you, everyone, on the line for taking the time to join us this morning. Also with me here are our Chairman, Alan Watson; and Adrian Whittingham, an Executive Director.

So I'd like to spend the limited amount of time that I have this morning by quickly covering off the financial and business highlights, elaborating a few of the significant points to assist shareholders in interpreting the financial summary, explaining how we use our strong balance sheet to assist with further growth and making some concluding remarks about our performance and our fund flows and how well we are positioned for growth going forward.

So the agenda on Slide 1 is straightforward.

We begin on Slide 2 with the financial highlights. Net profit after tax was $30.5 million, up 32% from $23.1 million in the prior year. Basic earnings per share is $0.183, up 28% from $0.143 in the prior year. Our share of Affiliates after-tax net profit was $33.1 million, up 33% from $24.9 million.

We declared a fully franked final dividend of $0.093 per share payable on the 4th of October, bringing the total dividend for the financial year to $0.154 a share. Now this represents a 3.5% per annum fully franked yield, which is equal to 5% per annum grossed up for franking. $0.154 is 90% of diluted EPS or 84% of basic EPS. We'd like to remind shareholders that this business produces substantial cash earnings and that we can pay this level of dividend whilst retaining a strong balance sheet. We have cash and principal investments of $51.2 million at the 30th of June, 2019.

Slide 3 shows a little more detail on the full year results. At the top block, that is the top 1/3 of the slide, shows the aggregate Affiliate numbers. So total revenue was $236.8 million, up 40.6%; total net profit after tax was $89.1 million, up 44.6%.

Now our share of that $89.1 million aggregate Affiliates impact was $33.1 million, which you can see in the upper part of the bottom block, what is the bottom 2/3 of the slide, which shows the numbers for the overall Pinnacle group.

Slide 4 sets out the 2019 business highlights. Funds under management were $54.3 billion at the 30th of June, which includes $6.8 billion acquired in July 2018. This was up $7.6 billion, 16.3% from the 31st of December and $9.5 billion excluding acquired FUM for the full year, and that was up 25% on FY '18.

Retail funds under management are now $11.6 billion, 37.9% up excluding acquired FUM. Net inflows were $6.5 billion for the year, including $2.9 billion retail of which $1 billion was in listed investment companies or listed investment trusts. We had large institutional flows into Firetrail, which is now closed to institutional capacity. That was in the first half of the year.

Significant progress has been made in Metrics following our acquisition of a 35% interest, including $1.1 billion of net inflows, of which $845 million was new closed-end capital. So we're very pleased with our Metrics acquisition. It is proceeding very much as we had hoped when we made that acquisition about a year ago.

We've established 2 new Affiliates during the year, Longwave and Riparian, and PNI was added to the S&P/ASX 200 index in March 2019. That was about 5 months ago.

Slide 5 has some further detail on the funds under management growth, including in graphical form.

Slide 6 has the funds under management by Affiliates. You can see there it's along the top line. These are the Affiliates FUM individually at the 30th of June, '19. All of our Affiliates FUM has grown during the year with the help of equities markets. People would be aware that the ASX 300 is up 6.8% and the NIFTY as well was up 3.6% overall for the year.

The only additional information on Slide 7 really is the amounts of performance fees. These were very modest other than in Palisade as I think was well signaled through the year.

Slide 9 sets out some of the significant points to assist in interpreting the financial summary. The main one that I would call out is the second point, and I want to reiterate this. As we've consistently stated, we'll continue to invest in activities, which we believe will bring substantial benefits over the medium term whilst recognizing that such investment may restrain our profits to some degree in the short term. So not only have we added to the resourcing within Pinnacle parent as we've grown the number of strategies offered by our Affiliates and enhanced the overall quality and strength of our services, but we've invested in additional resourcing ahead of planned further growth.

These costs are all expensed outright on the Pinnacle parent P&L and they're what we call Horizon 2 costs. Now this includes: firstly, servicing new Affiliates without charging them for the services prior to them reaching profitability. So this includes Firetrail through the first half and Two Trees, Longwave and Riparian, which are still in Horizon 2 state.

