The 2016 financial year has been a difficult period for Pacific Current Group Limited (Pacific Current) as we continued with our restructuring efforts designed to simplify and refocus our business.
On behalf of the Board, I wish to thank our shareholders for their continued support and patience during a period of significant change for the Company. The past year has been a challenging one for Pacific Current as we continued to implement some very important changes both within our management team and our portfolio. Whilst these changes have been challenging, we end the financial year with a business that is better placed for growth and the delivery of shareholder value over the years ahead.
The year saw changes of key personnel both at Board and Executive level. In April, our Chief Executive Officer, Tim Carver resigned from his position as CEO and subsequently joined GQG Partners LLC (GQG), a US-based funds management start-up backed by Pacific Current, as its CEO. Tim is responsible for all business strategy and management at GQG. Tim will resign as a director of Pacific Current prior to the Annual General Meeting in October.
We also appointed Tony Robinson as an independent Non-Executive Director in August 2015, replacing Andrew McGill. Tony was subsequently appointed as an Executive Director of the Group and joined Paul Greenwood, Global CIO and President North America and Joseph Ferragina, Chief Operating Officer on our new Executive Team.
I am confident that this new Executive Team has the right skills and experience to oversee the necessary changes and restructuring efforts being made at Pacific Current. They have worked diligently and assiduously on changes to staffing, the portfolio structure, carrying values and the reduction of material costs within the business.
The financial year also saw the continuation of our efforts of repositioning our portfolio towards “sunrise” investments and the pursuit of our strategy to continue to slowly divest out of businesses that we believe have lesser growth prospects or those where the sale price have been better than the boutique’s growth prospects.
This strategy led to the decision to invest in GQG, a boutique which we believe has exciting growth potential. It also led to the challenging decision to sell our investment in RARE. The decision to sell our RARE stake also reflected the fact that we wanted to support RARE’s majority shareholders who wished to pursue the opportunity to partner with Legg Mason.
With some of the proceeds from the RARE sale, we acquired a minority ownership stake in Aperio, a rapidly growing boutique that is well suited to our overall strategy and has already had a positive impact. Both Aperio and GQG have exceptionally sound growth prospects and we expect them to continue to make a positive contribution over the years ahead.
One of the main challenges during the year was continued FUM losses at Seizert due to recent underperformance at the US boutique. These losses offset much of the positive performance across our broader portfolio and resulted in some one-off costs that had a negative impact on our full year result.
Despite these significant one-off costs, which also reflect the impact of our restructuring initiatives, Pacific Current’s balance sheet remains sound. The completion of the sale of the majority of the Company’s interest in RARE positively impacted the financial position in FY2016.
Pacific Current’s underlying net profit after tax decreased to $11.6 million, down 31% on the prior financial year. Statutory results were a loss of $48.2 million.
Funds under management increased by 3.0% to $50.4 billion as at June 30, 2016. This reflected a strong performance from Aperio, Aether and IML offset by continued outflows at Seizert and RARE.
The Board has declared a fully franked final dividend of 5 cents per share, taking the total dividends for the year to 25 cents per share. This equates to a total payout ratio of 60% of underlying earnings for the year, which is at the lower end of the targeted range. The Board has confidence in the outlook for the business and reaffirms the targeted payout ratio band of 60-80%.
The financial results were affected by a series of interest charges and other non-labour costs that will not carry through to the 2017 financial year. The result was also affected by the impairment charge relating to continued losses at Seizert, which was offset by strong performances at Aperio, Aether and IML as well as a positive contribution from GQG.
Going forward, we expect these core boutiques to be the key drivers to earnings, reflecting our continued diversification of the business that has been achieved following the merger with Northern Lights in 2014. The investments in GQG and Aperio reflect our continued efforts to diversify towards boutiques that are better suited to current and future investment trends and away from the traditional long-only style of management.
The business from the Board down recognises its corporate social responsibility and continue to support a number of diligent and hard-working organisations in their efforts to bring about meaningful social change. For a number of years, we have supported Third Link Investment Managers through the provision of investment and support services on a pro-bono basis, with all fees donated to the not-for-profit sector.
The Board and Management recognise that shareholders have had to endure an arduous and challenging year given a number of significant changes for Pacific Current. The near term outlook for the Company remains somewhat difficult as we continue to implement important changes to refocus the business and reposition our portfolio towards more attractive industry segments.
Management remains focused on improving our financial results and I am confident that Pacific Current has the right team in place to deliver on this goal. We remain optimistic that the changes we have made, as well as the broader position of our portfolio will deliver growth over the years ahead.
