One of the worst-hit S&P/ASX 200 Index (ASX: XJO) names in 2023 has been the Pinnacle Investment Management Group Ltd (ASX: PNI) share price, which is down 45% in the year to date.
There has been a lot of pain for some sectors on the ASX, while others have been spared. For example, ASX bank shares have done quite well this year, as they're seen to benefit from higher interest rates. But fund managers have taken a hit.
A lot of fund management companies' earnings come from the amount of funds under management (FUM). If the FUM falls, the levels of revenue and earnings are likely to drop. Remember, investors often like to judge a business by its profitability.
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What are Pinnacle shares known for?
The business is invested in a growing number of leading fund managers such as Coolabah, Firetrail, Hyperion, Spheria, Plato, and several more.
It takes a stake in the fund managers' businesses and can also help them in a number of areas. These include seed FUM and working capital, distribution and client services, middle office and fund administration, compliance, finance, legal and so on.
While it started by looking at ASX share-focused fund managers, it's now looking at expansion opportunities. It's planning to take advantage of the "significant offshore opportunity to evolve into a global multi-affiliate" by exporting its business model.
Why it could be an opportunity
Any ASX 200 share that has been growing for a long time and then goes through a rough patch is worth looking at. The Pinnacle share price's performance was strong after the COVID crash up to the end of 2021.
With some share market valuations down heavily, the underlying FUM growth of Pinnacle has also stuttered. At 30 September 2022, it had $80.5 billion of FUM, down 4% from June 2022.
I think that when share markets stop declining, long-term asset price growth will be a natural boost for Pinnacle's underlying earnings. The end of declines could also lead to better fund flows for the respective fund managers in Pinnacle's portfolio as well.
Pinnacle says it's working with affiliates to "actively pursue growth initiatives, recognising that these will moderate profits in the short-term but provide extremely lucrative growth opportunities over the medium term".
The ASX 200 share is also looking for incubations, which are a "highly attractive investment proposition". It's looking to incubate more outside of Australia and leverage the operational infrastructure that it has developed in the UK, Europe, and Canada. Australia has a large capital market, but the rest of the world is a much bigger opportunity.
Pinnacle share price valuation
According to Commsec, the business is valued at 18 times FY24's estimated earnings with a potential FY24 grossed-up dividend yield of 6.1%. Whilst the share price could go even cheaper, I think it's now priced at very attractive value for the long term.