Secondly, launching active ETFs and other initiatives towards direct-to-retail consumer capability, including expanding our marketing capability very substantially; and thirdly, offshore distribution.

So all of which has added to Pinnacle parent's cost and not added yet to our revenues. There's further detail on Horizon 2 investments on Slide 15, 16 and 17, and look, I'd like to emphasize that this is a very conscious and deliberate strategy. We make extremely high returns on our Horizon 2 investment over the medium term. But it can take up to 3 to 5 years from incurring the cost for the benefit to come fully through.

Mentioned these costs were expensed straight out as they're incurred on the Pinnacle parent P&L. We are comfortable doing this. I believe that Pinnacle shareholders are readily able to understand the impacts and make adjustments to broadly assess what our true profits are. I mean clearly, profits are effectively higher and substantially higher than what we report. And although, as I said, Horizon 2 investments are lucrative over the medium term, we discipline ourselves to not exceed what we consider to be a reasonable level of Horizon 2 P&L drag each year.

Now Slides 10 and 11 demonstrate what we call a strong and flexible balance sheet, including cash and principal investments of $51.2 million at the 30th of June. This surplus capital is valuable to us. We deploy it very effectively upon investing in the funds and the strategies of Affiliates, particularly in seeding new strategies where it is very valuable and helpful. Then we usually rotate out once the strategy has gained traction and deploy it again in new strategies.

At the 30th of June, we've had an unusually high level of cash and low level of principal investments. We've since deployed $5 million into the Plato market mutual fund, which is Dave Allen's new strategy. And we've got $8 million cash ready to deploy into our new Hyperion Global fund offshore, actually in the U.S., the U.S. 40 Act mutual fund.

I don't really have time to go through how we've deployed the rest of that PI money and what we're going to do with the cash, but I do want to emphasize that the cash and principal investments also play a very important second role, which serves as dry powder that we can use in the event that we find attractive Horizon 3 opportunities.

Now most of the rest of this slide deck, Slides 14 to 45, provide a lot more supporting detail about our results and our strategies. I'll skip over most of these and leave it to shareholders to review for themselves.

On Slide 40 shows that our medium-term performance remains strong. Slide 41 and 42 show that many of our Affiliate strategies have performed strongly. But over the past year or so, a few have underperformed their benchmarks. This is mainly style related or just related to particularly short-term circumstances we believe. We're happy to discuss this further in individual meetings. Suffice to say, we are not concerned about the short-term performance of our Affiliates. Our Affiliates are very high-quality. The leaders are very experienced, and there is an excellent long-term track record in all of them.

Slides 42 and 44 talk about Pinnacle charitable foundation. We're very proud of the foundation and its work. I won't have time to go into that in more detail.

So finally to Slide 46. So in concluding, I'd like to remind shareholders that Pinnacle remains a high-growth company with substantial initiatives underway and plans to continue to grow strongly by way of each of Horizons 1 and 2 and possibly, Horizon 3 as well as we promised 3 years ago when we became a pure play funds management company.

Now Alan, in his Chairman's letter, has elaborated on this a little. There's quite a lot in our Chairman's letter that I would refer shareholders to that give great background on our recent performance and so on and prospects. I haven't got time to go into all of that.

But as I mentioned, we will continue to invest significantly as part of our initiatives to achieve this growth. We are very focused on sustaining growth over the medium term.

We think we are one of very few ASX 200 listed companies that is forecast by analysts to continue to grow at well in excess of 20% per annum, and we're delivering a yield of 3.5% per annum fully franked, which is equivalent to 5% per annum growth after franking credits and especially if you exclude the resources companies that are very different than us, not many companies growing at more than 20% with a yield of more than 3.5% fully franked.

The overall level of institutional net inflows this year, other than the extraordinary Firetrail inflows in the first half, reflects a particular set of circumstances prevailing during the 12-month period under review. We have a strong institutional sales pipeline going into the 2020 financial year, and we expect our institutional inflows to be substantial again this year.

