Premium content from Motley Fool Extreme Opportunities
Ouch! What a painful year 2022 was for investors!
In an effort to curb rampant inflation, Central Banks around the world increased interest rates significantly and at a pace not seen since the late 1980s. This of course sent asset prices tumbling and one of the worst affected categories was growth focussed equities, the market darling of the last bull market.
In this report, we will uncover five companies that we think are set up well for a strong rebound as well as one bonus idea.
'Rebound Rocket' Pick #1
Pinnacle Investment Management Group (ASX:PNI)
What Does Pinnacle Do?
Pinnacle Investment Management Group (ASX:PNI) is a financial services and 'multi-affiliate investment management firm' that operates slightly differently to a typical fund manager.
It holds an equity interest in numerous investment management firms (its affiliates) and provides them with a wide array of services, laying the foundation for these affiliates to deliver exceptional investment advice to their clients in a highly regulated environment.
Such services include working capital and seed funding, as well as a comprehensive range of cost-effective distribution and non-investment support services. These cover human resources, information technology, marketing, legal support, marketing, as well as a number of others.
To put it simply, the Pinnacle business model involves having several investment management firms under the one 'umbrella'. Pinnacle holds ownership interests in each of its rigorously selected boutique partners, and then benefits from their performance and growth.
Why Is Pinnacle's Share Price Down So Much?
Pinnacle has gone through a turbulent period with its share price sliding by more than 50% from its all-time highs of $19.29 in November 2021, to less than $9 at the beginning of January 2023. In fact, it sunk to as low as $6.49 in June last year.
The reason for this decline is largely because the performance of Pinnacle's fund manager affiliates is mostly correlated with the equities market. When equity markets rise, Pinnacle fund managers earn higher returns on their investments and higher performance fees. The converse is also true. When markets decline, Pinnacle fund managers generally earn lower returns and fail to earn performance fees.
As such, the company's share price has suffered due to the decline in the broader equity markets throughout 2022.
However, the company has been diversifying its earnings base across different asset classes, investment styles and geographies. It is also tilting towards an increased revenue mix from retail clients and performance-centric strategies.
By doing so, Pinnacle is expanding the breadth of its performance fees to reduce its exposure to movements in equity markets, whilst simultaneously pursuing new avenues to grow its business.
What Are Pinnacle's Rebound Qualities?
As global markets recover, we believe that Pinnacle fund managers will also earn higher returns. Beyond that, there is an even bigger opportunity for Pinnacle's management to grow the business.
As we alluded to above, Pinnacle's strategy to diversify its portfolio of affiliates based on different asset classes, strategies, and geographies could be a winning formula in boosting its management and performance fees, regardless of the market cycle.
Since its founding in 2006, the company has developed a strong and reputable brand in Australia, as well as distribution-related intellectual property in our nation. We believe that Pinnacle can now replicate its business model in overseas markets by extending its distribution capabilities, and by backing emerging boutiques in other geographic regions.
In recent years, the company has opened offices in Japan, the UK and US. Whilst it may take time to build out its distribution capabilities in other markets, international expansion creates optionality and provides new growth levers for Pinnacle to pursue.
And in our view, there is no better crew to tackle such expansion than Pinnacle's strong management team, which boasts a proven multi-year record of sound execution, capital allocation, and earnings and FUM growth.
Source: Pinnacle Investment Management AGM Presentation.
Overall, we believe that this combination of qualities – which has been built and refined over many years – is incredibly difficult to replicate by new rivals seeking to enter this space, which gives Pinnacle the upper hand.
