Company Reports

This note replaces the original version that accompanied our report "Industry Pulse - Australian Asset Managers: 2024 Q1," published March 14, 2024. We were recently made aware of inaccuracies in the net flow data for certain unlisted managers in that original report. As for our investment conclusions, we stand by our key assessments: the fair value estimates, moat, uncertainty, capital allocation, and star ratings for our Asset Manager coverage.

Share prices of ASX-listed asset managers fell for most of 2023 but broadly rebounded late in the year in anticipation of lower interest rates. Stabilizing interest rates generally enhances investor risk appetite, thus boosting fund flows, asset prices, and earnings for asset managers. Globally, net annual fund flows into open-ended, money market, and exchange-traded funds turned positive in March 2023 after close to six months of net outflows. This reflects a stabilizing US federal-funds rate and an increased likelihood of rate cuts in 2024. In Australia, the prospect of cuts in the Reserve Bank of Australia’s cash rate in the near term is likely positive for flows into Australian-domiciled funds—consisting of ETFs, industry funds, and active managers.

Narrow-moat Pinnacle’s net profit aftertax for the first half of fiscal 2024 was broadly flat from the previous corresponding period and was as expected. The underlying drivers surprised us, though. Affiliate profits grew 30% from the PCP, with better-than-expected net inflows and fee margins resulting in strong revenue. However, elevated growth expenses exceeded our forecasts, with affiliate pretax profit margins contracting to 41% from 44% in the PCP.

Pinnacle Investment Management provides seed and working capital, marketing and distribution services, business support and responsible entity services to a network of boutique managers--which it terms as "affiliates." Apart from charging fees for its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. As of December 2023, Pinnacle has 15 affiliates under its network with around AUD 100 billion in FUM.

Our conviction in the thesis for listed wealth managers, asset managers, and their related service providers has strengthened after gathering insights from the recent 2023 Super & Wealth Summit, hosted by the Australian Financial Review. These firms are influenced by similar business drivers and industry trends. Most derive their revenue from funds under management and/or administration, or FUMA, which are driven by asset price movements and new fund flows from clients, and management fees or commissions on these FUMA.

Pinnacle Investment Management provides seed and working capital, marketing and distribution services, business support and responsible entity services to a network of boutique managers--which it terms as "affiliates." Apart from charging fees for its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. As of September 2023, Pinnacle has 15 affiliates under its network with around AUD 90 billion in FUM.

We retain our fair value estimate for narrow-moat Pinnacle at AUD 11 per share. Net inflows for fiscal 2024's first three months were AUD 200 million. While modest at less than 1% of funds under management, it is a standout compared with other listed asset managers. The industry experienced redemptions over this period due to persistent client aversion toward risk assets, caused by uncertainty on the trajectory of interest rates.

Pinnacle Investment Management provides seed and working capital, marketing and distribution services, business support and responsible entity services to a network of boutique managers--which it terms as "affiliates." Apart from charging fees for its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. As at December 2021, Pinnacle has 16 affiliates under its network with AUD 94 billion in FUM.

Pinnacle Investment Management provides seed and working capital, marketing and distribution services, business support and responsible entity services to a network of boutique managers--which it terms as "affiliates." Apart from charging fees for its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. As at October 2021, Pinnacle has 16 affiliates under its network with AUD 91 billion in FUM.

Pinnacle Investment Management provides seed and working capital, marketing and distribution services, business support and responsible entity services to a network of boutique managers--which it terms as "affiliates." Apart from charging fees for its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. As at June 2021, Pinnacle has 16 affiliates under its network with AUD 89 billion in FUM.

Pinnacle Investment Management provides seed and working capital, marketing and distribution services, business support and responsible entity services to a network of boutique managers--which it terms as "affiliates." Apart from charging fees for its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. As at December 2020, Pinnacle has 16 affiliates under its network with AUD 71 billion in FUM.