Although we can't predict what equities markets or investment markets generally will do over the coming year and beyond, we believe our company will continue to prosper through all market conditions and is increasingly diversified, diversified in asset classes, in sources of funds under management, in the greater range of high-quality investment teams. And therefore, it is strong, robust and resilient. And we have a business model that is extremely well-regarded and designed to prosper in the evolving market environment that we address, both in Australia and overseas.

So that's all I wanted to say initially. I'd like to invite questions now. So Miles, the operator, we are ready for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Scott Murdoch from Morgans.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [2]

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Just wondering if you can just give us a few more thoughts around the net flow environment looking out into the year ahead. Just any commentary would be appreciated on the areas of strength that you see. And also, if you can just touch on what sort of outflows you've seen in the year just gone, including sort of any risk of any large mandates there that are out with super funds given the environment we're in?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [3]

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Yes, okay. Thanks, Scott. So look, I'll probably just summarize this briefly by saying that -- well, as I mentioned, that in institutional, we have a strong pipeline and we're confident that we'll have good institutional flows in the year ahead. We've had a much poorer-than-expected institutional flow environment for the year. We think it was just some particular circumstances in this year. You know that institutional can be very lumpy. We actually had some very large inflows indicated to us that just didn't drop during the year. It's one of the challenges of measuring over point to point.

We did have some quite large outflows in 2 or 3 of our major Affiliates. I'll probably call out, I'm sure Andrew Parsons wouldn't mind me saying this, that in Resolution Capital, we had some quite large institutional outflows. Now as everyone knows, Res Cap is a fantastic fund manager, Global REITs especially, performed extremely well and the asset classes performed very well. And what happened during that period, quite a few of large clients took the top off their allocation. And there was actually roughly $1 billion of net outflows in institutional in Res Cap. Now do I think that's a fundamental problem? No. Res Cap has some quite large -- quite a large pipeline, but it was just one of those things in the circumstances.

Retail, retail is a different story. We are pleased with our overall level of flows; they our market-leading flows, $2.9 billion, $1 billion of that was LICs and LITs. $1.9 billion is normal, but that was roughly $1.2 billion in the first half and only $600 million or so in the second half. It was a weird period, the second half in the retail market. As you know, the market was down in the December quarter then we had an election in May with all of the threats of losing franking credits and so on. We've had the Royal Commission. There have been some outflows from major platforms. I think it's way too early to say how that's all going to settle in the retail market. And obviously, the performance low was the benchmark, whilst Firetrail and Antipodes has been lower, and that's probably impacted retail flows as well.

So I mean we don't like to make forecasts. But going forward, I would say nothing fundamentally has changed for us. We are confident of our inflow. I might ask Adrian to comment briefly about the retail, but my overall comment on retail is it's way too soon in the kind of changed environment for Royal Commission to start predicting any major trends.

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Adrian Whittingham, Pinnacle Investment Management Group Limited - Executive Director [4]

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Thanks, and thanks for the question, Scott. If I can just maybe add a few other points to elaborate on Ian's reply. If you look at Slide 23, particularly as it relates to the institutional market, what we wanted to provide is greater clarity. As we've seen this financial year just gone, there's been more than 15 industry funds that have been mentioned of potentially merging. So we've had a very clear and complete analysis of our institutional client base. And you can see on that slide, we have 78 institutional separate account clients.

Now what that means is that we are very well diversified as a business, and we are less reliant on 1 or 2 large institutions for support for our Affiliates and ultimately, for support for Pinnacle.

Now clearly, we want to stay on top of that. We're -- the rebalancing that occurred with Resolution Capital and equity managers, perhaps maybe it's now behind us with where markets may end up. But from an institutional domestic perspective, we are very comfortable. And as Ian mentioned, the pipeline is looking very strong for this FY.