Once again, I thank all our shareholders for their continued support during a difficult period and our dedicated staff, investment partners and clients for their efforts and hard work. I look forward to updating you with more information on our restructuring efforts in the near term.
M. Fitzpatrick
Chairman
| Year End FUM ($bn) | 50.4 |
| Aggregate Boutique Management Fees ($m) | 176.1 |
| Underlying Net Profit ($m) | 11.6 |
| Final Dividend (cps) | 5.0 |
| Full Year Dividend (cps) | 25.0 |
In many ways FY2016 was another transitional year for PAC. We underwent meaningful changes in our management team as well as within our portfolio of investment boutiques. While challenging to navigate, we believe we have ended the year in a place where PAC is well situated to grow with a portfolio that better reflects the direction investors’ appetites are moving.
In mid-2015 we made the difficult decision to sell our position in RARE. Our investment in RARE was enormously successful, returning more than 33 times the initial investment. While we believed RARE was an important asset, we felt it was appropriate to support the majority shareholders who wanted to pursue the opportunity to partner with Legg Mason. We were also confident that we could rapidly redeploy the proceeds from this transaction. When the transaction concluded, we immediately retired expensive merger-related debt and invested in rapidly growing Aperio Group (Aperio). Aperio is a firm exceptionally well suited to benefit from the trends toward passive management, ESG, and factor-tilted portfolios. Early results suggest that the decision to make this portfolio investment was indeed the right one.
Shortly before the end of FY2016 we invested in GQG Partners. While a true start-up, we believe GQG has exceptional growth prospects. The firm has been founded on the investment skills of one of the world’s more prominent long-only investors, Rajiv Jain.
Mr. Jain left his prior employer, where he managed US$48 billion and decided to partner with us in a new venture, GQG Partners. With its focus on global and emerging market equity strategies, its products should have broad appeal. The initial response to GQG from consultants and prospects has been exceptionally positive and makes us quite bullish on its prospects for FY2017.
Aperio and GQG illustrate our efforts to concentrate new investments in “sunrise” segments of the asset management industry – those areas that will be the beneficiaries of increased investor allocations in the years ahead. This idea informs not only how we go about seeking new investment opportunities but also how we think about managing our existing portfolio. Accordingly, shareholders should expect to see us continue to slowly migrate out of businesses with lesser prospects or where we are offered prices that are more attractive than our view of the underlying growth prospects and then redeploy capital into more attractive industry segments.
The biggest challenge we faced during the year were headwinds at Seizert. The decline in Seizert’s FUM has been brought on by recent underperformance and the declining appetite for active US equity strategies. The Seizert team is talented and stable and we are confident that the firm is simply enduring a typical performance cycle, the likes of which they have seen numerous times before. Nevertheless, with the benefit of hindsight, we clearly overpaid for this asset and the attrition in Seizert FUM has offset much of the progress being made across the broader portfolio.
Total FUM of our portfolio companies finished the year at A$50.4 billion. The biggest contributor to this sum was Aperio Group, which ended 30 June 2016 at A$20.5 billion, up from A$18.2 billion at the time of our investment six months earlier. In addition to large inflows at Aperio, other boutiques – IML, Raven and EAM – also experienced rapid growth during the year. Seizert and RARE (in which we still own 10%), were the notable laggards.
Like FY2015 we had large amounts of noise coming through the financial statements in FY2016. Specifically, we took large asset impairments, primarily at Seizert, due to the reduction in the firm’s FUM.
Statutory results were a loss of $48.2 million with an underlying profit of $11.6 million. The Aurora Trust recognised impairment charges of $119 million and this impacted on the PAC result.
Despite the challenges noted, our optimism regarding our portfolio is increasing. One reason for this is the breadth of growth we are seeing across our portfolio. In fact, the majority of our portfolio companies have demonstrated true organic growth this year and only a small number have stayed even or lost ground.
Another reason for optimism relates to how well our team executed in FY2016. In the face of considerable change they have worked tirelessly to close new investments, improve our financial reporting, and identify operational efficiencies. For example, early in 2016 we completely restructured our sales and marketing team. The net result was significant cost savings and more sales people in the field seeking to grow our portfolio companies.
In closing, I would like to thank our shareholders for their support and patience as we worked through the challenges of FY2016. In many respects, we are in a much stronger place than we were a year ago because of the modifications to our portfolio and the cost savings we have identified. Nevertheless, management is keenly aware of the need to enhance financial results going forward and we are intensely focused on doing just that. As large shareholders ourselves, maximizing value for PAC shareholders remains our most important priority in FY2017.
P. Greenwood
Global CIO & President, North America
