The Pinnacle Investment Management Group Ltd (ASX: PNI) share price is up 975% in five years.
Pinnacle Share Price
The share price chart above compares Pinnacle's performance (in blue) to the broader market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), Magellan Financial Group Ltd (ASX: MFG) and Platinum Asset Management Ltd (ASX: PTM).
Who is Pinnacle?
Pinnacle is a $400 million managed funds business. But unlike Magellan or Platinum, which actually invest the money on behalf of their investors in the funds, Pinnacle takes an ownership stake in the businesses that are paid to invest the money.
That might sound a little confusing, so let's use an example.
Let's say you want to invest in global shares but you want someone else to do it for you.
Your money is pooled together with a bunch of other investors in a managed fund, which the investment manager (Platinum, Magellan, etc.) invest for you. In exchange, they get a management fee and a performance fee if they do well.
Pinnacle take an ownership stake in the investment managers when they are starting out. For example, Pinnacle took a 23.5% ownership position in Antipodes Partners. Antipodes is an investment management business which is rivalling Platinum and Magellan.
So what does Pinnacle do for the investment managers?
Pinnacle provide sales, investor support and handle all the finance-ey stuff that goes on inside the fund, they also talk to investors and do pretty much everything else aside from investing the money.
It's good for the investment companies (e.g. Antipodes) because they can focus on their investing.
Looking ahead
Pinnacle has done well because it has put bought ownership positions in seven great investment management businesses which cover Australian shares, infrastructure, small cap, hedge funds and international shares.
Basically, Pinnacle has partnered with good managers to offer access to investors seeking returns in many asset classes. These managers have performed very well which means that Pinnacle's funds have grown rapidly, earning more management and performance fees.
And the wonderful thing about their business is that it is scalable. Pinnacle are like the real estate property managers of managed funds, getting paid for every extra dollar that flows back and forth between the investors and investment managers.
Are Pinnacle shares a buy?
I think Pinnacle shares will be a rewarding investment over the long run, as their funds continue to fill up to their capacity and they bring more quality investment teams on board. However, their potential is no secret, with its shares trading at 50 times its yearly profits.
While paying up for a quality business is a no-brainer for a long-term investor (you do it), Pinnacle is a cyclical business. For example, between mid-2007, the height of the financial crisis, Pinnacle shares fell from $4.40 to a low of 20 cents in 2012.
The business has changed a lot since then and I don't expect that to happen again. However, like all financial companies, investors risk buying their shares when the market is doing really well and profits are above cycle-adjusted normal levels.
Therefore, in my opinion, Pinnacle shares should be at the top of investors' watchlists but patient investors might choose to hold off buying in.