As it relates to retail, if I can point you through to Slide 25, and what I want to focus on here is really looking at FY '18 versus FY '19 flows. And yes, we've seen a pickup in the last financial year, although it's been weaker towards the second half. The key point I want to make, and it relates to really Horizon 2 and Pinnacle investing ahead of growth, in FY '18, 70% of our net flows related to Antipodes, while the financial year just gone, it took up 30-odd percent.

Now the key thing to note with these is that with our Horizon 2 ambitions around listed, by building out a listed capability and a listed team by doing the Metrics acquisition, we are always thinking ahead of where the market may shift to protect our fill should we go through a cyclical period of underperformance for our managers and to also make sure we are accessing new distribution channels whilst the direct-to-consumer part of the market.

And with retail, clearly, intermediated channel has faced its challenges with the Royal Commission, et cetera. We are seeing even greater disintermediation, and we are seeing growth in our direct-to-consumer part of our business.

You can see on slide -- the slide that actually covers all the Horizon 2 initiatives, which is on Slide 18, direct-to-retail is that first flow. Now the important thing to mention here is that it actually excludes the direct-to-consumer allocations that are LICs, LITs and what would be ETF because it's very hard to get that information from the register.

So overall, as Ian mentioned, yes, it's been challenging, but we've invested ahead for direct-to-consumer. Institutional wasn't the best year, but there were some reasons for that and we're comfortable looking forward.

So that's a very long answer to your question, Scott, but I wanted to make sure I covered as many bases as possible.

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [5]

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Yes. And I'll just -- to cover off on your last question there, Scott. You said can I comment on the risk of large outflows. And look, this has been pretty topical, and there've been some kind of rumors floating around and so on. Adrian mentioned -- so I don't think we are at risk of these kind of large outflows that we've seen from some managers from a few big industry funds that have got particularly things going on.

Adrian mentioned we have an extremely diversified institutional client base. That is deliberate. We have been at great pains to make sure that we don't have any of our Affiliates exposed to just a small number of very big clients. And those particular industry funds that have gotten a lot of press about insourcing and terminating management and so on, we do not have substantial exposure there. So I think we can feel comfortable.

I mean, look, there was a rumor went around a little while ago that we're about to lose substantial mandate. It was total rot, and we know who started it. It was total rot. So if people want to talk about outflows from Firetrail, Firetrail stay in very close contact with their institutional clients who they've known for a long time. And Firetrail, that team has a 15-year track record, including with many of those clients. And they've got a large waiting list of people who'd like to become Firetrail clients, but they're closed.

So I do get, if you can hear, a little bit annoyed at these kind of rumors that people start.

So no, we are not at risk of kind of large outflows. And if we do get -- I mean there's always some movement in the institutional market as people reposition and rebalance and so on. If we ever get a significant outflow, in most of our strategies, that can be replaced very quickly. We have a waiting list on quite a few of our strategies. So sorry to go on, but it's a very important point. And I do wonder whether some of our shareholders haven't taken some notice of these rumors which do annoy me.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [6]

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Okay, Ian. That's pretty clear. Just another couple questions if I can. I think your message around the cost growth in Pinnacle parent is pretty consistent and well heard. But I'm just wondering sort of I guess forward-looking, I know you're not going to give cost guidance per se. But this year was a big step up in cost, you've explained that. Just the incremental sort of acceleration in that cost base that we should see going forward. Obviously, it's going to grow a bit, but, I mean, is there a large part of that cost in now that are going to drive the revenue, for example, the ETF strategy and et cetera that you've bedded down now?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [7]

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Yes. So thanks. We tried to signal fairly clearly that this year would be a very big step up. We said we were adding substantial [tariff] to our resourcing, including in the areas like ETFs and marketing and direct-to-consumer, et cetera. So what has come through is exactly what we had planned.

You're right, Scott. There will be some further flow through, kind of full year effect. But I also said earlier that we discipline ourselves, and we are not going to let that Horizon 2 net cost balloon out. It's going to be ongoing, so you will see the cost of Pinnacle parent continue to grow and our revenues continue to grow, but no, not at the rate of growth that we experienced in FY '19. That was a big step up.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [8]

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Okay. And I'll just take one last one while I've got the line. Just any commentary and outlook that you can give us on the pipeline of new affiliates that you might be talking to?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [9]

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Yes. So we've always said we'll probably add a couple each year in what we call builds or Horizon 2. I don't see anything to change that. I'd have to say, I reckon the rate of good people approaching us is as strong as it's ever been. I think as we just continue to move forward and demonstrate success, we are more and more in demand in that regard. We've always said that we are extremely selective and are going to continue in that regard. But yes, that's all part of Horizon 2. We will keep adding probably a couple a year.

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Operator [10]

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And our next question is from Tim Lawson from Macquarie.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [11]

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Just trying to link your general comments on the pipeline to Slide 18. Can you just talk a little bit about where you think those opportunities are specific to the lines you highlighted on that Slide 18?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [12]

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Yes. So Slide 18 is Horizon 2. And I should keep reminding everyone, Horizon 1 is still the main game, and our really big inflows will come from existing affiliates filling out towards capacity in a whole range of strategies. And so when we talk about our pipeline and so on, it's more Horizon 1 than anything.

But to look at Slide 18, certainly, we have significant confidence in Hyperion Global, Longwave, Spheria ongoing, Two Trees...

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Adrian Whittingham, Pinnacle Investment Management Group Limited - Executive Director [13]

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And I think that, Tim, is -- yes, it's global distribution. So one thing we haven't really elaborated on much is that the pipeline for offshore clients is growing significantly as well. So that is a key pillar.

When we talk about incubating new affiliates, and, of course, for Horizon 1, for our existing, we're generally looking to have them accessible in direct-to-consumer, accessible in intermediated, accessible in domestic institutional and global distribution, so 4 channels we talk about.

Now not every affiliate can actually tap those because of -- it just depends on their strategy. But in regards to global distribution, clearly, it's our most underrepresented. We've only been going for a short period of time being fully committed. So further to Ian's comments, we would see global distribution potentially being significant opportunity for us.

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [14]

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And also, that $3 billion that we've got from offshore at this stage, we expect that to grow quite substantially. Part of our Horizon 2 costs that I called out was our London office. We have 2 very experienced and capable distribution people over there and office accommodation and so on. But that's all there for sales offshore, which we are confident we're going to get.

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Operator [15]

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Our next question is from Liam Cummins from Wilsons.

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Liam Cummins, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [16]

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Look, firstly, Ian, just picking up a comment you made around the institutional inflows for FY '20. You're saying that there are a few things that didn't drop in FY '19. Could we get a sort of maybe a feel for how much of FY '20 is just sort of delays from FY '19 versus sort of new interest?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [17]

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Yes. So look, it's always hard to say, Liam. The insto market, I talk about it being lumpy and it sort of moves around. I mean maybe I'm showing my age, but I remember when -- in the days where you won some institutional business, then it suddenly arrives. And it didn't get lost all right. These days, you win it and time goes by and things change, and yes, sometimes it comes. And then all of a sudden, you'll get very large mandates passed.

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Adrian Whittingham, Pinnacle Investment Management Group Limited - Executive Director [18]

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And Liam, probably in prior years, basically, if we had a forecast -- obviously, we've never really forecast a number out there. In the prior year, we probably received all the more exits. But the lumpy nature of institutional flow, it probably wouldn't be appropriate today to give you a number or whatnot.

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [19]

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We did say that $7.9 billion last year was extraordinary and that we shouldn't expect that rate to continue, but yes. Look, so no 12 months seems like a fair period of time, but really in 1 12-month period or another, it can be particularly large or it can be particularly small, and we just don't know. But we wouldn't be making these statements if we didn't have significant pipeline. So we've got visibility back. But that's sort of a few months out. Who knows beyond that. We've certainly got a range of very good capabilities that are still available, but some of things that brought us big sales last time, like Solaris, is largely closed to insto now.

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Liam Cummins, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [20]

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Got you. And maybe on Slide 25, on the retail flows page. So I'm interested in Hyperion. Obviously, that was shut to most retail strategies. Obviously, there's a negative number there. This year, it switched to sort of a plus 2% of your inflows for '19. Can we sort of get a feel for how much sort of marketing effort's gone into Hyperion Global to date and what do you sort of expect that number? If you can -- I mean, well, I was hoping to get a number, but if you can sort of give us a feel for where that number could potentially go to and maybe what capacity the FUM could run at?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [21]

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Yes. So I would say a lot of effort and not a lot of sales so far for Hyperion Global in retail. But things are looking good. They've got good new ratings. All the work's gone on to get them like on all the swaps and so on. So that's looking good. I mean the capacity and the strategy is like $10 billion or more. So getting traction, some new strategy is hard work. And so I don't think we'd like to put numbers on it. It's too hard to forecast. There's a lot of things going on out there that will impact it.

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Adrian Whittingham, Pinnacle Investment Management Group Limited - Executive Director [22]

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Yes. Also, what I would say, if we execute well -- and we're getting momentum, you could see that in the slide numbers. If we execute well, that strategy should be in the, let's just say, top 5 of net flows for global equity. And we're well positioned to achieve that. Obviously, this year, we actually have to get significant results. So it's a focus for us. But that being said, it's just one of the global equity strategies we have in the marketplace. We have Antipodes, as you are aware, haven't been a fair market. They're very well positioned, low EBITDA, clients understand their positioning in the marketplace. So they naturally have (inaudible) as it relates to Hyperion.

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [23]

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And look, Antipodes, people should be aware, it's underperformed its benchmark for the last year or 2. But first of all, since inception, it's still significantly ahead. But over this period, they are still one of the top-performing value-style managers in the world. Their style has been out of favor, but they have performed well -- very well relative to their peers. And people need to have diversified portfolio, including by manager and style, so people ought to be putting Antipodes into their portfolios, yes.

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Liam Cummins, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [24]

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Good. And maybe as half a follow-on to that question, where are the sort of the -- I guess the tone of conversation is? Because sort of the main retail clients around Antipodes because, as you said, we're sort of in an environment where things are starting to get tippy. You would have expected flows to be sort of reasonable into that strategy. So I just wondered maybe sort of how direct the correlation is between sort of outperformance numbers on a short term versus flows you'd expect to see rather than people looking a bit further ahead.

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [25]

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Yes. I'll let Adrian answer that. There's no doubt that Firetrail's retail flows are lower than they were. They were extremely high. But as I said before, there's so much been going in this retail market. I mean we are still one of the largest net sales success organizations out there. It's just that the retail market in the last half overall has had low net inflows. So look, it is hard to say. Look Liam, there's no doubt that there are quite a few retail investors who are impacted by short-term performance. They shouldn't be but that's easy for us to say, so.

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Adrian Whittingham, Pinnacle Investment Management Group Limited - Executive Director [26]

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Yes. We've been very focused on -- even when we take the new managers to the marketplace, clearly, we're not focused on selling just purely on performance or historic performance. For Antipodes, when we -- through that very rapid adoption of their strategy by clients, we are very clear in talking, particularly for Long Short, it has a role to play in portfolios, in wrapper portfolio construction, relative to higher-quality or growth managers because just overall, in periods when markets sell off, you should expect to get some protection from Antipodes. So we're just saying, very -- actually we're being very focused on making sure our clients understand that. I'm sure at the edges, there will be some that, perhaps, may be more performance-centric. However, when ultimately the markets does move from the biggest divergence from growth and value in more than 50 years, they're not positioned in a value strategy. Then clearly, as you would know, they're going to be impacted by that.

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Liam Cummins, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [27]

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Yes. Got it. Maybe one last one for me before I jump back in the queue. Can you just give a quick update on how you see the IC market at the moment? It's obviously felt like it's pretty well shut sort of late last calendar year, but there's obviously a few more things happening at the moment. So maybe just sort of your views on where the appetite might be in that channel?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [28]

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So we will keep watching it. Clearly, it moved sort of in favor of income, and we've had great success with Metrics, which has just done a fabulous job for its investors ever since the first day when MXT was launched. We think demand for income is extremely strong. We have a range of candidates. We've been out stable for weeks and weeks. We like the market. We think it services a particular investor group, and we want to keep servicing that.

But as to what we bring to the market at any point in time depends on market circumstances. So there's a few big ones out there at the moment. We'll see how they go. But we intend to remain a participant. But look, everything we do, we want to be good for investors.

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Adrian Whittingham, Pinnacle Investment Management Group Limited - Executive Director [29]

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And I think the key thing is yes, it serves the IPO. And this definition of success is getting a significant IPO, although that ultimately, it's about the client journey and it's about ensuring you can do your best possible to make sure the strategy doesn't trade at a discount or significant discount to NPA.

So that's very much in our focus and our planning when we look at new strategies we manage it to bring to the market in good faith because we want to make sure that all of our clients have a good experience, not just the initial benefit of getting a new strategy away.

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Operator [30]

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(Operator Instructions) And our next question is from Nick from Ord Minnett.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [31]

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I'm wondering if you could provide a bit of commentary around performance fees, maybe even around some sort of volume trends on managers and what that looks like.

And then I guess just a sort of a foray into asking about Palisade, including some of the eruption that happened there over the last 12 or 18 months. The result looks to have been pretty strong in terms of getting new margin and everything. So just some comments on those 2 things?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [32]

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Yes. What was the first one?

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Adrian Whittingham, Pinnacle Investment Management Group Limited - Executive Director [33]

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The performance fee.

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Alan James D. Watson, Pinnacle Investment Management Group Limited - Non-Executive Independent Chairman [34]

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Performance fee progress.

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [35]

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Yes. So the largest part of performance fees was Palisade, as expected. And overall, Nick, this is a very low performance fee outcome. I think people are generally aware of why we do have large performance fee potential now. Something like 30% of our total FUM attracts performance fees with large increases in the Antipodes and Firetrail's FUM attracting performance fees. And Palisade was just slightly down on last year's performance fees. But looking forward, Palisade is absolutely fine. Palisade keeps continuing to do the job for its investors that they expected it and produces very good returns, and therefore, healthy performance fees. Their challenge is getting their FUM to grow and finding the assets, but they are working very hard on continuing to do that.

But Nick, to your question about the composition, besides Palisade, there were performance fees from Res Cap. And remember, it's mainly Res Cap's funds, its retail funds. Metrics had some performance fees. Hyperion Global had some. Solaris had some, and there was some in Spheria. So that's more or less the sort of FY '19 breakdown. But we…

(technical difficulty)

Sorry, just a sec. Leave it, I think, there.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [36]

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I know you're having a fire drill, but I'll ask you that question.

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [37]

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Yes.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [38]

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I thought there might be some one-off expenses in relation to the acquisition that you did in earlier in the financial year. Have you split it out? Are there any (inaudible)?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [39]

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Sorry, just -- yes, so Nick, we have had -- so yes, look, we have had quite a few one-off costs during this year. Yes, a little bit related to our acquisitions, but quite a lot of them really relating to Horizon 2 growth. I mean we expanded our office accommodation in Sydney and Brisbane. We had quite a few search fees. We had some legals related to new affiliates and so on. So yes, it was a fairly big year, but I would say those costs relate to our growth, our Horizon 2 growth in particular.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [40]

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But there's nothing there you'd call out as one-off when you attach to that acquisitions because, I guess, you're doing those every year. So there's nothing to sort of normalize for in that model right?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [41]

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That's right. Look, I'd like people to get used to the idea that it's the net cost of Horizon 2 in Pinnacle parent. Get used to just spend $5 million or so each year. That's not a growing amount, but it's a consistent amount each year.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [42]

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And just in terms of the profitability of the (inaudible), and which should give us Hyperion, Res Cap, Palisade, Solaris, and adding them up, they did really well. Are there any -- in terms of the materiality of the profit maybe at Firetrail, is that still sort of in its early stages or is the money really not one for the full year, just in terms of thinking about the profitability of the big sort of (inaudible)?

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [43]

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Yes. So every year, along with our auditors, we look at each affiliates, and they have criteria as to what is material. I think it's likely that 1 or 2 extra affiliates will pop into that material -- into the criteria and you'll see some more that are sort of shown separately in that table that you're calling out there, Nick. But yes, obviously, Firetrail turned from being loss-making last year to profitable this year. Antipodes' profitability keeps growing. We've got Metrics now that is quite substantial and so on. But none of those met the criteria in the year just gone, but they're getting towards it.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [44]

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And maybe just one last one for me. The REIT outflow in the second half of $1.5 billion, which is a nice number. Can you -- obviously, [it can't really be interpreted if exposed] (inaudible). And so if we back that out and the Metrics was -- what is -- where do you think the sort of growth in that retail business is going to come from into next year? And I guess, actually, following that, which manager is potentially going to look at doing something like a real life savings?

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Adrian Whittingham, Pinnacle Investment Management Group Limited - Executive Director [45]

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Yes. So Nick, I'll answer that. It's Adrian. I mean, look, clearly, I think, closed to this year -- or for the year just gone, were more diversified. I would say we should expect to see continued good flows around Metrics, not only in the listed environment, but they will be releasing a wholesale trust, which a number of clients have expressed interest in. So we can see demand there in the retail channel.

There's also been a number of high net worth groups who have invested in some of their subtrusts, some of the specialized subtrusts for their significant clients. So we'll see growth with Metrics in that channel as well.

I think furthermore, we will see Solaris continue to grow. That was just upgraded yesterday by -- in retail by Lonsec, highly recommended across all strategies. We've got fantastic momentum around that the Long Short, but also in regards to their performance fee, the only strategy that's in the marketplace.

Hyperion, we touched on. And also Resolution Capital continues to be the dominant player. And we still think there's growth for global REITs in the clients' portfolio.

Finally, I think you will see Plato. Clearly leading up to the election, there were headwinds around franking credits. Very pleased with, certainly, the support they're getting post the election. So we -- you will see further demand and support for Plato. Income is obviously the theme -- or one of the biggest themes in the marketplace.

And finally, there are some other affiliates such as Two Trees. Whilst we haven't really made much progress on the retail perspective, if you look at their performance versus their hedge fund peers over the last 12 months, they're in a really strong position. So I would say we actually have quite a lot of options of flow from a retail perspective. But it will be a matter of making sure we get momentum. As you know, retail folk are very much about momentum. One thing that I'm very proud and pleased about as a business and the teams, they're being very focused in getting momentum and supporting our clients strongly. This year is no different. It's just different managers more so compared to what we've had in the past.

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [46]

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And Nick, in terms of your LIC/LIT question, all I can say there is watch this space. Obviously, we can't announce a new LIC until it's ready. But I think we've indicated, we want to continue to be a player in that space.

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Operator [47]

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There's no further questions at this time. I would like to hand the call back to the speakers for any closing remarks. Please go ahead.

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Ian Macoun, Pinnacle Investment Management Group Limited - MD & Executive Director [48]

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Well, I think if there are no more questions, we look forward to the one-on-one meetings over the next several days.

I think we have covered most things pretty well. I could go on and talk about the fact that our industry continues to have strong tailwinds with superfunds growing and so on, and the need for high-quality active fund managers is as great as ever. And everyone can form their own views, but I think in the kind of environment going forward, just the better of markets will struggle to produce the kind of returns that investors need, and so high-quality active managers, we think, are going to be in demand as much as ever.

We are continuing to grow strongly, and we're working hard to continue the sort of rates of growth that we've experienced and that people are forecasting for us.

So I'll say thanks very much to everybody. We're happy to take questions and have discussions one-on-one.

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Operator [49]

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Ladies and gentlemen, I do believe that's the end of the call today. Thank you for all participating. You may all disconnect. Thank you and goodbye.